Dynamic range indicator - Dynamic range indicator review - The Average True Range Indicator – Why It Is Invaluable For Forex Day Traders

The Average True Range Indicator – Why It Is Invaluable For Forex Day Traders

by on September 13, 2010

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A lot of people who day trade the forex markets will look to trade a particular currency pair regardless of how little, or how much the pair has already moved during the current day. However this is a flawed strategy because you should always be aware of the average trading range of a currency pair and how much it is likely to move, and this is where the ATR indicator comes in.

The ATR indicator, or the Average True Range indicator to give it it’s full name, not only tells you how volatile a particular currency pair is, but it also tells you the average trading range of any given pair. This is most useful when you use this indicator on the daily chart because then you can determine how much a pair moves on average each day.

Let me give you a few examples. At the time of writing, the ATR for the GBP/JPY and GBP/USD pairs is currently 145 and 114 points respectively, whilst the ATR for the USD/JPY and EUR/GBP pairs is as low as 68 and 60 points.

So why is this kind of information useful for day traders?

Well let’s say you switch on your computer at 08.00 (UK time), ie when the London market opens, and see that during the overnight trading session all the major pairs traded in a trading range far in excess of their current ATR, as indicated by the ATR indicator. This would suggest that the big price moves have already taken place and we may be in for a lot of sideways price movements for the rest of the day. You certainly wouldn’t be overly confident trading any breakouts that may occur, because they may be short-lived.

If on the other hand the trading range was very narrow, say 30 or 40 points for the GBP/USD or GBP/JPY pairs, then you know that there are potentially a lot of points to be had if the price breaks out of this tight trading range, either upwards or downwards. This is because the average daily trading range is usually a lot higher than 30 or 40 points.

So the point I want to make is that the Average True Range indicator is one that every day trader should be aware of because it can indicate how many points profit you could potentially make, and whether or not you should be trading. This is particularly the case if you are trading intraday breakouts.

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