This is Tai Zen – currency analyst for prisonorfreedom.com. It’s a blog where we talk about the tools, the techniques, the strategies and the technologies that are available to help people find freedom and health wealth and relationships.. In this episode of currency analysis. I’m going to talk about how to estimate Bitcoin’s price velocity using ATR.
In today’s objective, we are going to cover “What is the average true range often abbreviation ATR” and we will also talk about “What is the difference between ADR vs. ATR” and ATR stands for “Average daily range” and these two indicators are commonly used and are commonly interchangeable and there’s only a slight difference between the two.
I will explain that in a minute and then we will also cover “How to use Bitcoins ATR to measure volatility, How to use Bitcoins ATR to set stop-loss and how to use Bitcoins ATR to measure time and distance for a price projection or estimation”. And then lastly, I will go over “What is the ideal ATR setting?” Okay. So let’s go ahead and get started here.
Once again, excuse me, I will use tradingview.com as my analysis platform. The reason why I’m doing this ATR or average true range video is– if you’ll look here in the comments, I was commenting and updating everyone on one of the example trades that I posted yesterday on how to manage a trade and over here.
Anthony asked me “How do you use ATR indicator in your last chart?” And I’m sure that the reason why he’s asking me this is I stated over and over that, I do not use indicators in my trading. And so when he noticed that I have one indicator here at the bottom of my chart, I think that’s probably what prompted him to ask how I’m using it. So this video is for Anthony and the other folks that see me using the ATR… Oh, up here LiveLearn here.
So the first thing is, what is the average true range? Okay, so then I’m gonna to go to this chart here, the average to rank. I’m pulling up Facebook here as an example because it has the quality. It’s not a 24-hour market like Bitcoin is so it’s a lot easier to explain ATR and ADR. ATR – the average true range is how much it moves in that day. So in this particular case yesterday the average true range– see how it says 62.44.
That was the high of the day yesterday and I’m a look at this red candle by the way, and then the measure at the bottom is like 60.40. I’m sure you zoom in you can get a more accurate look at it. Let me go ahead and do that right now. So you guys can see what I’m talking about.
Then on this daily chart here. The bottom is 60.44 and the top is like 62.44 or 62.42 somewhere around there. It’s almost like a $2 range. So it’s safe to say that Facebook moved closer to $2 yesterday. So that would be considered the average daily range because that’s how much it moves in one day.
So ADR is the average daily range. So we measure the very low of a candle to the very top of the candle. We have about a $2 range. So that would constitute the average daily range. Now, the average true range is a little bit different. It measures from the time that it opened. Thus, the price closed down here yesterday and it gapped up all the way up to herein and it opened here, and then it closed here at the bottom of the candle body.
So the average true range is slightly different from the average daily range because it takes that gap into account. So you have a gap over here, you have a gap over here, over here you have a gap here. So average true range take account that there is a gap and it calculates the total range that the price moved during that day or during that time period. So ADR is used to measure the daily range of stock, Bitcoin or a currency or futures market or anything like that. ATR is used more on measuring the candles.
So the ATR would be expressed as a 7-day ADR as because it’s usually measured in daily ranges. If you switch to like a 60-minute candle right here, of course, the ADR will also measure the 7 periods. But usually, it’s used to measure the daily range, not the intraday candles like the 60-minute or the 180-minute or the 240-minute.
That’s why you’ll notice that on a 60-minute range, the range is almost the same. It’s $0.76 range and $0.75 range here. Meaning that if you add up the distance that price moved in the last 7 candles and divide by 7, you’ll get about $0.75 move and then if you take up here on the average true range.
If you take the distance that price moved from the high to low in the last 7 candles and divide by 7 you will get a $0.76 money. So it’s not that far off. But when we change it to the daily range, you’ll notice the daily candles here. There’s a significant difference in price.
Okay on the ADR it still indicates that Facebook moves an average of $0.75 a day whereas on the 7-period average true range. It indicates that Facebook moves an average of $3 per candle not per day but per candle. Okay. So the answers to “What is the average true range” and “What is the difference between the average daily range versus the average true range” is ADR is average daily range and it only measures the top the high in the low of the candle distance.
