ADR and ATR Indicators - Finally EXPLAINED for Beginners

Let me know if this sounds familiar. You

find the perfect setup. You place your trade with your stop loss exactly where all the gurus tell you to put it and you're feeling really good about it.

Then out of nowhere, bam, a violent spike rips down, hits your stop loss to the absolute pip and then immediately reverses right in the direction you

wanted, just without you along for the ride. It's one of the most frustrating

ride. It's one of the most frustrating things in trading, and it's really enough to make you want to throw your monitor out the window. It makes you feel like the market is out to personally get you, like some big player

knows exactly where your stop loss is and is hunting for it. But what if I told you it's not rigged? What if the problem isn't your analysis of the market, but how you're measuring the

market? What if there was a simple

market? What if there was a simple decades old volatility secret you could use to better measure the market and place your stop losses? It's a powerful tool that's already in your existing

charting software. In this video, I'm

charting software. In this video, I'm going to fully explain ATR, average true range. I'm going to show you exactly how

range. I'm going to show you exactly how to use this indicator to measure market noise so you can set your stops like a professional and stay in more winning trades. But before we get to the actual

trades. But before we get to the actual solution, let's talk about the problem.

The enemy that's knocking you out of these trades isn't just price movement.

It's actually price volatility. Think of

volatility as the market's natural chatter. Some days the market is moving

chatter. Some days the market is moving in a really tight and controlled way, and other days it's moving up and down really chaotically. Using a fixed

really chaotically. Using a fixed stop-loss, like always setting your stop loss at 20 pips or at 1% of your account, it's kind of like trying to have a conversation at the same level whether or not you're in a library or at

a rock concert. On a particularly quiet day of the market, that stop-loss might be way too relaxed, and you could actually have a much better risk-to-reward by setting a smaller stop-loss. But other days, if the market

stop-loss. But other days, if the market is really noisy and chaotic, you need a bigger stop-loss to account for that.

So, how do we measure this volatility of the market? How do we know if we're

the market? How do we know if we're trying to have a conversation in a library or a rock concert? This is where ATR comes in. The ATR or average true

range was developed way back in 1978 by John Wells Wilder Jr. This is the same guy who developed RSI and parabolic S.

The ATR was created for one primary reason, to measure volatility. You may

have heard of a similar indicator called the ADR. It's average daily range. The ADR is is very similar. It's a little simpler

very similar. It's a little simpler actually. ADR also measures volatility.

actually. ADR also measures volatility.

For example, if you're using a 9 period ADR, it'll calculate the difference between the high and the low for the last nine periods and average them.

That's your ADR. The problem with the ADR and why a lot of people recommend and prefer the ATR is it totally ignores price gaps. So like if you're trading

price gaps. So like if you're trading forex, the price gap you see over the weekend. If you're trading in the stock

weekend. If you're trading in the stock market, this the the gaps you'll see overnight, that kind of thing. But

here's the most important thing. The ATR

does not tell you the direction of a trend. A rising ATR does not mean the

trend. A rising ATR does not mean the trend is going up. And a falling ATR does not mean the price is going down.

It will only tell you how much an asset is moving over time. That can be up in one direction, down in one direction, that can be up and down in both directions. What a high ATR does tell

directions. What a high ATR does tell you is high volatility. It means price is moving a lot. A low ATR tells you you have relatively low volatility. Price

isn't moving that much. So, how does the ATR actually work? Well, the math is kind of complex, but the basic idea is simple. For every candle in the period

simple. For every candle in the period that you're looking at, the ATR looks at a couple of things. The distance from the candle's high and low, the distance from this candle's low to the previous

candle's close, the distance from this candle's high to the previous candle's low. It then takes the biggest of those

low. It then takes the biggest of those three numbers and sets that as the ATR.

By including the previous close, this accounts for price gaps. And price gaps can be a really big hidden source of volatility. So, if you're using a 9

volatility. So, if you're using a 9 period ATR, it'll make that same calculation for every candle for the last nine. It'll find the highest of the

last nine. It'll find the highest of the three things I I talked about, and it'll get the average of all those nine candles. That's your ATR. If you add the

candles. That's your ATR. If you add the ATR to your chart, it's going to show as just a single line below your price chart. It'll go up, it'll go down. When

chart. It'll go up, it'll go down. When

it goes up, the ATR is high. When it

goes down, the ATR is low. Okay. So, how

do we actually use the ATR to make a smarter stop loss? The answer is really simple. Use an ATR multiplier.

simple. Use an ATR multiplier.

