How To Use The ATR Indicator In MT4
Hi, this is Shaun Overton with ForexNews.com and OneStepRemoved.com. In this 3 minute video, I’m going to explain the ATR indicator and how to use it in MetaTrader 4. It appears by default in MT4. If you don’t have a free demo account, then you can follow along with one from OANDA by clicking the link below this video.
ATR stands for Average True Range. The range or true range of a bar is the high minus the low. If the high of a bar was 1.3512 and the low was 1.3460, then the range of the bar is 1.3512 minus 1.3460, which is 52 pips.
ATR comes into play when you look at more than one bar. 14 is a common period used with ATR. What you’re doing is taking the average of the ranges among 14 bars. Start with candle number 1, then take the range of candle number 2, and so on all the way to 14. The average of those ranges is the ATR.
ATR is useful because it gives you an idea of how many pips one bar is likely to move. Traders that want to improve the entry prices of their orders should consider using a limit or stop entry. A limit order is a price better than the current market. A stop order is a price worse than the current market.
Although most novices hear the word stop and think of exiting at a loss, you can also use stop orders to enter. The potential advantage to waiting for a worse price is that the price may confirm a bias in your direction. You’re trading a worse entry in exchange for increased confidence that the move will continue.
How much of the ATR to use is up to you for improving an entry. I usually like to start around 25% of the ATR value and then adjust downwards for entries.
Using a percentage of the ATR also applies for trading with an expert advisor, especially the exits. Volatility changes over time. Today’s one hour chart might show an average true range of 15 pips. Six months from now, the ATR might jump to 30 pips. It makes sense to adjust fixed profit targets and stop losses with the volatility.
Again, most traders and programmers do this by using a multiple of ATR. If the ATR is 15 pips and you think that’s a reasonable distance, then you use a multiplier of 1. If your strategy tends to catch larger moves, then multiplying the ATR by 2 might make more sense. Using an expert advisor to adjust and test the multiples gives the trader the opportunity to backtest and view historical performance.
Most traders leave the default setting of 14 for ATR, which I think is a mistake. It’s an even bigger mistake if you use ATR for setting exit targets because 14 bars is a really small time frame. I prefer to use a 50 period ATR because it smoothes out the changes in volatility. I’m not looking for precise measurements. A ballpark estimate of the range is good enough for my purposes.
You can find the ATR in MT4 by looking at the navigator window. Select the plus sign next to Custom Indicators, then drag and drop the icon onto your chart. The only setting to change is the period.
Thanks for listening. The next step is to click the link below this video to sign up for a free MT4 demo account with OANDA.