I normally use the average true range in trading myself. So let’s go ahead and take a look at how I use the ATR to trade Bitcoin. Let’s talk about how to use Bitcoin ATR to measure volatility. So if we go over here to– by the way, I’ve been asked to use other exchanges other than just Mt. Gox. So I’m going to go ahead and use the BTC-e exchange here.
First of all, when I look at ATR, I always look at the daily range first. The way that I use ATR is the same way that a cardiologist would use the heart beats per minute. Let’s say that my normal heart rate equals 78 beats per minute. If I were to tell you that my heart rate is now at 140 beats per minute. That would let you know that I have a high heart rate.
If I were in a lying position and I’m not moving around, my heart rate would slow down to around 72 beats per minute and you would know automatically that I have a low heart rate. Some of you guys that have been following me for a while, you know that I’ve had multiple heart attacks before;
The first one I had was back in 2007 and it was a very very a massive heart attack and I did not know that it was a heart attack at that time, so I pulled to the side of the road and I just lay there and I suffered a heart attack for about an hour before my work boss came and pick me up and took me to the emergency room to be saved.
Then when I got to the ER at the hospital that I noticed that when I looked up the heart rate monitor it indicated that my heart rate was at 195 beats per minute all the way to as low as 20. I think that was the lowest number that I saw.
Now, we know that the normal heart rate for me is this right here is 72. So when when I saw that it was 195 and even during the most intensive exercises that I’ve ever done in my life as an athletic trainer, the highest I’ve gotten was like 180 or 185 for a very brief moment, as the matter of fact, as soon as I stop the exercise, my heart rate would drop very quickly because I had a very efficient heart.
However, when I saw that my heart rate was at 195 beats per minute. It was very scary because I knew that that is not a normal heart rate for me. I knew that from over a decade worth of training people and train myself at the gym. I knew that that was not a healthy heart rate and what made it even scarier is that my heart was jumping from 195 beats per minute down to 20 beats per minute within like 5 is 10 seconds span, and I know from years of exercise that that is not possible and that’s not healthy.
Maybe I shouldn’t say it’s not possible, but that is not healthy for a normal male at 36, 37 years old to have his heart rate jump from 195 beats per minute and then 5 seconds later, it’s beating at 20 beats per minute. The only way that the doctor knew that there was something wrong with my heart, one of the ways anyway, was to look at my normal heart rate, which was at 78 right here and see that this is a low number and this is an extremely high number. So either end of the extremes.
That’s the heart rate measures, likewise, when we talk about the ATR, we can measure and tell that the ATR is healthy or not healthy. So if we look over here at the range now that we have a number in mind, we know that when the price went up to 1240 and set a new high here, the average true range was– if you look over here to the grey box right here, you’ll see it and let me just expand this window a little bit so that your eyes will focus on here.
If you notice that during the run-up to 1240, we reach the high of $180 per candle meaning that if you took the average of these 7 candles at a time during this period right about here, you’ll notice that the average of the last 7 candles – the distance of travel was $180.
Then it narrowed down to about $100 in this area right here, the average of the 7 candles and then it reached the peak of $204 around here. The average of these 7 candles in this area here and likewise the average of the 7 candles here was around $158 in this area right here.
So keep in mind that ATR is a lagging indicator. However, it gives us a good perspective on the velocity and what’s the normal healthy heartbeat or the heart rate of the price movement of Bitcoin. So right now we noticed that price ran up in the past as you can see here, you’ll notice that the price movement of Bitcoin was– before the huge run-up, if we put a line right here, you’ll notice it was around $10 a candle.
So to go from $10 a candle in October all the way up to around $150 to $200 in the middle of November, that is a huge run-up. That’s like saying that my heart rate went from 78 to 195, it’s near the extreme is what I’m saying. So now if we look back here to the current time, we will notice that the heart rate or the ATR of Bitcoin is now right around $58, $60. You can say to the low of right here which is around $34. So the price or the heart rate of Bitcoin right now floats between anywhere between $34 to $60.
So how does that help us? Well, first of all, the first thing that it does is it helps us measure volatility. So if we look at the price of Bitcoin right now, we can say that it was less volatile than it was during the middle of the last half of October and November and December.
