00:00When trading, the large profits are made when the market is making large breakout moves.
00:07It's hard to get large profits if the market is flat.
00:11So, what if there's an indicator that can actually predict exactly when a price breakout is coming before it even occurs?
00:19Well, that indicator is the ATR.
00:22If you are not using the ATR indicator as part of your trading strategy, then you are missing a gold mine.
00:28It's literally the best indicator. Why?
00:32Because it can measure the most important metric on trading, which is volatility.
00:38And in this video, I'm revealing the best way to use the ATR indicator.
00:43And as a bonus, I'll also tell you how you can set your stop loss using the ATR indicator.
00:49And also, a very important money management strategy.
00:53So, without further ado, let's get started.
00:56The ATR indicator stands for Average True Range.
01:02And its only purpose is very simple.
01:04To identify the volatility on the market.
01:07So, when you open the ATR indicator, you'll get a single line.
01:11But, believe it or not, you don't really need this line.
01:15Because the only important part of the indicator is the ATR value.
01:19The number in the corner.
01:20So, this number shows the average pips on the market in the past 14 candles.
01:27You can switch this to whatever value you want in the settings, but I prefer the original.
01:32So, you can see here, this means that in the current market, the average pips of the last 14 candles is 53 pips.
01:40So, the higher the value, the more volatile the market is.
01:45And the lower the value, the less volatile the market is.
01:49But, disclaimer, the ATR does not measure the direction of a trend.
01:54Just because the ATR is heading upwards, does it mean that the price is uptrending.
01:59So, now, I'm revealing the best way to use the ATR indicator.
02:06So, like I said in the start of the video, the big profits are made when the market has a high volatility.
02:13So, it's important for us to know when a market is volatile.
02:17What you need to understand, is that the volatility of the market is constantly changing from low volatility to high volatility and vice versa.
02:25So, we know that if the market is on a low volatility period, it means that somewhere in the future, we will see an increase in volatility.
02:35Luckily, using the ATR, it tells you exactly when the market is on a low volatility.
02:42So, here's what you need to do.
02:44First, you pick a time frame.
02:46In this case, I'm using the 30-minute chart.
02:49And next, what you need to do is zoom out of the chart a little bit.
02:53You can see that the ATR is constantly switching from lows to highs.
02:58So, now, what you want to do is find the relatively lowest point.
03:03It doesn't have to be the exact low, just pick one that is low enough.
03:07So, now, you point at it using your mouse to reveal the ATR value.
03:12Now, we know that in this time frame, a relatively low ATR is considered at around 23 pips.
03:19Obviously, if you chose a higher time frame, the value would be much higher.
03:24But in this time frame, it's about 23 pips.
03:27So, now we know that once the ATR drops down to somewhere around 23 pips, volatility will start to pick up soon.
03:35And high volatility means bigger price movements.
03:38It's now easier for us because we already know that somewhere in the future, the price is going to break out.
03:46But we just don't know the direction yet.
03:48Remember, a high ATR value means the price can either break out upwards or downwards.
03:54So, now, your only job is to predict the direction of the breakout.
03:58There's actually a lot of ways you can do this.
04:01But my favorite method is using a trend indicator such as the Heiken Ashi.
04:06So, you can see in this example, the ATR is on a relatively low value.
04:12And the Heiken Ashi displays multiple green candles.
04:16Meaning that the breakout is most likely to happen in the upwards direction.
04:20And that's exactly what it did.
04:22It went upwards and you would have secured some profits.
04:25Here's another example.
04:28You can see that the ATR is at a relatively low value.
04:32Which indicates that a breakout might happen.
04:35Now, you can see that volatility is actually starting to pick up.
04:39And the Heiken Ashi is displaying huge red candles.
04:43Meaning that the breakout will likely happen to the downside.
04:46And that's exactly what happened.
04:49So, that's how you use the ATR to predict when a price is breaking out.
04:53So, now, I'm going to show you exactly when to exit a trade to get as many profits as possible using the ATR.
