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# Trading Harmonic Patterns with Average True Range (ATR)

AnalyticsTrade Team Last updated on 7 May 2023

## What is Average True Range (ATR)?

Average True Range (ATR) is a technical indicator used to measure the volatility of a financial instrument. It was developed by J. Welles Wilder Jr. and introduced in his 1978 book, New Concepts in Technical Trading Systems. The ATR indicator is a measure of the average range of price movement over a given period of time. It is calculated by taking the average of the high, low, and close prices of a security over a specified period of time. The ATR is a useful tool for traders to gauge the level of volatility in the market and to identify potential trading opportunities.

## How to Use ATR to Trade Harmonic Patterns

Harmonic patterns are a type of technical analysis that uses Fibonacci ratios to identify potential price reversals. These patterns are based on the idea that price movements tend to repeat themselves in predictable ways. By using the ATR indicator, traders can identify potential harmonic patterns and use them to enter and exit trades.The ATR indicator can be used to identify potential harmonic patterns by looking for price movements that exceed the average range of price movement. For example, if the ATR is showing an average range of 10 pips, then a price movement of 20 pips or more could indicate a potential harmonic pattern.

## How to Calculate ATR

The ATR indicator is calculated by taking the average of the high, low, and close prices of a security over a specified period of time. The ATR is typically calculated using a 14-day period, but this can be adjusted depending on the traderâ€™s needs.To calculate the ATR, the following formula is used:ATR = (High â€“ Low) + (High â€“ Close) + (Low â€“ Close) / 3

### ATR and Risk Management

The ATR indicator can also be used as a risk management tool. By using the ATR indicator, traders can identify potential levels of support and resistance and set their stop-loss orders accordingly. This can help traders to limit their risk and protect their capital.

### ATR and Position Sizing

The ATR indicator can also be used to determine position sizing. By using the ATR indicator, traders can identify the average range of price movement and use this information to determine the size of their positions. This can help traders to manage their risk and ensure that they are not taking on too much risk.

### ATR and Trend Identification

The ATR indicator can also be used to identify potential trends in the market. By using the ATR indicator, traders can identify potential trends and use this information to enter and exit trades. This can help traders to identify potential trading opportunities and increase their chances of success.