So we can see that through the shape and the size of the candles but it’s a lot faster if you just look down here and see that that Bitcoin had around $150 to $200 price range each day and now it’s down to $34 to $60. That’s how you measure the volatility. Now if the price was to jump up to like $100 or $200 per candle again within the next few weeks or few months, then we would know that Bitcoin is becoming very volatile right now.
So let’s take a look at the next bullet point here. How do we use the Bitcoins ATR to set stop losses? Let’s just switch to a 60-minute candle here. Let’s just say that if you were to zoom in right here, and you were to execute a trade right here. What I do is I normally pull the ATR down very low here because all I need to see is the number over here.
I really don’t need to see the entire chart– if you’re a beginner and you want to get your eyes used to it, you’re welcome to expand this ATR window a little bigger so that your eyes can clearly see it. But what I do is that when I trade Bitcoin, I normally have it on the one day and I just have a quick glance at it and each day or each week, the beginning of week and then I just compress it like that so it does not get in the way and after that I can see this 52 and I know that that it’s at a low volatility right now.
Let’s switch to the 1-hour chart. Let’s just say that the market’s going sideways and you want to set a stop loss. I’d like to colour code red as my exit and then I will clone this line again and put it up here. As my target profit, in this case, I’ll just use purple just so your eyes can tell the difference between the two. I always like to take trades are at least a 2 to 1 or a 3 to 1 risk reward which means that for every dollar that I risk. I want to make sure that there’s a potential 2 to $3 gain.
Let’s say that we decide to make this trade and– by the way, the overall long-term trend is up. So even though we are in a sideways market, when the trend is 30 degrees or more like this, when we have a clear uptrend like that, a lot of of people consider that a trend. However, I do not see this as a downtrend at all, I see this as just a tilted sideways market.
So in this tilted sideways market, first of all, I would not go against the long-term trend, in other words, we are in a daily uptrend. Let’s take a look at how I would use the ATR to set up this trade. Now if you can follow me for a while now, you know that I do not like to chase trades meaning that I set my trades up in advance, I do not chase a trade, I do not wait for the price to start running up and then I start panicking and chasing after a trade.
So there is sideways market right there and for the purpose of this presentation, I’m drawing my sideways market where it’s hitting those majority hits rule that I used to drive my trendlines. So now I would look to go long when the price reaches somewhere down here somewhere. I would love to go long and my stop loss would be below the low of this big drop right here.
Looking at that, I would raise my profit target to somewhere about right there. If I take this tool over here – risk management tool, you will notice that first of all you place this on the entry which is right there and then you’ll notice that if I pull this up and expand this chart a little bit, you guys will see what I’m talking about here. You will see that there’s my profit target and there’s my projected stop loss.
So there’s my risk right there, my risk to rewarded that 4.8. That means that for every dollar that I risk, there’s a potential $4.8 of potential gain for every dollar of potential risk, right? So now if I look at the size of this stop loss, it’s 16.17, the distance from the green line to this red line and if we double check over here, if you add $16 on top of this 15, it should come out to the 31.
So I know that’s the size of my stop loss right now. If I expand this ATR window down here, it will show that it’s at 4.1 meaning that– you can look at the number over here, it’s about $4. That means that you can expect the price of Bitcoin to move about $4 every hour.
So we’re looking at the hourly chart and it indicates that in the last 7 candles or 7-period if we add up the total high and low distance that the price of Bitcoin moved and we divided by 7. We get 4.1. I just ran it off the $4, right. So that means that if we enter a long here at the green line and we set our stop loss $16 away from the entry. We have a very good shot at not being shaken out.
Let’s say that if I were to move my stop loss to below the low of this low. Let’s say that for explanatory purposes, I move it to below the low of this, and let’s just expand some more so you guys can see it and let’s say that I put it right here. Now, you’ll notice that the stop is now 2.8 dollars away from the entry.
So if the vibration or the frequency of Bitcoin moves $4 an hour, then there’s a very high risk– see how price of Bitcoin vibrates as it goes up, there’s a very high chance that the vibration will shake me out of this trade long before I even have a chance for the trade to develop and move in my favour, right?
