The ATR is a great tool which can make you money & save you money, if you pay attention to alerts.
The ATR is based on previous price action but not like other indicators. We don't use the ATR as a method to tell us when to take trades, for example like a moving average or another indicator like that.
We use the average true range to tell us when not to (based on previous trading days).
What Is The ATR?
The ATR will tell you the average amount of movement a currency pair will move in a days worth of trading.
If you need to now by how many pips a currency pair is likely to move in a day you can put this great indicator on the chart and it will tell you. This indicator can also be used to measure any timeframe too which is also great. Placing it on a daily chart gives us the average movement for the day.
Most charting packages have this indicator so finding one is not hard.
So How Is The ATR Used?
Firstly, let me tell you what it is not - it's not and oscillator that some traders use to tell them the direction of the current move. It's used to get an idea of how far the currency pair might stretch until it comes up against the average or typical Candle move from the high to low.
Now let’s say a daily chart of the Euro shows the average ATR is 173 pips. If you see what looks like a good set up, but you find the market has already moved today by more than about 75-80% of the ATR, then the odds of it moving in the same direction by any more than 20-25% of the ATR are very much reduced to being most unlikely.
However, if the current day's move so far is only 35 pips from high to low, then there is still plenty of ATR left, in this case, 173-35 = 138.
The second way traders use it is to look for reversals once the ATR has been completed or exceeded and look for bounce-back reversals. It's another way of looking at a currency pair that has become over sold or overbought and there could be a trading opportunity for the bounce.