Forex how to use atr to exit trades?

Forex trading can be a complex and challenging endeavor. There are several technical indicators that traders use to make decisions about when to enter or exit trades. One such indicator is the Average True Range (ATR). In this article, we’ll explore what ATR is and how it can be used to exit trades.

What is ATR?

The Average True Range is a technical analysis indicator that measures the volatility of a currency pair. It was developed by J. Welles Wilder, Jr. in 1978. ATR measures the difference between the high and low prices of a currency pair over a given period. The higher the ATR value, the more volatile the currency pair is.

How to calculate ATR?

The calculation of ATR involves three steps:

1. Calculate the True Range (TR) – This is the greatest of the following three values:

a. The difference between the high and low price of the current bar

b. The absolute value of the difference between the previous close and the current high

c. The absolute value of the difference between the previous close and the current low

2. Calculate the Average True Range (ATR) – This is the moving average of the TR calculated over a given period.

3. Choose the period for ATR – The period can be adjusted to suit the trader’s preferences. Generally, a common period for ATR is 14, which means that the ATR is calculated over the last 14 bars.

How to use ATR to exit trades?

ATR can be used to exit trades in two ways: using a fixed ATR value or a multiple of ATR. Let’s explore both methods.

Fixed ATR value

In this method, the trader sets a fixed ATR value as the exit point. For example, if the ATR value is 50 pips, the trader may decide to exit the trade when the price moves 50 pips in the opposite direction of the trade. This method can be useful for traders who prefer a set exit point and want to limit their losses.

Multiple of ATR

In this method, the trader sets a multiple of ATR as the exit point. For example, if the ATR value is 50 pips and the trader chooses a multiple of 2, the exit point would be 100 pips. This method can be useful for traders who want to factor in the volatility of the currency pair and adjust their exit point accordingly.

Let’s look at an example to illustrate how ATR can be used to exit trades.

Suppose a trader enters a long position in EUR/USD at 1.2000 and sets a stop loss at 1.1900. The ATR value for EUR/USD is 50 pips. The trader decides to use a multiple of 2 for the exit point. Therefore, the exit point would be 1.2000 – (2 x 50 pips) = 1.1900. This means that the trader would exit the trade if the price falls to 1.1900, which is the same as the stop loss.

Conclusion

ATR is a useful technical indicator that can be used to exit trades in Forex. By measuring the volatility of a currency pair, ATR can help traders adjust their exit points based on the market conditions. Whether using a fixed ATR value or a multiple of ATR, traders can incorporate ATR into their trading strategy to improve their chances of success.