Basically, instead of using any kind of fixed amount to set our stop- loss, we're going to use a multiple of the ATR. This creates a much more dynamic

ATR. This creates a much more dynamic stop-loss. So, your stop-loss is going

stop-loss. So, your stop-loss is going to be bigger when the ATR is really high and smaller when the ATR is low. The

more volatile the market, the bigger your stop loss. This formula is really simple. If you're buying, you're going

simple. If you're buying, you're going to set your stop loss at your entry minus the ATR times whatever multiple you're using. If your entry price is 100

you're using. If your entry price is 100 of whatever and the ATR is 15 and you're using an ATR multiple of 1, you would set your stop loss at 85. If you're

using an ATR multiple of two, you're still buying at 100. You'll have a 30 stop loss and you'll set your stop loss at 70. If you're selling, it's the

at 70. If you're selling, it's the opposite. If we're selling at 100 and

opposite. If we're selling at 100 and the ATR is 15 with a multiple of 1, we're going to set our stop loss at 115.

If our ATR multiple is two, we'd set our stop loss at 130. You get the idea. So

maybe a better question is, what multiple should I use? Most people

recommend between 1 and 1/2 and 3. 1 and

1/2 to 2 is a great start for most swing traders. It gives you a really good

traders. It gives you a really good balance of being just outside of that normal market chatter without having you risk too much. 2x is probably an industry standard. A 3x multiplier is

industry standard. A 3x multiplier is great for when you're holding a trade for a really long time or if you're working with a particularly volatile asset, maybe something like pound yen or

a stock that is really, really volatile.

As long as the overall trend is still intact, it's going to give you room to work through all the pullbacks. So,

let's work through an example. Let's say

we're trading EuroUSD, which right now is trading at about 116. So, if we check the ATR on our daily chart, we have a 14 period ATR. And right now, it says 0.77.

period ATR. And right now, it says 0.77.

That means 77 pips. This tells us that on average, EuroUSD has been moving about 77 pips per day for the last 14 days. We're using the daily chart and

days. We're using the daily chart and we're swing trading. So, we're going to use the standard 2x multiplier. So,

we'll do some math here, but basically, we're going to set our stop loss at about 154 pips. Quick pause. If you're

finding this video helpful, do me a quick favor and hit the like button. It

really helps the channel. You could also subscribe and see what else I'm putting out. Back to the video. ATR is a really

out. Back to the video. ATR is a really amazing tool, but it's not a magic wand.

Here are a few things to consider to really use it like a pro. First, context

is everything. The ATR is a riskmanagement tool. It's not a crystal

riskmanagement tool. It's not a crystal ball. It's really not going to help you

ball. It's really not going to help you very much to know when to buy or sell, at least on its own. You're still going to need a solid strategy to find setups.

Whether you're using RSI, moving averages, support and resistance, whatever it is, the ATR is just going to help you measure volatility. Second,

consider a trailing stop. For really

strong trends, the ATR can help you set a trailing stop-loss to really lock in profits as the trend continues. The

formula is the exact same, but instead of leaving it until you exit the trade, periodically go and re-evaluate your stop loss with the same criteria and the new price. Maybe at the end of each

new price. Maybe at the end of each candle, you go and recalculate your stop loss. I would always recommend not ever

loss. I would always recommend not ever moving your stop loss further away, but only making a tighter stop-loss as the as the trade moves in your direction.

Third, you can use the ATR to help you figure out your position sizing. It's a

really easy way to figure out exactly what you should be risking and how big your lot sizes should be or whatever else. Once you know exactly what your

else. Once you know exactly what your stop loss should be, it's pretty easy to reverse engineer a 1% risk. Basically,

the way that this works is you're always risking a set dollar amount. Usually,

this is 1 or 2% of your account. If the

market is really volatile and you have a really big stop-loss, you're going to place a smaller order. If the market is really calm and you have a tighter stop-loss, you can place a larger order.

but you're still risking the same amount of actual money. Okay, so let's bring it all together. The constant frustration

all together. The constant frustration of getting stopped out for no reason is often caused by a fixed stop-loss. A

fixed stop-loss isn't adapting to the market's changing conditions. The

solution is using the ATR, which helps us measure market volatility and set more dynamic stop- losses. By using a simple multiplier, usually around 2x, we

can set that dynamic stop-loss, and we can adapt to the market in real time.

Using the ATR can turn setting your stop- loss from a guessing game to something very logical and repeatable.

It gives your trades room to breathe, and it helps you filter out the random noise so you can stay in and capture the actual move. So, stop letting volatility

actual move. So, stop letting volatility be your enemy, and start using it as an ally. So add the ATR to your chart,

ally. So add the ATR to your chart, start playing with it and back testing, and hopefully start trading with a lot more confidence. If you found this video

more confidence. If you found this video helpful and you'd like to hear me explain more concepts in day trading, I've got tons more videos. If you

haven't already, like the video and subscribe either way. My name's Andrew and I'll see you