Catch the Momentum Trend Trade: Unique Volatility Strategy Based on the Average True Range

This strategy is a unique combination of the average true range indicator (ATR), which measures volatility, with the MACD and the Parabolic SAR, which indicate the direction of the trend.

The strategy aims to select only the “true trends” and to avoid fake signals from common trend indicators like the MACD. To do that, we’ll use an advanced version of the ATR indicator, known as the ATR ratio indicator.

A few words on the ATR ratio indicator used in this strategy

The ATR ratio variation of the indicator measures short-term volatility against the long-term volatility on a given currency pair. In our strategy, we are looking for the short-term volatility to increase above the long-term volatility, which tells us that the current momentum is strong and the trend change comes on higher volatility and likely volume. The inflection point of the ATR ratio indicator that we use is 1. Practically when the ATR ratio turns above 1, it means that short-term volatility is higher than long-term volatility. In this strategy, for the short-term value, we use a period of 3 or 5, while for the long-term value, we use 100.

So, let’s get into it and describe how to trade this exciting strategy.

Indicators used:

· ATR ratio with values 3 or 5 (for short-term), and 100 (for long-term) you can download the ATR Ratio indicator here

· Parabolic SAR (standard settings)

· MACD with settings 21, 34, 8 (all Fibonacci numbers)

Timeframe: any

Currency pair: any

Strategy rules:

Look for MACD and Parabolic RSI to simultaneously signal the same trend (bullish or bearish). Simultaneously means roughly at the same time (within 3-4 bars max). For example, the bullish crossover on the MACD should happen within 3-4 bars of the Parabolic SAR turning bullish. It doesn’t matter which one turns first, only they have to occur closely one after the other.

By the same token, the crossover of the ATR ratio above 1 should ideally occur at the same time as the bullish crossovers on the MACD and PSAR. This makes for a great momentum strategy and getting the odds on our side.

Buy Entries:

1. Look for the ATR Ratio to break above 1 (gray horizontal line on the chart)

2. Then look if the MACD is near a point of crossing to the bullish side (indicating trend change or start of new trend)

3. Then look for the Parabolic SAR to confirm the bullish signal from the MACD by giving a bullish signal itself (dot goes under the current candle)

4. Enter long

• Place the stop below the Parabolic SAR dots (it can be a trailing stop)

• Exit when the MACD crosses in the other direction

• Important note: The ATR ratio indicator is not important after the point of entry. You should manage the trade based on the trend indicators MACD and Parabolic SAR.

Sell Entries:

1. Look for the ATR Ratio to break above 1 (gray horizontal line on the chart)

2. Then look if the MACD is near a point of crossing to the bearish side (indicating trend change or start of new trend)

3. Then look for the Parabolic SAR to confirm the bearish signal from the MACD by giving a bearish signal itself (dot goes above the current candle)

4. Enter short

• Place the stop above the Parabolic SAR dots (it can be a trailing stop)

• Exit when the MACD crosses in the other direction

• Important note: The ATR ratio indicator is not important after the point of entry. You should manage the trade based on the trend indicators MACD and Parabolic SAR.