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How to use Average True Range ATR for Stop Losses and Take Profits

Updated: Aug 29

What is the Average True Range used for?

The simplest way to describe the Average True Range ATR calculation is to measure market volatility. Don’t worry if you don’t know what this means right now in a newbie term all it’s doing is measuring how much an asset goes up and down using maths!

It's important because as professional traders we don't want to be setting static stop losses or take profits based on pips! This is the wrong approach and you'll likely get stopped out a lot because you don't actually know how much the currency pair moves. Using an ATR calculation solves this by professional setting stops based on volatility of currency pairs. There will be a unique ATR for each thing you trade so make sure to read this article fully to understand why you're getting stopped out.

Common misconceptions about the Average True Range ATR and ATR Indicators is that there’s some sort of strategy behind it. There’s not. All it’s doing is measuring the volatility and not telling us which direction the price is likely to move.

What you’ll actually be able to do after reading this short article is work out yourself how much prices move over given time frames. This is much better than relying on some shoddy indicator you find on platforms, at least this way you’re in full control!

You might realise after reading this article if an ATR is 3% within a month and your stops are less than this, very likely you'll be getting stopped out so start using ATR in your trading NOW! It's so important..

The Key Points for using the Average True Range ATR are:

  • Creating dynamic stop losses and take profits

  • Understanding how much certain assets move by

  • Moving away from placing stop losses based on pips and candles but on volatility (ATR)

  • Setting realistic expectations for returns

How To Calculate Average True Range (ATR)

Calculating the Average True Range (ATR) is really easy because we’ve made a simple ATR calculator template for you so literally all you need to do is copy and paste price data into the cells and it does all the grunt work for you. It’s currently on sale so don’t miss out use coupon code “ATR99” to get up to 99% off.

Click here to get your template or click the image below.

This is what the ATR Calculator looks like:

What we’ve got in the calculator is price data, the average monthly volatility and then a calculator to automatically workout our stop losses for long positions and short positions! So it’s now really easy to work out the stop loss (SL) and take profit (TP) every week.

Confusing? Let’s break it down so you understand how it works and how you can do it too. On the left hand side we’ve got 12 months of price data to work out our volatility. This includes the Date, price, open, high, low and the % change.

Based on the price data which we copy and pasted from google we’ve worked out the “high to low”. This is the range of the month using this calculation (high minus low or High - Low).

Now that we have the high to low prices we’ve got the range of that month and we want to work out the average monthly volatility Average True Range (ATR). So we need to also do the same thing for the previous months.

To work out the monthly Average True Range (ATR) which means how much does move on average per month we do the following calculation highlighted above. Sum the current and previous month high to low and get an average then divide it by last month's opening price. This gives us in our example a value of 3.12% which means this asset on average last month moved up or down by about 3.12%. We now do the same monthly Average True Range ATR calculation for the previous months (do about 12 months). This carries on nicely to the next part of the calculator which works out the average ATR over 6 to 12 months.

Now that we’ve got the monthly ATR values for the past 12 months of price data we can work out an average over the past 6 to 12 months to use in our stop loss and take profit calculations. This is done really easily by just averaging the monthly ATR value of the past 6 months and 12 months which gives us around 4%.

So now we know over around 6 to 12 months the price will move around 4% on a monthly basis.

The next step in the calculator is to just manually type in the current price of whatever you’re trading. For example if the EURUSD exchange rate was 18.75 I type 18.75 in the Exchange rate cell as pointed out above.

The stop loss for a long position is calculated by using the currency exchange rate and multiplying it by 1 minus the Average 1 month ATR over the year (the 4% mentioned earlier). We minus it from 1 because we want to work out a number that’s less than the current exchange rate. Then the target is easy: it's just the current exchange rate multiplied by 1 plus 3 times the average monthly ATR over the year. This in the end works out as a 1:3 risk reward stop loss and target based on volatility!

The short side of the calculator is worked out the same but inverted the operator for stop loss and take profit (soft target).

On a graph this is what the final values would look like:

Remember our excel calculator does this instantly so you don’t need to worry about doing the excel formulas. All you need to do is copy and paste price data into the price cells. If you don’t know how to do that I’ll show you now.

How to update the ATR Calculator

Step 1 - Find what asset you want the ATR for

In this case I’m just going to use EUR/USD exchange rate as an example. So, what you want to do is to type into google “ EUR/USD historical data”. If you want to work it out for a different asset or currency pair just replace EUR/USD with whatever it is you want. It should look something like this.

Go ahead and click the link. This will direct you to the website in which you can get free historic data. Our next step is to convert the data into monthly data. Head to the drop down menu on the left under the historic data title and click monthly. It will convert all data into monthly formats.

Step 2 - Copy and paste into the ATR calculator

Now we can go ahead and copy and past the past 12 months into our excel template. All we do is highlight current month data to this month last year like below. Right click and copy the data and then paste it in the excel template.

Here we've copied the last 12 months data.

Then we've pasted it into the price section of the calculator.

Now the data is in the red box area above our formulas automatically calculate everything else and we’ve got a stop loss and target to work with!

Step 3 - Use the stop loss and take profit targets

Now that we’ve got new price data all we need to do is use the numbers from our calculator to plug into our trade ideas. Manually type in the exchange rate cell the current exchange rate of what you want to trade and you’ll automatically have the stop loss and take profit numbers you want to use in your trading!

Remember to get your Average True Range ATR calculator template to work out stop losses and take profits professionally. Use coupon code “ATR99” for up to 99% off while the sale lasts.

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