ATR is falling again on the daily chart, and I am looking for a bit of consolidation on the pair. With a falling ATR and the RSI firmly under 30 the pair looks ripe for a retracement to higher levels, or at least a period of consolidation. Those of you that are not familiar with the ATR it would be worth your time getting to know it a bit.

I like to use it as a tool to let me know if there is any volatility in the market, and how that volatility is affecting the market. Take the move lower in the EUR/USD this last week. The top line of resistance on the ATR was not broken suggesting that the move was going to hit some support around this level. You won’t find ATR very useful for finding convergence and divergence, but it does have one other major positive. It can help you plan entry and exit points.

If you know what the average that a given currency pair is ranging in a day, it doesn’t make sense to set your stops inside that range. Knowing where you should set your stops allow you to look at possible profit targets. Since you should always use at least 1:1.5 R/R, if your stop has to be 150 points away you need to determine if a target of 225 points away is attainable given the circumstances of the trade. If it isn’t move onto the next trade setup!

Five or six short days would see the ATR(14) move lower, and test the support of the channel. If the ATR falls below the channel line then look for several weeks of consolidation. This price consolidation might be in downward or upward channel, but you’ll be expecting it, allowing you to range trade the pair, inside the channel. If the ATR moves upward, followed by a clear break out in price action, you’ll know to short or long the pair based on that.

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