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An Indicator to Catch Market Swings

Sound familiar? You have spent years surfing the 'Net, and studying books and charts in search of currency trading strategies or forex trading strategies. All you really want is the 'Holy Grail' of entry techniques. You usually end up adding one indicator on top of another, switching from one guru to the next, until you are so confused and unsure of your entry system that you are unable to make entry decisions and stay organized. You get so distracted and frustrated that you quit watching the markets all together!

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An Indicator to Catch Market Swings

The ATR (Average True Range) indicator is not a leading indicator. It is designed to help you gauge the average size of a trading range.

Defined, it is the high minus the low for a given period of time. That period can be a day, a one hour bar, a one minute bar, or even a week. It's averaged over a period of time (i.e., 14 days) to smooth out that number.

ATR can serve as an early warning system. ATR essentially gives you an idea of how much price is fluctuating at any moment in time. When ATR bottoms out, it tends to signal the possibility of rising market action. Conversely, when it peaks, it tends to signal that price action could potentially decline.

Where the trading range is narrow, you will notice that the daily highs and lows are not all that wide. But, as price breaks out of its channel and starts trending, the difference between the highs and lows usually starts to widen. And, as the trending market starts to lose its steam, you'll see the highs and lows start to come closer together again.

The urge to over-trade is ever present in a trader’s mind. One of the greatest challenges in short-term trading, or day trading, is to overcome such a tendency. You'll notice how ATR rises and peaks at various times. Then, things slow down. And, yet again, ATR begins to rise once more. Knowing that this phenomenon occurs on a regular basis will serve as a constant reminder to you that setups that are occur during quiet times probably are not the real deal. You can apply this same knowledge to longer-term charts to give you a relative perspective on where things stand overall.

You need currency trading strategies (a.k.a. forex trading strategies). The trick is to trade less often, and hold onto positions longer. The challenge, obviously, is to determine exactly how long is too long. Indicator fascination will only get you in trouble, as most indicators either get you out of trades too soon, causing you to miss a major move, or keep you in too long, causing you to give back gains.

You need a more precise way of determining when to bail. Using ATR only makes sense – combined with other aspects of technical analysis. Combining your own experience with an ability to properly read charts will enable you to see more clearly where the best entry and exit points are. As a consequence, you will catch more of the major moves, and trade less often – moving you closer to being truly profitable with your trading endeavors.

Study ATR’s behavior. See where it bottoms out and peaks. See if you couldn’t apply this rhythm to your own trading to pinpoint those times that would be best suited to your buy/sell decisions. You might even be able to use this indicator to help you catch the daily swings – like jumping in on the high for the day, riding it down to the low, cashing out, seizing the opportunity to buy the low on the day, riding it out, and then banking your profits. Sounds too good to be true – and overly simplistic – but it does have merit, if you look closely at any chart you are working with, where ATR can be plotted. Most charting platforms/software offer it.

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