For successfully trading binary options, traders must analyze charts and understand the market. But it’s not easy, and the constant price fluctuation makes this process even more complicated.
But by using powerful software and helpful indicators like ATR, one can develop a better market understanding. Indicators like ATR help a trader to predict the price of an asset accurately.
This indicator makes it easy for traders to understand the market volatility. Meaning it helps a trader to know how much asset moves in a given time frame in the market.
But how can ATR help with binary options trading? What are its limitations? And how can it help with day trading? You will find answers to these questions and more in this guide.
What you will read in this Post
What Is ATR Indicator?
An ATR indicator, also known as the Average True Indicator, is a technical tool that gives an idea of the price movement of an asset. It calculates the volatility based on the past market movement.
This thing further helps a trader to know how the price of an asset will change. Additionally, through ATR, traders can also learn about the mood of the trading market.
To find out how far an asset has moved in the past, ATR moves up and down with respect to the price.
Traders can determine ATR’s value by calculating series of true ranges. Traders can subtract current high from the previous close, current high from current low, and current low from the previous close to learning about the different current ranges.
Once the value of different ranges is determined, traders can easily calculate the ATR. You can repeat the ATR’s calculation for as many periods as you want.
How Can ATR Indicators Help in Trading?
Average True Indicator plays an important role in binary options trading as it helps predict the range of movement. Without the help of the ATR indicator, a trader can never accurately speculate the price movement.
Unlike other binary options indicators that traders use to analyze the distance of market movement, ATR tells the range of movement.
To help you get a better idea of how ATR helps in options trading, here are a few different types of binary options.
The one-touch options have a target price. Here, the traders must predict whether the market will reach, i.e., touch the target price or not.
If it touches the target price, traders will earn a huge payout. This payout is higher than what traders can earn with high/low options.
Using ATR, traders can speculate the range of movement and convert a high/low prediction into a touch prediction. That means they can earn a better payout.
Besides the one-touch options, traders can also use the ATR tool when trading with ladder options. This binary options type works similarly to high/low options but with a little twist.
The ladder options have a current market price. With the help of ATR, you can understand whether the value of an asset will touch the market price or not. If it does, you can expect a payout of 1500%.
Boundary options have a price channel around the current market price. For this binary option type, traders need to analyze when the market price leaves the given price channel.
So, by using ATR, you can speculate whether the price of an asset will leave the price channel or not.
ATR is one of the best indicators that traders can use for improving trading predictions. And with better prediction, you can win a better payout.
Day Trading with ATR Indicator
ATR tool is a perfect indicator for intraday trading charts like 60 seconds or 5-minute trading. That’s because ATR moves higher as soon as the market opens. For instance, if the market opens at 11:00 a.m., the indicator will move up for some time.
This thing happens because ATR tells about the market’s volatility, and the market is most volatile when it opens. After moving up for a few minutes, the indicator starts declining and doesn’t provide much information as the market is not highly volatile during that time.
When the ATR declines, it only gives an idea of how much the price of an asset is moving.
ATR Trailing Stop Loss
A trailing stop loss is a way of exiting the market if the price of an asset is not moving as predicted. Also, it helps a trader to move towards the exit point if the price movement is in the right direction.
An ATR indicator can help you figure out where you can place the trailing stop loss in the market to avoid a huge loss. To determine the right spot for placing a trailing stop loss, you can multiply the ATR reading by two.
If you are selling stocks, you can put the stop loss above the entry price, twice the level of ATR. However, if you are buying stocks, put stop loss below the entry price, twice the level of ATR.
Additionally, if the price of an asset is moving favorably, you can twice the ATR by putting it below the entry price.
Limitations Of ATR Indicator
Just like any other trading indicator, ATR also has certain limitations. Here are two of them.
Market Environment Change
With the help of an ATR, you can know about the previous price trend of an asset, but the future can be different from what’s predicted. This can happen because end trading can slow the market, and any important news flash can disturb the market volatility.
Range Does Not Equal Direction
ATR only tells about the range of movement. But the range of movement does not give a clear idea of whether the market has moved too far or not.
To overcome these two limitations, you must actively check the ATR indicator. Overcoming the limitations will also help you make a good trading prediction.
The ATR indicator is an excellent tool that traders can use to know the market volatility. By using ATR, traders can calculate the realistic reach of an asset’s price and understand the market’s mood.
However, the ATR indicator also has certain limitations that traders cannot avoid. But you can surely overcome these limitations by keeping an eye on the market.
All in all, ATR is an excellent tool that one can for trading binary options and winning huge profitability.
(Risk warning: Trading involves risks)