Crypto Trading with ATR Indicator - Crypto Academy S5 W1 - Homework Post for Professor @kouba01

Greetings everyone, I am delighted to part in this new season of crypto academy. This happens to be the season 5 of crypto academy meaning we are moving forward. I am therefore grateful for all the lessons of our professors and their constant moderation. I am grateful to professor @kouba01 for this great lesson. Without wasting much time, I will go ahead to give solutions to the questions asked by our noble professor.

1. Discuss your understanding of the ATR indicator and how it is calculated? Give a clear example of calculation

With my understanding of this indicator which happens to be the ATR indicator. It is simply and very important to the crypto ecosystem. This indicator as brought to the limelight by Mr. Welles Wilder who was a crypto technician. The ATR indicator operates in such a way that, it presents the volatility of the market trend. That is, the price movement of the asset in the market. In addition, the ATR indicator indicates either high volatility or that of low volatility. The volatility simply means the price trend of the crypto asset in the market and this entity helps traders or investors to make good profits from trades they engage themselves in.

As the crypto world deals with that of either making profits or loss, the volatility helps traders as said earlier but the same way can course a havoc or loss to traders in cases the individual is not able to manage and challenge the risk. With regards to the volatility, the higher one makes it very tedious to have a view of the entry points as the signs shown maybe be wrong. Whereas the the low volatility will be simply to get entry points at the signals will be real and true. As we know and we have seen in previous studies, using one indicator alone will not provide the best or results but rather making a paring up with another will make it better. The same applies with the ATR indicator, it will be able to predict or indicate the volatility of the market of the asset but will not be able to give us a clear signal as to weather the coin is low or high in the crypto world.

CALCULATIONS

In the calculations of the ATR indicator, the best time period to use will be a 14 period time even though the inventor of this indicator made it a daily reading indicator. So in order to get the Range of the indicator, it comes in three fouls.

• TR= Max-Mini
• TR= Max- Close of the last day
• TR= Last close of the day - Mini

The formula therefore will be given us,

ATR for the current period = ((Previous ATR) x period -1 ) + Current True Range/ 14

Moving further, the True range of the 14 period days is been multiplied by the 13 days period of the previous day. This is then added to the current True range and the whole equation if divided by 14.

For example, let's take the previous ATR for a 14 period to be given as 6 and we have the high or maximum TR for the next day to given as 4.5. To get the current ATR we have it to be given as;
{(6x(13)}+4.5/14
78+4.5/ 14
82.5/14
5.89
This shows there is a reduction in the ATR for that matter there is an indication of a reduction in the volatility of the crypto asset.

1. What do you think is the best setting for the ATR indicator period

With regards to the settings for the ATR indicator from the founder of it in the person of Welles Wilder was been set to default at 14 for the period. This 14 day period was the default settings and was the picked to be the best settings to give out the signals for trading. This aspect of the indicator is very important as it will have to tell the market volatility been indicated by the indicator.

Even though we have the default settings to be that of 14 period days, various investors or traders can choose to make adjustments to the settings so as to go in line with their preferred trading criteria or technique.
We have traders that are into trading with long term period, these traders or investors will therefore have to make a choice of using a long period settings of the ATR indicator so as to go in line with their trading technique. On the other hand, we have traders that are short term traders for that matter they will have to select a short period for their trading using the ATR indicator. This will enable them go into the trade and make profits out of it.

I will be showing the various periods settings of the ATR indicator, we have the default one which is the 14 day period followed by the long term period which I chose 20 days period and then finally the short term which I select 7 days period.

When we look at the settings of the periods and the chat, it can be seen that, the ATR indicator has certain effects with regards to the period settings. If there period is long, the ATR indicator provides a clear signal and if the period is short, the ATR indicator provides a delicate signal.

---

3. How to read the ATR indicator? And is it better to read it alone or with other tools? If so, show the importance. (Screenshot required)

---

The ATR indicator is used in measuring the volatility of the market and it's quite simple in reading and analyze. In reading with the ATR indicator, high volatility is indicated by larger candlestick bodies which correspond to larger values of ATR. Likewise, low volatility is indicated by candlestick bodies that correspond to smaller values of ATR. I would like to illustrate an example in the chart below;

---

---

From the chart shown above, we observed that larger candlesticks bodies were formed during the bearish high volatility market in the chart. The increase in value of the ATR indicator signaled the high volatility in the price of the asset in the market.

---

---

From the chart shown above, we observed that smaller candlesticks bodies were formed during the ranging phase in the price of the asset in the market. The decrease in value of the ATR indicator signaled the low volatility in the price of the asset in the market. Traders and investors can enter into trades during this period to make good profits because it's possible for a high uptrend to occur after gathering momentum in the ranging phase.

