Why Average True Range is Important in Crypto Trading

Beginner’s Guide / 03.01.2021

The key to success in financial trading, including crypto trading, is to maximize profits while minimizing risks. Minimizing risks calls for thorough market analysis using both fundamental and technical analysis to achieve a profitable trading strategy. There are several technical indicators one can use in the crypto space to establish the market trends and enter/exit a trade when the time is right. 

A popular and efficient technical indicator in analyzing crypto markets is the Average True Range (ATR) indicator. The ATR indicator indicates market volatility and displays how much asset changes in price on average during a particular time frame. ATR points out when it’s right to enter a trade and can be used to determine where to place a stop-order. 

ATR indicator is important in crypto trading to ensure trading consistency. Here is how you can use the ATR to input a stop loss and measure profit targets. 

Average True Range (ATR) Indicator Overview

In summary, the ATR indicator is used to determine the volatility of price changes. ATR measures the price volatility of assets. Being a universal indicator, the ATR indicator can be used in any markets, including forex, stock, commodities, and cryptocurrencies. 

In crypto trading, the ATR indicator is a highly efficient way of determining the market volatility to make an informed trading decision. Understanding the market volatility in the particular trading sessions reduces volatility risk when entering/exiting a market. 

The ATR indicator is usually set at 14 by default. Therefore, on a daily chart, the ATR indicator will display the average volatility from high to low from the past 14 days. However, the ATR indicator changes with the chart timeframe. For instance, on a 1-hour chart, the ATR indicator will show on display the average volatility involving the last 14 hours. ATR indicator’s value is usually displayed on the top-right hand corner of the ATR indicator window. 

Importance of Average True Range (ATR) Indicator in Crypto Trading

ATR indicator comes in handy in crypto trading to aid in trading decisions. Information from the indicator can be used to determine how much an asset typically moves in a particular trading session. ATR indicator can help you plot profit targets and determine whether to enter or exit a trade depending on the market volatility. A popular misconception about the ATR indicator is that a high ATR value points to a bullish trade while a low ATR value indicates a bearish trend. This misconception is misleading and far from the truth. When used correctly, the ATR indicator can enormously grow your profits by minimizing price volatility risks. 

While the ATR doesn’t indicate the market direction, it can combine other trading strategies such as the best range true average trading strategy to establish market trends. This can be done by relating the general ATR value with the trend direction. In a market uptrend, the ATR indicator indicates lower volatility, while in downtrends, the ATR indicator value is high, indicating higher volatility. 

Crypto Trading using the Average True Range (ATR) Indicator

When using the ATR indicator to trade crypto, the primary question is how to profit off the intense volatility cycle. While the indicator can be used to analyze price direction or at what level the price level will occur, it can be combined with other trading strategies to determine when to buy or sell the asset. 

The concept behind trading crypto using the ATR indicator is quite simple. ATR indicator displays trading signals quite infrequently but often indicates crucial breakout points. The primary idea behind these trading signals is that a change in volatility occurs when the asset price closes more than an ATR above. Therefore, going long is an ideal trading option in such options. 

When to Exit the Market

The best thing about the ATR indicator is that it tells you when to exit the market. The primary rule in trading using the ATR is that a significant market change is indicated by asset prices closing more than one ATR below the most recent price close. In such situations, exiting the market is the best bet since the asset is more likely to experience a price reversal or enter a trading range at that particular point. 

In most cases, ATR is mostly used as a market exit strategy regardless of the analysis used when making the market entry decision. For a better market exit strategy, the ATR indicator can be used with the chandelier exit. The chandelier exit determines the best level to enter a trailing stop loss where the prices have reached the highest high after placing a trade.  In such cases, the ATR value is the distance between the highest high and the stop level. The value of the trailing stop is always dynamic, depending on the market action. 

Advantages of Trading Crypto Using the Average True Range (ATR) Indicator

Trading crypto using the ATR indicator offers several advantages. The crypto market is extremely volatile; thus, understanding certain durations’ volatility levels can be the difference between making profits and losses. ATR trading strategies are compatible with any trading time frame making them quite versatile and ideal for analyzing any crypto asset market. An ATR indicator is especially useful in day trading using a 15-minute time frame chart. This indicator will offer you profitable market entry points and exit points for maximum profits at lower risks. 

When used with other indicators, notably the chandelier exit, the ATR indicator will allow you to establish an ideal level to place your stop loss to close the trade with minimal loss. There are variations of the ATR indicator, and you can use one that suits your trading strategy. For instance, you can use multiple ATRs that vary in fractions or employ the filtered wave ATR strategy to determine price reversal points. By correctly using ATR, you’ll always be ahead of completion in crypto trading

Final Thoughts

Using the Average True Range in crypto trading offers limitless possibilities. For a start, the ATR indicator allows you to gauge the market’s volatility levels and, in turn, decrease volatility risk when entering a trade for maximum profitability. The ATR indicator can also be combined with other technical indicators listed above to determine a trailing stop loss and facilitate a smooth market exit with minimal losses. In essence, ATR integrates market volatility with price action to offer you the best and most profitable trades.    

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.