You might be wondering, what is the best strategy for success in cryptocurrency trading? The answer is simple: the best one is the one that can maximise profit while minimising risk. If you can devise such a strategy, it will be your key to a successful crypto trading journey. However, it is essential to recognise that creating such a strategy requires a deep understanding of crypto trading indicators.
When we consider risk in crypto trading, one of the primary factors that come to mind is volatility. Fortunately, there is a tool that can help us analyse the market purely from a volatility perspective. It sounds interesting, doesn’t it? That tool is none other than ATR (Average True Range). Let’s dive into more details about this powerful tool.
1. Average True Range: All You Need To Know
In simple terms, ATR is a tool used to measure how volatile the market is. It was developed in the late 1970s by a well-known technical analyst, named J. Welles Wilder Jr. ATR calculates the average price range of assets over a 14-period time frame. What makes ATR unique is that it does not offer information about price direction or trends.
1.1. What Does ATR Value Tell
A high ATR suggests that the market has experienced significant price swings over a specific time, indicating higher volatility. Conversely, a low ATR indicates that the market has been relatively stable, with smaller price fluctuations. \
For instance, if a cryptocurrency’s ATR is 5%, it means its prices have been changing by an average of 5% over the defined period.
2. Steps To Calculate Average True Range
To calculate ATR, follow these steps
- Step 1: Find the True Range (TR) for each period
TR = Max of the following three values
- The high of the current period minus the low of the current period.
- The absolute value of the current period’s high minus the previous period’s closing price.
- The absolute value of the current period’s low minus the previous period’s closing price.
- Step 2: Choose a time frame
Generally, traders choose a 14-period time frame.
- Step 3: Calculate the ATR
To calculate the ATR, you should sum up the TR values over the chosen period and then find the simple average.
For example, for a 14-day ATR of a stock, calculate the TR for each of those 14 days, sum them up, and then divide by 14 to get the ATR value.
3. How to Launch ATR on a TradingView chart
Launching the ATR indication on a TradingView chart is a six-step process.
- Step 1: Sign in to TradingView
Log in to your TradingView account.
- Step 2: Launch a Random Chart
Use the search option. Select any trading crypto pair or crypto you want to analyse by clicking on it.
- Step 3: Use the Indicator Icon
Look for the indicator icon, which is usually located on the top of the chart.
- Step 4: Search for ATR indicator
Click on the indicator icon, and type ‘ATR’ into the search bar.
When the ATR indicator appears in the search results, click on it to add it to your chart.
- Step 6: Configure Settings
A box will pop up with settings. Usually, the default setting is a 14-period ATR. You can leave it as is or modify it to suit your preferences.
That’s it! You have successfully added the ATR indicator to your TradingView chart to analyse.
4. Prime Benefits of Analysing Using Average True Range
Using the Average True Range to analyse cryptocurrency charts offers several significant benefits:
ATR helps traders assess price volatility in crypto markets, where prices can swing dramatically.
ATR is a valuable tool for setting both take-profit and stop-loss orders in crypto trading. You can multiply the ATR by a factor (e.g., 1.5 or 2) to establish reference points for both types of orders.
- Stop-Loss Orders:- By using ATR to determine your stop-loss level, you safeguard your positions from being closed prematurely due to daily price fluctuations.
ATR $500, 1.5xATR = $750 below entry for Bitcoin, guards against premature trade exit.
- Take-Profit Orders:- Similar to stop-loss, you can use ATR to set take-profit levels. This allows you to secure your profits when the price movement aligns with your trading strategy, preventing you from missing out on favourable price movements while reducing the impact of short-term market noise on your decisions.
ATR $30, 2x ATR = $60 above entry for Ethereum, locks in profit amid market noise.
5. Limitations of Average True Range
Like other indicators, Average True Range also has a few limitations
- Interpretation Challenges
ATR can be tricky to interpret as it does not definitively predict trend reversals.
- Price Direction Ambiguity
ATR solely measures price volatility and does not provide insight into price direction changes.
For example, a sudden ATR spike may not confirm an existing trend, leading to false assumptions.
- Lack of Trend Information
ATR does not inform traders about the strength or weakness of a trend.
Endnote
The ATR indicator is a tool developed to measure market volatility. A high ATR indicates wild price swings, while a low ATR suggests stability. To calculate ATR, find the True Range for each period and then average them, often over a 14-period span. Using ATR on TradingView is easy. ATR helps set precise orders in cryptocurrency trading but does not predict trend reversals, provide price direction, or indicate trend strength. Anyway, when combined with those indicators which can address the limitation of ATR, it can do wonders. So, ATR is an extremely valuable tool.