---

Using ATR indicator with other Tools in Reading charts

---

There is no indicator that is 100% perfect and as a matter of that, they are mostly or usually supported with other indicators in reading and predicting crypto charts. ATR indicator is not left out, it also requires the support or use of other technical indicators in predicting or confirming trends and signals of crypto assets. The ATR indicator produces the best when used with the Parabolic Sar and also with Bollinger Bands. I would like to utilize the Bollinger bands with the ATR indicator to reads charts of crypto assets.

This Bollinger band is also an indicator that is based on reading the volatility of crypto assets. It comprises of an upper and lower band which is placed above and below the 14 periods MA. When the price of an asset breaks the upper hand or lower hand of the Bollinger band then it's a signal of the high volatility of the price of the asset in the market. Likewise, when there is a contraction of the upper and lower hand of the Bollinger bands then it's also a signal of low volatility of the price of the asset in the market. A good illustration is shown below in the chart.

---

---

From the above chart, we can clearly observe that as the Bollinger bands expand, we saw larger candlesticks also breaking the lower band which is a signal of the high volatility of the price of the asset in the market. As volatility increases in the market so as the ATR indicator also increases because they correspond to each other.

---

---

Similarly, from the above chart, we can clearly observe that as the Bollinger bands contract, we saw smaller candlesticks formation which is a signal of low volatility of the price of the asset in the market. As volatility decreases in the market so as the ATR indicator also decreases because they correspond to each other.

It is very necessary for combining ATR technical indicators with other indicators such as the Parabolic Sar and Bolliger bands in reading crypto charts to help in determining false signals and also in filtering out the noise as well.

4. How to know the price volatility and how one can determine the dominant price force using the ATR indicator? (Screenshot required)

---

Determining Price Volatility and Price Dominance Using the ATR indicator

---

In using the ATR indicator to detect price volatility, a direct reflection in the price of the asset is observed when the price fluctuates or shoots high. When there price volatility of an asset increases, a larger candlesticks body formation is observed. The ATR spikes when prices of asset rise or falls. A good illustration and explanation are given below in the chart.

---

---

From the chart shown above, we can clearly see that the price of ETHUSD in the first box (1) there was an increase in the volatility as the price of ETH spiked from $3,060.33 to $2,853.95. The ATR as shown spikes up to a higher value where a larger candlestick body is observed or formed.

Also, we can see from the chart above that after the price spike of ETH in box 1, there was a reduction in volatility in the price of ETH which is determined by the formation of the smaller candlestick bodies. The ATR indicator signals any reduction that takes place in the volatility of the price of ETH. Similarly, the same situation can be observed in boxes 3 and 4 respectively.

---

Determining the Dominant Force on the Price

---

In order to determine the dominant force on the price of an asset, the volatility of the price of the asset has to correspond with the ATR indicator and it can either be bullish or bearish especially during strong trends. Let's have a look at the chart below and determine the corresponding trend with the ATR indicator.

---

---

From the chart shown above, we can clearly see that the ATR indicator is signaling reduced volatility with decreasing in the value of the asset, the price of the asset continues to increase. This indicates that the uptrend movement does not correspond or relate to the dominant price force of the asset.

This further explains the concept that the bullish momentum that is required for the uptrend movement is not enough to do so. Traders or investors do utilize this concept in order to avoid fakeout in the market.
The chart illustrated below also indicates how the ATR indicator is reversed with respect to the increase in the spike of the asset price thereby leading to the drop in the price of the asset.

---

---

From the above chart, we can clearly see that a reversal of the ATR indicator gives a sharp upwards spike and it corresponds with the price of the asset too. This shows that the dominant force of sellers is pushing the price of the asset down and it, therefore, corresponds with the ATR indicator from the chart.

From point 1 or box 1, we see that there was a dominant force of the sellers which pushes the price of the asset down and also corresponds with the ATR indicator as shown above. Similarly, we saw that in box 2, there was no corresponding with the dominant force of the buyers leading to the rise in the price of the asset and thereby decreased in the value of the ATR indicator as shown above.

---

5. How to use the ATR indicator to manage business risk? (Screenshot required)

---

For every trader or investor, risk management is one of the significant factors that they should consider when trading because it helps them to manage their capital in order to gain profits and avoid losses. With that, a trader or investor can equally use the ATR indicator to manage risks during trades by aiding in placing stop loss and taking profits points. It is advisable as a trader to use either a 1:2 or 1:3 risk: reward ratio in trading.

In managing risk using the ATR indicator, it has a formula that is constantly used, and it's very good in determining the stop loss and take profit points during trades.

Using the ATR formula to set stop loss Point:-

---

Stop-loss is one of the safest ways of exiting a trade when the price of the asset keeps decreasing or goes against your expectations in a trade. Once the price of the asset hits the stop-loss level an exit position in trade would take place which tends to prevent further losses. The ATR formula is used in determining not accurate but quite good position in setting your stop-loss points in trades. The formula is given below;

Stop-loss = Entry price +/- 3x ATR value.