05:02So, when trading, have you ever encountered this kind of problem?
05:06Where, for example, let's say you received a long signal here.
05:09And, let's say because you normally use a 13 pip stop loss, you also decided to use it here.
05:17But the price instead drops downwards and hits your stop loss, only for it to go back up again.
05:23So, you've closed your trade early and missed the trend.
05:27If you would have put your stop loss just slightly below here, it will not get triggered and you would have participated in this trend.
05:34So, how do we avoid situations like this?
05:38So, knowing that different markets have different levels of volatility, do you think it makes sense for us to use the same stop loss for all of them?
05:47Of course not.
05:48Because if a market is more volatile and you put a small stop loss, 9 times out of 10, it will most likely get hit.
05:56But, if the market is calm and less volatile, a smaller stop loss would make much more sense.
06:04So, what you need to do is use the multiples of the ATR to determine your stop loss depending on your risk tolerance.
06:12For example, let's say your entry indicator displays a long signal here.
06:17And, at this specific point, the average pips of the last 14 candles is 24.
06:23So, you can actually put your stop loss based on that number.
06:28In this case, 24 pips.
06:30But, if you have a lower risk tolerance and think that 24 pips is too much and you want a tighter stop loss, you can divide that value by 2.
06:40So, you can also put your stop loss at 12 pips.
06:43So, it all depends on your risk tolerance.
06:46But, it needs to always be a multiple of the ATR.
06:49Another example would be this.
06:53Let's say you received a short signal from your entry indicator and the ATR value is 14.
06:59So, you can put your stop loss at 14 pips.
07:03But, if you think that 14 pips is too small for your risk tolerance and you want a higher stop loss, you can multiply that value by 2 to make it 28 pips.
07:13It all depends on your risk reward ratio as long as it's still a multiple of the ATR.
07:20So, back with our first example.
07:22If you actually placed your stop loss based on the ATR, which is around here, instead of just making up a random number, it wouldn't have closed the trade too early and you will still participate on this rally.
07:34If you want to use the ATR as a trailing stop loss, you can use an indicator called the chandelier stop.
07:42This indicator is also based on the ATR.
07:45It is designed to keep traders in trend until a reversal happens.
07:49So, you can close your trade when a candle hits the chandelier stop.
07:53And, disclaimer, this indicator is not designed for entry positions.
07:59You don't want to take long or short positions based on this indicator.
08:03If you want a similar indicator that is actually designed to detect trends, you can use the supertrend indicator instead.
08:10So, now, I'm revealing an important money management strategy that you can use with the ATR.
08:16So, let me give you a scenario.
08:19Let's say you're trading, and the current ATR value is 20, and you're risking, let's say, $100 on this trade.
08:28So, my question is, do you think it makes sense to risk that same $100 but on a trade which has a 60 ATR?
08:37No, because it's more risky.
08:39That's like saying you would risk the same amount of money when investing in the S&P 500 and Bitcoin.
08:45Obviously, you want to lower your budget for the more volatile investment.
08:50So, you need to optimize your trading budget based on the volatility on the market.
08:55So, instead, what you actually want to do is this.
08:59Let's say, per trade, you are risking $100 on a market with 20 ATR.
09:05If next time you want to trade with a market that has a higher volatility of, let's say, 60 pips ATR,
09:11since it's three times more volatile than the first one, that means you want to put your capital three times less.
09:19So, in this case, you would only put $33 on a market that has 60 ATR, and you don't have to worry about getting little profits.
09:28Because remember, the market is three times more volatile, so it has a higher chance of making bigger movements.
09:34So, even with less capital, you'll still get decent amounts of profits.
09:41So, I just revealed the best strategies that you can use with the ATR indicator.
09:46And all I ask for in return, is a very small favor of liking the video and subscribe to the channel.
09:53It literally takes only two clicks, but it means a lot to me.
09:56So, thank you guys for watching, and I'll see you in the next video.
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