How to read ATR in Forex – Average True Range Indicator Explained

ATR, or the Average True Range indicator measures the volatility of a market by measuring the price range for a defined amount of candlesticks. It is used as a measure of potential volatility and quite often used by traders to determine how far to set targets or even stop losses. While ATR is used with just about any time frame, the original use of ATR was based upon daily candlesticks, analyzing the volatility over the last 14 candlesticks, which is the default setting.

Recently, the ATR indicator has been used by day traders, as it can give traders an idea of how much further a trade can go. It also can suggest perhaps if a market is overbought or oversold, whether or not it has the ability to continue going further before perhaps closing out your positions and going home. Longer-term traders will look at the ATR to determine whether a pullback in a trend, or of bounce from oversold condition is possible.

How to read ATR in Forex and Using the ATR

Using the Average True Range indicator when trading Forex is quite common, but you should remember that the indicator is not necessarily a system in and of itself. It is simply a way to determine whether you are in a trend in environment, and whether or not there is enough left in a potential trend or move for the session to get involved. Obviously, the ATR will be greatly influenced by how quick the pair moves, so the ATR range for a minor pair or exotic pair will be much higher than something like the EUR/USD.

Keep in mind that the ATR reading will change drastically as extreme conditions occur. It should also be noted that this measures volatility, not directionality. In other words, if the ATR comes in at 220 pips on a daily chart, it does not matter whether or not the market is going up or down, it gives you the same reading. In that sense, you should look at the ATR is a secondary indicator, as it will simply tell you the potential size of the move, not which direction you should be trading. Having said that, if you have an ATR of 75 on the chart you are trading, and the recent move has only moved 20 pips, all things being equal you should be looking for a move of 55 pips.

You can also use the ATR to set stops, which is probably one of the biggest uses for the ATR on the whole. Again, if you have an ATR that is 75, a stop loss of 75 pips is quite often used as the potential stop loss. Think of it this way: if the market moves more than the average against you, then it suggests that you are completely wrong in the position, and it is time to get out.

A few things to consider

Keep in mind that the indicator itself is not reason enough to take a trade. It simply a bit of a roadmap of what could happen, not even necessarily what will happen. You need to have a system in place to take trade, using the ATR to back up your stop losses and/or targets. Because of this, you need to already know what you are doing before using this indicator as a supplement.

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What is price action in Forex?

If you are trading for any time at all, you will eventually come across the term “price action.” It is not an easily defined term, as there is no set parameter as to what would be price action or what would not be price action. Ultimately, price action is the movement of the markets over time. In other words, if the market is rising in a Forex pair, then it would be considered to be “positive price action”, or perhaps “bullish price action.” On the other hand, if a market is falling, then it is considered to be “negative price action”, or sometimes is called “bearish price action.”

Luckily, charting platforms make it quite simple to see whether or not the most recent action or even longer term action in the market is positive or negative, and learning to read price action is the most basic of skills that you will need as a Forex trader. For example, you need to understand whether or not price has been rising or falling over the longer term, giving you the ability to understand the most likely of outcomes for any trade that you have.

Price action encompasses everything that happens

Sometimes, price action is simply the market going back and forth. This is referred to as “consolidation”, is quite often forms various technical patterns that people will pay attention to. Bullish flags, bearish flags, rectangles, triangles, and many other formations are referred to by their name, but essentially it is just a form of the market going back and forth before its next move. In this scenario, you need to pay attention to the fact that the market is going nowhere in the short term, but also recognize when price action suddenly changes, and we break out of an area of back-and-forth trading. This shows that the market is ready to start trending again.

By being able to read what the market is doing, you have the ability to place trades with a bit more confidence, but nothing is 100% accurate. However, over the longer term if you do trade with the market and the price action, then you have much more likelihood of becoming successful.

You should never trade against price action

One of the biggest mistakes that retail traders will make is that they try to trade against price action. For example, they may believe that the currency pair has “fallen too far”, and then start buying it. That is the wrong way to look at the market, because quite frankly the market can move much further than you anticipate. There is a reason that the market has been falling, and simply jumping in because it is “cheap” is a great way to lose money, because things can always get “cheaper.” Obviously, this works the opposite way as well. If the market has “risen too far” it is not time to start trying to sell it.

Recognize when markets break support or resistance

Price action encompasses almost everything you can see on a chart. However, one of the most important things that new traders can learn is to recognize when support or resistance has been broken. If there is a level that the market has had trouble breaking above, but then finally does, that can be for referred to as “the market breaking above resistance.” On the other hand, if there is an area that the market has not been able to fall through, but eventually does, then it becomes a break down below support. These are signs that the market is highly likely to go further, and this gives you a hint that you want to be involved with that move.

