Can the Average True Range Strategy Indicator Be Profitable?

Learn the secrets and techniques of trading the Average True Range (ATR) indicator with real technical analysis examples in this tutorial guide. Whether you trade in the stock market or forex market, understanding these strategies can help you make money in intraday trading and swing trades.

Can the ATR Strategy Make You a Profitable Trader?
How do you trade it to make more money? Which Average True Range strategy is the right one? How do you use this ATR indicator properly without blowing up your accounts? Let’s find out.

ATR, or Average True Range, is one of the most useful indicators out there. It is so easy to use that even your dog could trade using ATR and become a millionaire. Average True Range is loved by many professional traders because it solves one of the biggest problems in trading Forex and Stocks. The ATR indicator is used to set the stop loss properly, something that many new traders struggle with. If you are good at predicting the direction of a stock, there is a high chance of losing money if you don’t set your stop loss properly. If you don’t set your stop loss and profit target at the right place, the price can hit your stop loss first and then go in your desired direction.

Unlike most indicators that are easy to understand but difficult to use, the Average True Range is always easy to understand and easy to use on all time frames.

How to Use the ATR Indicator
The ATR stop loss strategy is simple. I have also used this strategy in my $50 small account challenge series to set the stop loss at the right place. I will show the trade that I am currently in after we understand how to use this indicator properly.

Here’s how the ATR indicator looks like on TradingView. It will come with one line. By default, this indicator will come with an ATR length value of 14. I recommend using the default settings, as most traders do. What we are looking for on this indicator is the ATR value when we are about to enter a trade. We are not looking for an uptrending or downtrending ATR line; we only want this value.

As the name suggests, this indicator shows the true average value of a stock or forex pair. On this chart, and by default, it is showing the average of the last 14 candles. This information is very useful to avoid your stop loss getting hit before the price finally decides to move in your favor.

Example of Using ATR
Let’s look at an example. Let’s say you wanted to sell a forex pair. Maybe it is at a strong resistance, so you want to go short. Let’s say this line is the resistance line. If you set your stop loss just above the resistance line, there is a high chance that your stop loss will get hit because there is not enough room for the price to wiggle around before going in your direction. If you set your stop loss too far from your entry, you will not get a good risk-to-reward ratio, and that’s not good.

By adding the ATR value to the stop loss, you are taking the average range of the last 14 candles into consideration. In other words, you are taking volatility into consideration. If the last 14 candles were big, the ATR value will be high. This means the market is volatile and bigger candles can form, so we should not set our stop loss close to our entry. Similarly, if the last 14 candles were small, the ATR value will be low. This means the market is not that volatile, and there is a low probability of a big candle appearing; therefore, we can set our stop loss close to our entry.

Conclusion
That’s all there is to it. Here’s what happened to the trade we took as an example in this video. Our technical analysis was spot on.

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