VIDEO LESSON: Money Management and ATR explained

Risk & Money Management are very important, if not the most important issues that must always be addressed by anyone seriously considering trading the Markets. They cater for the preservation of both your Initial & Accumulated Trading Capital. You may already have a great system or set of rules to determine what to buy but if your method of Money Management is clumsy, you will lose money, unnecessarily! Once buying that share your role is no longer as a Trader or investor but a Risk Manager. At some point in time your trading system will meet a draw down period (losing streak) and if you don't know what to do, you will lose your feeling of control and try to desperately trade your way out of this crisis. Many people feel despondent and abandon a perfectly good trading system, or give up trading altogether with large profits still to be made.

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Average True Range (ATR) Technical Indicator developed by J. Welles Wilder

The Average True Range (ATR) indicator is a measure of volatility. The ATR indicator measures the range of price movement for a particular price period. The ATR is a directionless indicator and it does not indicate the direction of the Forex trend.

High ATR values

High ATR values indicated market bottoms after a sell off.

Low ATR values

Low ATR values indicated extended periods of sideways price movement- Price Range, such as those found at market tops and consolidation periods. Low ATR values are typical for the periods of sideways movement of long duration which happen at the top of the market and during consolidation. 

Calculation 

The ATR is calculated using the following: 

• Difference between the current high and the current low

• Difference between the previous closing price and the current high 

• Difference between the previous closing price and the current low

The final Average is calculated by adding these values and calculating the average. 

The indicator of Average True Range is a moving average of values of the true range

Technical Analysis of True Average  Range (ATR)

True Average Range can be interpreted using the same principles as other volatility indicators.

Possible trend change signal - The higher the value of the ATR indicator, the higher the probability of a trend change;

Measure of trend momentum - The lower the indicator’s value, the weaker the trend movement

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