Study price action

In order to become a successful technical trader, you will need to learn price action in general. This involves shapes, trends, and even to a lesser extent indicators. If you do not study and then pay attention to price action, you are doomed to fail. You need to know what the market is trying to tell you. While nothing will keep you from having losses, if you work with the market as opposed to against it, you have a much better chance of success.

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What is Forex Scalping – Forex Scalping Definition

In order to understand what Forex scalping is, you need to understand what the term “scalping” actually means. When you are looking to “scalp the market”, you are looking for short term trades, sometimes lasting just a few moments. Because of this, you are not worried about economic conditions or fundamental analysis, you are worrying about places that you may or may not see momentum in the market.

In order to be an effective scalper, you have to be able to get in and out of the market rather quickly. This is because you are not necessarily looking for anything more than a quick gain, taking advantage of little pockets of illiquidity or spaces of “thin air” in the market. Once you get good at reading charts, you can start to recognize support resistance, and more importantly in this case: micro support and micro resistance. It is not uncommon for a scalper to have trades that last for just a few minutes, or even just seconds. Because of this, it takes a very quick mind and nerves of steel to do this type of trading.

Why someone would be a scalper

There are a multitude of reasons why somebody might be a scalper, not the least of which is that it is much “safer” to be in and out of the market that it is to hang on to a long-term position, possibly even losing money overnight while you are not in front of the computer. A true scalper would never consider holding a position overnight, or for that matter several hours. They are looking to pick up little bits and pieces of profit along the way. Many scalpers will point to the fact that they are simply “small fish in a large ocean”, referring to the larger institutions out there. In that sense, they are a bit afraid of going up against the large institutions, but also know that they have an advantage in the sense that they do not have to put so much into the market, meaning that they are going to be much more nimble both entering and exiting.

Scalping takes extreme concentration and discipline

Scalping is not something that you do on a whim. It takes extreme amounts of concentration and is something that also takes a lot of skill. Quite frankly, scalping is not something that traders should do until they have quite a bit of screen time in front of them. Having said that, you can always use a demo account as a great way to practice in live conditions.

Perhaps even more important is the ability to have discipline when trading. If you are in a losing trade, you need to get out sooner rather than later. This is because if you are not quick to take your losses, they can compound rather quickly. This is because quite often scalping is done with large positions, so therefore it can compound against you. Speaking of which, you need the discipline to trade in manageable sizes. Remember, as a scalper you are trading little micro movement, not something that it is developing over the longer term, meaning that the slightest little deviation in monetary flow can move the market for or against you.

A couple of ways to scalp

The first ingredient of a decent scalping market is to find one with a small spread. This is because a market that has say seven pips for the spread, you could struggle to overcome that wide of a gap. However, in a market like the EUR/USD pair that has little in the way of a spread, it makes your job much easier.

Brick walls

When you look at markets, quite often you will see areas where the market cannot get through. You may see several candles in a row that are struggling at the same price, showing that there are either buyers or sellers in that range. If that is going to be the case, then obviously if the market breaks through that level it means that it is likely to continue going in that direction, at least for the short term. You can see the set ups all over the place on short-term charts, but you need to be patient enough to see the market break through these levels. Quite often, a trader will wait for a break of one of these “brick walls” in order to pick up three or four pips. Obviously, it comes down to your trading plan, but that is just an example of how they can be taken advantage of as there will be a little bit of a lack of orders against you once you break through that initial barrier.

Round number bounce

Another potential trading opportunity is when the market is sitting at a round figure. For example, the 1.10 level could be an area of a lot of interest due to the psychology of that big figure. However, there are also other ones that are minor large, round, psychologically significant numbers that could also attract a lot of attention. For example, the 1.08 level might attract a lot of attention. Quite frankly, a lot of scalpers will simply play for a bounce from that level, as they know a lot of the larger funds will have order flow in that area. Again, we are simply looking for a short-term gain of just a few pips.

Make it your own

At the end of the day, you are going to need to trade how you are comfortable with, because of course there is a certain amount of psychology and comfort that is needed in order to be able to perform on a consistent basis. Because of this, you need to demo trade you’re scalping ideas and recognize when things are working against you. You have to have enough confidence to get out when it is time to, and enough patience to wait for the set up to occur. Even though you are only trying to scalp the market, it is not uncommon for a scalper to sit around and wait for just a couple of opportunities during a trading session. It is not constant action, rather it is quick in and out when you are active.

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