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 rebounds after falling toward 1.1700
EUR/USD gains traction and trades above 1.1730 in the American session, looking to end the week virtually unchanged. The bullish opening in Wall Street makes it difficult for the US Dollar to preserve its recovery momentum and helps the pair rebound heading into the weekend.
GBP/USD steadies below 1.3400 as traders assess BoE policy outlook
Following Thursday's volatile session, GBP/USD moves sideways below 1.3400 on Friday. Investors reassess the Bank of England's policy oıtlook after the MPC decided to cut the interest rate by 25 bps by a slim margin. Meanwhile, the improving risk mood helps the pair hold its ground.
USD/JPY rallies to near 157.00 as Yen plunges after BoJ’s policy outcome
The USD/JPY is up 0.85% to near 156.90 during the European trading session. The pair surges as the Japanese Yen underperforms across the board, following the Bank of Japan monetary policy announcement. In the policy meeting, the BoJ raised interest rates by 25 bps to 0.75%, as expected, the highest level seen in three decades.
Editors’ Picks
EUR/USD rebounds after falling toward 1.1700
EUR/USD gains traction and trades above 1.1730 in the American session, looking to end the week virtually unchanged. The bullish opening in Wall Street makes it difficult for the US Dollar to preserve its recovery momentum and helps the pair rebound heading into the weekend.
USD/JPY rallies to near 157.00 as Yen plunges after BoJ’s policy outcome
The USD/JPY is up 0.85% to near 156.90 during the European trading session. The pair surges as the Japanese Yen underperforms across the board, following the Bank of Japan monetary policy announcement. In the policy meeting, the BoJ raised interest rates by 25 bps to 0.75%, as expected, the highest level seen in three decades.
Gold stays below $4,350, looks to post small weekly gains
Gold struggles to gather recovery momentum and stays below $4,350 in the second half of the day on Friday, as the benchmark 10-year US Treasury bond yield edges higher. Nevertheless, the precious metal remains on track to end the week with modest gains as markets gear up for the holiday season.
Crypto Today: Bitcoin, Ethereum, XRP rebound amid bearish market conditions
Bitcoin (BTC) is edging higher, trading above $88,000 at the time of writing on Monday. Altcoins, including Ethereum (ETH) and Ripple (XRP), are following in BTC’s footsteps, experiencing relief rebounds following a volatile week.
How much can one month of soft inflation change the Fed’s mind?
One month of softer inflation data is rarely enough to shift Federal Reserve policy on its own, but in a market highly sensitive to every data point, even a single reading can reshape expectations. November’s inflation report offered a welcome sign of cooling price pressures.
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