Using ATR for Price Filtering

I was reading about using Average True Range for price filtering and stop losses and found the subject interesting.  The ATR is one indicator that I never really exposed myself to until now.  If you don't know what the ATR is, it is an indicator that measure volatility.  http://www.investopedia.com/terms/a/atr.asp

One way to use the ATR is for price filtering.  If you have a system that generates a certain buy or sell signal, it's always helpful to use some sort of price filtering so that your chances of being whipsawed are lessened.  Let's just say as an example that the MACD has generated a buy signal.  Instead of just buying right then and there, it would be beneficial to confirm this signal.  One way to do this is to get the daily ATR of the currency you're trading.  For example, the 21 day ATR of the GBP/USD today was 140.  If a long signal went off at a certain price bar, you would first find the high of the bar.  Let's say that high is 1.8435.  The close of this bar was 1.8425.  So if you were NOT using price filtering, you would have bought at 1.8425.  But since we will use ATR for price filtering, we will say that if we get a long signal, we will buy at the high of the bar + 15% of the daily ATR.  15% of 140 is 21.  So we take the high of the bar, 1.8435 and add 15% of ATR which is 21.  We get 1.8456 and this is the price that we will buy at.  Today, the GBP/USD shot up to about 1.8550 after that price bar so if we did NOT use price filtering, we could have caught 125 pips.  If we used price filtering, we would have caught only 94 pips.  In this case, the price continued to trend up but many times, this will not happen and if you bought at 1.8425 after a bullish candle was exhibited, you may find that the price will reverse or and you'll get whipsawed.  If you use price filtering, your chances of getting whipsawed are lessened.  

Another way to use the ATR is for stop losses.  I know some people are of the thought that technical levels such as support or resistance should be used as stop loss levels but they don't always have to be.  Going from the above example, if we wanted to place a volatility stop, we could say that we are going to use a stop 30% of the daily ATR.  This would be 140 x .30 = 42 pips.  So we could use a 42 pip stop from our entry point of 1.8456 which is 1.8414.  Bear in mind that these are just examples and you could obviously modify the percentages or the entire method altogether.

Yet another way to use the ATR is for support or resistance line penetrations.  Instead of entering a position if price penetrates a trend line, you could enter using a certain percentage of the daily ATR from the trend line price.  So if a support line break occured at 1.8400, instead of just selling at 1.8400 or 1.8395, you could sell at 15% of the daily ATR below this line.  If the ATR was 140, you would sell 21 pips below 1.8400 at 1.8379.  Once again, this could save you from making a trade that doesn't continue in your direction.