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 stays bid near 1.1650 ahead of Fed rate decision
EUR/USD keeps the green near the 1.1650 level in the European session on Wednesday. Markets turn cautious and ignore the US Dollar ahead of the US Federal Reserve interest rate decision later on Wednesday, where a 25 bps rate cut is almost fully priced in. Meanwhile, cautious ECB-speak keeps the Euro afloat.
GBP/USD holds gains above 1.3300, eyes on Fed outcome
GBP/USD trades on a firmer note above 1.3300 in Wednesday's European session. The US Dollar weakens against the Pound Sterling as the US Federal Reserve is widely expected to announce another interest rate cut on Wednesday. Next of note will be the UK monthly Gross Domestic Product (GDP) report that will be published on Friday.
Japanese Yen bulls seem hesitant as fiscal concerns offset BoJ rate hike bets, ahead of Fed
The Japanese Yen remains on the front foot against a broadly weaker US Dollar through the early European session on Wednesday, though it lacks bullish conviction. Japan’s Corporate Goods Price Index exceeded expectations and reaffirmed bets for an imminent rate hike by the Bank of Japan.
Editors’ Picks
EUR/USD stays bid near 1.1650 ahead of Fed rate decision
EUR/USD keeps the green near the 1.1650 level in the European session on Wednesday. Markets turn cautious and ignore the US Dollar ahead of the US Federal Reserve interest rate decision later on Wednesday, where a 25 bps rate cut is almost fully priced in. Meanwhile, cautious ECB-speak keeps the Euro afloat.
GBP/USD holds gains above 1.3300, eyes on Fed outcome
GBP/USD trades on a firmer note above 1.3300 in Wednesday's European session. The US Dollar weakens against the Pound Sterling as the US Federal Reserve is widely expected to announce another interest rate cut on Wednesday. Next of note will be the UK monthly Gross Domestic Product (GDP) report that will be published on Friday.
Gold struggles around $4,200, looks to Fed for fresh impetus
Gold extends its sideways consolidative price move through the European session and trades around $4,200 this Wednesday. Traders now seem reluctant and opt to wait for the outcome of a two-day FOMC policy meeting later in the day. The key focus will be on updated economic projections and Powell's speech.
Federal Reserve expected to cut interest rates as disagreement among officials grows
The United States (US) Federal Reserve (Fed) will announce its interest rate decision on Wednesday, with markets widely expecting the US central bank to deliver a final 25 bps cut for 2025.
BoC expected to hold interest rate, signaling the end of easing cycle
The Bank of Canada is widely expected to maintain its benchmark interest rate at 2.25% at its meeting on Wednesday. That would follow two consecutive quarter-point rate cuts in September and October.
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