A good is given below; let's assume I have placed a sell entry price for ETH/USD at $4,060 and also the current ATR value is 116.88. Therefore from the formula given above, we get our stop-loss as follows;

Stop-loss = $4,060 + (3 x 116.88)

Stop-loss = $4,410.64

This indicates that I have to set my stop-loss level at $4,410.64 and I have represented that below in the chart below and I have also placed that above the current high price of ETH. Also, this means that when the price of the asset hits the stop loss level set then the setup would not be valid. The set-up also has a very small chance of being invalidated because of the ATR formula used in the calculation.
We must say thanks to the ATR indicator for easing this for us.

---

---

Using the ATR formula to set take-profit Point:-

---

Take-profit is also one of the safest ways to exit a trade by taking profit during trades. Once the price of the asset hits the take-profit level an exit position in trade would be executed which would tend to help traders leave trades with huge profits. The ATR formula is used in determining not accurate but quite good position in setting your take-profit points in trades. The formula is given below;

Take-profit = Entry price +/- 3x ATR value.

Using the example I gave in the previous question, take-profit can be calculated using the formula above as follows;

Take-profit = $4,060 - (3 x 116.88)

Take-profit= $3,709.36

This indicates that I have to set my take-profit level at $3,709.36 and I have represented that below in the chart.

---

---

The following calculations for stop-loss and take-profits showed above provide the importance of the use of the ATR indicator in managing risks in trades. It helps traders to set a good position in exiting trades.

---

6. How does this indicator allow us to highlight the strength of a trend and identify any signs of change in the trend itself? (Screenshot required)

---

Using the ATR indicator to highlight strength of trends

---

The ATR indicator as we saw earlier can be used in determining the dominant price force of an asset so it can be used in determining the strength of trends as well. Although it fails to determine the direction of trends in terms of trend strength, it is one of the best. In determining trend strength, the ATR indicator is utilized with the price movement of the asset for a good determination.

The prices of assets mostly bounce off from the support and resistance level during the ranging market period in order to bring out greater momentum to form new trends. Prices breakout in either upward or downward with respect to the action of buyers and sellers in the market.

The price action-reflection on the ATR indicator is used in determining the strength of a trend and I would illustrate an example in the chart shown below.

---

---

From the chart shown above, the price of the asset broke the resistance level and that created a valid indication of a strong trend (uptrend). This explained the fact that buyers during this period have a dominant force to push the price of the asset in the market thereby leading to the spike increment of the ATR value.

---

Using the ATR indicator to highlight Trend reversal signs

---

ATR indicator is utilized in checking for the dominant force in the market during trending markets and it's noted with the increase in the value of the ATR indicator with price increment followed. When the dominant force in the market is exhausted the ATR value starts to decrease with time and when that happens the price of the asset starts to depreciate as well, hence a trend reversal is initiated. The reversal in trend is a result of the lack of dominant force to further push the trend of the asset in the previous direction hence an opposite direction is observed. I would illustrate an example in the chart below.

---

---

From the chart shown above, we can clearly see that after the bearish trend was over and the ATR value also decreased, a small-ranging phase occurred to gather momentum to start a new trend in the market. The ATR value started to increase after some time and a trend reversal from the bearish to bullish trend as the price of the asset breaks above the resistance level. The new trend continues for some time as the ATR value also keeps on increasing.

---

1. List the advantages and disadvantages of this indicator

As an indicator just like other indicators, the ATR indicator has certain merits and demerits which I will explore below for the benefit of all of us.

• The indicator is very flexible and simple to use as it can set to any period to suit one trading technique.

• When this indicator is used along with other great indicators, it provides great results thereby bring about great profits to the trader.

• ATR indicator helps us to get the volatility of the market trend of the asset.

• This indicator also goes in a long run to help us get entry and exit points so as to get good profits from our trades.

• Any timeframe trading technique can be employed with the ATR indicator and this makes it very simple for usage.

• As the ATR indicator is able to tell us the Volatility of the market is helps us to get the trend and manage risk in trading.

Let's look at the Disadvantages of the ATR indicator

• The ATR indicator isn't able to give as the trend as to which the market is moving on but only the volatility of the market.

• Using the ATR indicator alone won't be able to give the exact points for entry and exits points unless the indicator is been combined with another great indicator.

CONCLUSION

When one is making trades in the crypto world, the aim is make much profits rather then loss. For that matter, the presence of indicators are very necessary as it helps us in making trades with the aim of profit making. The ATR indicator is one of these indicators that helps in the trading process since is indicates the volatility of the market. It goes in a long run to give us the positions of entry and exit especially when combined with other indicators.

Even though the trading signals of the ATR indicator are not much clear enough it gives us the volatility of the market. The ATR indicator as well when combined with other indicators will be of great benefits as it will gives us good signals for trading.

Thank your very much to @kouba01 for this wonderful lesson given to us.