Brandon Wendell, CMT
Brandon Wendell
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.
One 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.
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.
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!
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD remains offered below 1.0800 ahead of “Liberation Day”
EUR/USD came under extra downside pressure on Tuesday, returning to the sub-1.0800 region on the back of tepid gains in the US Dollar and rising caution prior to Trump’s announcements on Wednesday.
GBP/USD meets support around 1.2880, USD remains strong
After bottoming out around the 1.2880 region, GBP/USD now manages to attempt a bounce and flirt with the 1.2900 zone in the wake of weaker-than-expected US data releases.
USD/JPY tumbles to near 149.00 as Trump tariff fears improve Yen’s safe-haven appeal
USD/JPY slides to near 149.00 as the Japanese Yen strengthens due to multiple tailwinds. Investors expect Trump’s tariffs could weigh on the US economic outlook. The BoJ is expected to raise interest rates in the May policy meeting.
Editors’ Picks
AUD/USD: Further gains need more conviction
AUD/USD reversed two-daily pullbacks in a row on Tuesday, staging a decent comeback from Monday’s troughs near 0.6220 to the boundaries of the 0.6300 hurdle propped up by the RBA hawkish hold and firm data from Chinese business activity.
EUR/USD remains offered below 1.0800 ahead of “Liberation Day”
EUR/USD came under extra downside pressure on Tuesday, returning to the sub-1.0800 region on the back of tepid gains in the US Dollar and rising caution prior to Trump’s announcements on Wednesday.
Gold nears $3,100 as fears receded
Gold is easing from its fresh record high near $3,150 but remains well supported above the $3,100 mark. A generalised pullback in US yields is underpinning the yellow metal, as traders stay on the sidelines awaiting clarity on upcoming US tariff announcements.
Bitcoin just as vulnerable as major assets – Anthony Yeung, Global Head of Strategic Development at CoinCover
Bitcoin trades under the $85,000 mark, holding on to nearly 3% gains on Tuesday ahead of Donald Trump’s Liberation Day. Crypto traders remain fearful, the sentiment reads 34 on a scale of 0 to 100 on the Fear & Greed Index.
Is the US economy headed for a recession?
Leading economists say a recession is more likely than originally expected. With new tariffs set to be launched on April 2, investors and economists are growing more concerned about an economic slowdown or recession.
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