The stop-loss is way too tight as in my opinion and my personal this 2.8 dollar stop loss is smaller than the hourly ATR for Bitcoin. And so there’s a very very high possibility that your Bitcoin was a close down to hear when I get ready to go long. It will shake me out long before I get a chance for the price to shoot back up. Because of that, the way we use ATR to set our stop losses is to right here.
Where we use ATR to set the stop losses? We want to make sure that our stop loss no matter what time frame that we used to be just slightly bigger than the actual ATR. So I move my stop loss to below the low of this low right here and we come over here and we move it to here then what happens is that $14 stop loss is three, almost four times greater than the hourly ATR for Bitcoin, which means that the probability that I will get shaken out of my stop losses is a lot less. Because I’m operating within the parameters of this trading instrument called Bitcoin.
If I was to go back to Facebook and I was setting my stop losses on an intraday 1-hour, I would want to do it so that the ATR is just slightly greater than $0.76. Now the percentage stop loss, the size of your stop loss will vary amongst each trader, the strategy that I explain here to manage your stop losses is fairly the same but how it’s being used is going to be slightly different. So that’s that’s how the ATR is being used to manage your stop losses.
The next thing that I want to talk about is how to measure time and distance for price projection. So let’s say that I wanted to project how long it will take for the price to reach from here down to here, to my entry target for a long so the price is up here right.Let’s say that it comes up to hear bounces off this tilted sideways market and then it starts to come down because of the distance between the top of this channel, right?
Let’s go ahead and use this measuring tool here. The price range– if we just grab that and go to the bottom here, it says that’s about $79 range. So if we take our trusty old calculator here because I’m not one of those Asians as very good at math if we take $79 and we divide that by an average true range of $4. We get 19 candles or 19-period.
We can round it up to 20, you know it does not have to be perfect. As long as we get a good estimation– so we know that within the next 20 candles if it were to come down to our entry for a long it would take at least a good estimate of 20 candles. What matters is that you have an educated guess based on past performance of this Bitcoin.
Now another thing that you can use is if you were doing a price projection, when it comes down to here you can look at how long it takes to get back up to here and we know that it takes 20 candles because each moves an average of $4, then you can pretty much reverse the math and figure it out.
Now the last thing that I want to talk about is “What is the ideal ATR setting?”. So now that we know how to use ATR to measure volatility and time and distance and set stop losses, what is the correct setting?
There is no correct setting, there is no correct setting, you click on this gear right here and the length of this is 7. Now traditionally, traditionally before computers were invented and electronic trading, traditionally, old school method was to use a 14-period ATR or ADR, either one, 14 days or 14-period was the standard.
This is the reason why most platforms that you set up an account, they just have it defaulted to 14. Now, my trading mentor who was a very very savvy day trader. He recommends that if you are day trading, meaning that you are opening a position and closing it within the same day, you trade intraday, then he recommends using a 5-period ATR.
Now whether you use a 7-period or 5-period for day trading or a 14-period, that’s up to you. Since I take more of a swing trade and a more swing and position type trading with Bitcoin, I’m just going to stick with the traditional 14. If it’s 7, it’s not going to hurt me. This just gives you a ballpark figure whether you’re off a little bit or not, it’s not going to kill you.
So hopefully this video has been helpful and this answers Anthony. All right, give me questions, comments, you can leave the feedback under my YouTube video or in the comment section of my freedom blog at prisonorfreedom.com. If you want to make coffee or beer donations, that would be awesome, you can do that at prisonorfreedom.com/donation.
Sharing is caring. If you know people that are trading and they’re not sure how to use ATR correctly or how to set their stop losses without being shaken out or how to measure volatility or do a price projection using ATR. You are welcome to share this video with them learning about ATR has helped you increase your success with trading up, please send me screenshots of your success, I’d love to share it with other people.
I always recommend that you become a real freedom fighter and share your knowledge of Bitcoin to help yourself and others become financially independent through this Bitcoin technology that was created by Satoshi Nakamoto that is taking power away from the 1% on Wall Street and giving it back to the 99% on Main Street, to the common people like us.
So let’s join this Bitcoin revolution, thanks for watching this video and I look forward to seeing you in the future currency analysis video. Alright, have a great day guys, and may the training gods smile upon you when you are trading Bitcoin.