The Average True Range (ATR) is an indicator that measures price volatility, helping traders find the right stop-loss, while at the same time maximize profits.

For this strategy, we use the 10 cycle ATR setting. That is, the indicator will measure the price volatility of the previous 10 candles. When the ATR is used properly, it can help traders get high profitable strategies.

However, to a certain extent, ATR can still help traders partly assess the trend based on the ATR value associated with the current main trend of the market. As shown below:

Now we go into the ATR-based trading strategy. In this article we discuss the principles for pre-orders. Sell orders have the same principle, traders with the opposite thinking are okay.

Step 1: Install the chart as shown below

The picture below is the combination of ATR indicator combined with EMA 20 (You use Tradingview to combine these 2 indicators on the chart):

Step 2: Wait for the ATR to cross the EMA from below

A breakout of the ATR above the 20 EMA is a sign that higher volatility is imminent. With higher volatility, it's also a sign of a new trend. As shown below:

This strategy not only incorporates ATR but also considers price action to confirm the rise of volatility in ATR.

Step 3: Ensure the breakout of the ATR indicator corresponds to the breakout of the price action

See the picture below:

After ATR broke above the 20 EMA, we see the price also broke the previous high with a strong bullish candlestick. This is a signal that the market can continue in the breakout direction. Is the right time to buy.

Step 4: Open a long position when the price breaks the highest price of the bullish candle

As shown below:

It can be seen that a strong bullish candle is a key factor for this strategy, it confirms the breakout of ATR is meaningful.

Step 5: Target profit taking is equal to ATR indicator value

As shown below, the ATR value is 16 pips. This should also be a reasonable profit taking level for ATR. 

As shown below:

Step 6: The stop loss is below the lowest price of a strong bullish candle

When the price surpasses the low of the strong breakout candle, it shows that the upside pressure of the market is not as strong as we analyzed. So this is a reasonable stop loss. As shown below:

The above is the principle for buy order on how to apply ATR to build a trend trading strategy. Sell order you apply in reverse. As shown below is an example of the rule for a sell order:


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