Stocks

ATR Gauges the Gas Is Left in the Price Tank

brandonwendell
Brandon Wendell
Instructor, CMT

As traders we all want to find the highest probable turning points in the markets. At Online Trading Academy, our students learn how to find them through the discovery of high quality supply and demand zones. In addition to the zones, there are several Odds Enhancers that we teach that traders can use to increase their probability of success in the markets.

Free Trading WorkshopOne odds enhancer is similar to a fuel gauge, the Average True Range, (ATR). A fuel gauge in a car tells you how much gas you still have left. If you know your average miles per gallon for the car, you can figure out how far you can still travel without running out of gas. The ATR can tell you how much price movement you may experience before you run out of momentum.

The range of a stock’s price is the difference between the high price and the low price during a period of time.  The true range is a little different in that it also includes any gapping that may have occurred from the prior period.  So, the Average True Range measures the stock’s price vibration (average movement between high and low) over a period of time.  The default is usually 14 periods.

The ATR of a stock will differ based on the period you have your chart set for.  If you are viewing a daily chart, the ATR will refer to the average movement that stock will make between the high and the low for the day.  If you have your charts set for 15 minutes, then you will see the average movement for every 15 minute period.

When price is trending strongly in a particular direction, knowing the ATR for that timeframe can offer you a clue as to when price may pause or reverse.  For instance, in the following picture, the daily ATR for SPY was $3.81.  If you subtracted that from the prior day’s close of $185.28, you knew that the morning gap and price drop would likely see a pause when it reached the daily ATR range.

Using Average True Range as an odds enhancer

Additionally, when price reaches a supply or demand zone beyond the ATR, it is more likely to reverse.  Price may still have plenty of momentum when it reaches a supply or demand within the ATR.

We can even use this ATR on a larger timeframe.  Last month’s ATR for the Q’s was $9.52.  At the close of January, QQQ finished at $104.13 and started to sell off in February.  Subtracting the ATR to the closing price of the previous month, we arrived at a target of $94.61 for the monthly trend of the Q’s.  After opening positive on the first day of the month, prices dropped until they were just shy of the ATR target.  As of the writing of this article, price has lost its downward momentum and has been basing at that ATR target.

Chart of ATR on the QQQ

So, while it is not a perfect timing tool for the markets, the ATR can be used to enhance our trading.  It is an odds enhancer for traders.  To learn about the other odds enhancers, join us in one of our classes at Online Trading Academy today!

Brandon Wendell – bwendell@tradingacademy.com

Disclaimer
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.