Risk management is the secret sauce to long-term trading success. Without it, even the best strategies can fall apart. That’s where the Average True Range (ATR) indicator comes in-it’s like your market volatility radar, helping you navigate price swings with confidence.

What is the Average True Range (ATR)?

Think of ATR as your market mood detector. Created by J. Welles Wilder Jr., this indicator doesn’t predict price direction-it simply measures how much an asset moves, whether it’s stocks, currencies, commodities, or Derived Indices. More movement? Higher ATR. Calm market? Lower ATR. Simple, right? It adjusts to different market conditions, making it a great tool for risk management.

Why traders love ATR

Traders use ATR mainly for two key reasons:

• Position sizing: ATR helps you adjust your trade size based on how wild the market is. More volatility? Trade smaller. Steady market? Maybe go a little bigger.
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• Smart stop-loss and take-profit levels: ATR helps you avoid getting stopped out too soon by setting realistic price targets that match market fluctuations.

How to use ATR on Deriv’s trading platforms

Good news! You don’t need to crunch numbers-Deriv’s CFD platforms automatically calculate ATR for you. Just add it to your trading chart, and you’re good to go.

If you’re curious about the math behind it, ATR is found by taking the biggest value among:

• The current high minus the current low
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• The absolute value of the current high minus the previous close
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• The absolute value of the current low minus the previous close

Then, it’s averaged over a set period (usually 14 days). A longer period smooths the line but reacts slower to sudden changes.
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Using ATR for risk management

Setting stop-loss and take-profit like a pro

ATR helps you place smarter stop-loss and take-profit levels. Let’s say ATR for the Volatility 25 Index is $8.5 and you buy at $100:

• You could set your stop-loss at 2 times the ATR ($83)
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• And your take-profit at 3 times the ATR ($125.50)

When volatility is high, placing stops and targets farther away gives your trade more breathing room.

Position sizing made easy

ATR is also great for deciding how big your trade should be. A common rule? Risk only 1 ATR unit per trade. So, if ATR is $8.5, you’d risk a max of $8.5 on that trade. This keeps your risk in check while staying in sync with the market’s natural moves.

A few things to keep in mind

ATR is awesome, but it’s not perfect. Here’s why:

• It’s a lagging indicator: ATR looks at past price movements, so it won’t predict the future, just help you prepare for it.
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• It’s best used with other tools: No single indicator can do it all. Combine ATR with technical and fundamental analysis for smarter trading decisions.

ATR is like a trusty sidekick for risk management. It won’t predict the future, but it’ll give you a solid heads-up on market conditions. Before using it in live trades, try it out on a demo account and see how it fits into your strategy. 

Happy trading!

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