Do you use indicators in your trading?
With the recent market volatility an ATR indicator be useful.
See how you could use it in your trading by watching the video below.
Hi, and welcome to this Blueberry Markets video update with me, John Kibbler, head currency analyst.
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In this video, I’m going to be talking about the ATR indicator, how you can apply it in a strategy, and yeah, go from there.
I wanted to do something a little bit different, not too much going on in the markets at the moment. Obviously, Dollar just battling for that strength at the minute. There’s a bit of pressure on some risk currencies as well. So Kiwi and Aussie still remain under a little bit of pressure.
I’m looking to do something a little bit different. Something from the educational side of things, and just kind-of applying the sort of trend is your friend but also applying the ATR strategy.
Now, ATR means the Average True Range. If you’re on your Metatrader 5 platform if you go to insert indicators. Come all the way down into oscillators, you can see here it says Average True Range and you get this little box that opens up.
Basically, the period just stands for the amount of candlesticks looking back in a specific time frame. So for me, looking at something like a 7 or 14 is absolutely fine. If we just leave it on a 7 and just click okay, what we’ll get is this line through here, and if you actually just hit the middle of your mouse button or just come up to the crosshair up here, you can see that you get some numbers here.
So on a Yen pair obviously, the decimal point comes first for the amount of pips, what this is saying to me is that the average range on a daily time frame for the past 14 days is 122 pips. So that’s giving us the range of the candlesticks.
Now we can apply this and use this in our trading, and one way we can do this is by making sure our stop-loss is either above or at the daily trading range. What I’m going to focus on here is we had this nice little trend running through here on NZD/JPY, where you could have looked to take a few moves out of the market, and what I’m going to do is just line up some levels of support.
Typically in a trend, we want to see the market form higher highs and higher lows. Then a market comes back and retests the previous structure higher.
I’m just going to map out a few of those structure points. –If we’ll let me clone this up, here we go through here, here, up here as well– We don’t get the pullback that we desire through there. –I’m just going to pop this line here as well– Because technically if the trend was going to continue, we’d also be looking for bias in and around this area through here.
Now what I like to do when I’m looking at this daily time frame, if I’m going to try the daily time frame approach, what I’m going to look for, is when the market creates that higher on the daily and pulls back. I’m going to look for four-hour trading opportunities in here.
This allows me to get a better entry on the turn. What typically look for is if we’re going to look for something called either the higher high higher close into day’s case or we can look for something called the lower low lower closed candle on a downtrend in scenario.
But I’m not going to go for the downtrend today. I’m just going to go through this GBP/JPY trend through here and how you can apply the ATR indicator to a strategy.
I’m going to jump into this now, I’m just going to going to that four-hour time frame. We’re going to highlight a couple of these trading opportunities. What we’re going to essentially do, is switch back between the four-hour and the daily.
We’re going to look at areas where the market forms and the higher high, higher close pattern, and how we can apply that in trends.
Let’s just take the example through –Let’s just remove these actually because I’m just going to take the example above, okay, just through here.– So, we get our daily time frame saying we should be looking for some higher highs if we just grab the control Y greens on our period separators so you can see the week just through here.
We’re looking for the market to come and retest that structure and form a higher high, higher close candlestick. A lot of people probably be looking at this one going. Yet this is the perfect one here. However, we do get this retest in here, which provides a higher high, higher close candle, and what that essentially looks like is a close above the previous candlestick high.
This bullish candlestick here closes above this previous candlestick high. This alerts us to a potential trading opportunity prices, broken higher come back. You can also add the RSI, and look for an overbought oversold condition as well. That adds better-filtered trades up –I’m just going to ignore that — For now, I’m going to look at the picture here.
What I’ll do typically is look to buy above that candlestick high. In most rules, a lot of people will just look at this and go well. Yeah, put my stop loss below the low through there, and end up getting stopped. Because sometimes the market would jump to find liquidity, where common stop areas would be, and then the market rallies on.
The ATR will help you stay out of bad trading and bad stock placement. Here it says that we’re looking at 106 pips let’s say on our stop loss.
Now, if I jump back to the daily timeframe, we actually look at the average daily range at this time. If we’re looking at the daily time frame, it’s saying that we need around about 97 or 100 pips on our stop loss.
What I like to do with that information is add that on to our four-hour time frame. I might sound a little bit extreme, but what I’d like to do is give my trend some breathing space. It’s saying around about we need an extra 100 pips onto this low. Saying 106, so saying 206pip, stop loss over, just keep dragging it down until it says 206.
You can see then, it gives us a hell of a lot of breathing room for the market to go. So the market comes back, it retests this structure just through here, it breaks below that low. A lot of people will be thinking, this isn’t going to work out. We then get that rally to the upside just through here.
This is a really great example of when the ATR can keep you out of a bad situation. The market comes in, comes back in, gives you your higher high, higher close situation through there. It then allows us to place our stop losses comfortably away from that low market rally is in our favor, happy days.
Let’s look at another example. Here we have a great example, the price comes up, creates a high through here pulls back into the zone. This produces another higher high higher close candlestick through there.
You can look at it two ways. You can look at it at the four-hour, but I like to go to the daily time frame again. So let’s just mark up our entry. This is where our stop loss would be. Again look if I just pan this to the right if we just put our stop loss below that low, it’s in a vulnerable position, and that’s what we want to stop you from doing. Stop placing these stop losses in vulnerable positions.
We jump to that daily time frame. Have a little look it says on that particular day, where we look to take that trade it’s saying 107 pips. So what we want to do, let’s go back into that four-hour time frame, go to this and say to ourselves, what it’s saying here the stop-loss is.
Let’s just, for argument sake, say it’s 50 pips. So we’re looking at 157 pip, stop loss. If you want to be accurate well, you can look at the actual numbers through there. But around about 157-160 pips is absolutely fine.
Again, keeps you out of trouble, okay the market comes back down. You still want to be in this move, because technically the daily trend is still in favor. It’s come back into the supporting area.
Four-hour jumps into this zone. You stay in the trade because your stop-loss is a healthy move away. Market rallies nicely in your favor.
So that is how you can use ATR in your trading.
Hope you enjoyed the video. If you have any comments, let me know in the comment section below. Cheers.
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