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 viewing the ATR on a five-minute chart, you are seeing the average price movement for every five-minute candle.
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 chart, Apple had a daily ATR of $1.35. On April 20th, price opened at $141.21 and ran upward. Once price reached the ATR it stalled and drifted sideways. Eventually, the stock closed one penny off of the projected ATR.
Additionally, when price reaches a supply or demand zone beyond the ATR, it is more likely to reverse. Though 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. For example, look at February’s ATR on XLE of $6.02. At the beginning of March, XLE opened and moved upwards before dropping most of the month. Subtracting the ATR from the high price of the month, we arrived at a target of $67.11 for the monthly trend. Just before “running out of gas,” prices reversed.
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: US Dollar to remain pressured until uncertainty fog dissipates
Unimpressive European Central Bank left monetary policy unchanged for the fifth consecutive meeting. The United States first-tier employment and inflation data is scheduled for the second week of February. EUR/USD battles to remain afloat above 1.1800, sellers moving to the sidelines.
GBP/USD softens to near 1.3600 as BoE hints further rate cuts
The GBP/USD pair loses ground to near 1.3610 during the early Asian session on Monday. The Pound Sterling softens against the Greenback amid growing expectations of the Bank of England’s interest-rate cut. Traders will take more cues from the Fedspeak later on Monday.
USD/JPY drops back below 157.00 on Japan's verbal intervention
USD/JPY has come under moderate selling pressure below 157.00 in the Asian session on Monday. The Japanese Yen lost ground to near 157.70 following Japan’s ruling Liberal Democratic Party's outright majority win in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi. However, JPY buyers jumped back and dragged the pair southward on FX verbal intervention by Japan’s Finance Minister Katayama.
Editors’ Picks
USD/JPY drops back below 157.00 on Japan's verbal intervention
USD/JPY has come under moderate selling pressure below 157.00 in the Asian session on Monday. The Japanese Yen lost ground to near 157.70 following Japan’s ruling Liberal Democratic Party's outright majority win in Sunday’s lower house election, opening the door to more fiscal stimulus by Prime Minister Sanae Takaichi. However, JPY buyers jumped back and dragged the pair southward on FX verbal intervention by Japan’s Finance Minister Katayama.
Gold holds gains near $5,000 as China's gold buying drives demand
Gold price clings to the latest uptick near $5,000 in Asian trading on Monday. The precious metal holds its recovery amid a weaker US Dollar and rising demand from the Chinese central bank. The delayed release of the US employment report for January will be in the spotlight later this week.
AUD/USD: Buyers eyes 0.7050 amid upbeat mood
AUD/USD builds on Friday's goodish rebound from sub-0.6900 levels and kicks off the new week on a positive note, with bulls awaiting a sustained move and acceptance above mid-0.7000s before placing fresh bets. The widening RBA-Fed divergence, along with the upbeat market mood, acts as a tailwind for the risk-sensitive Aussie amid some follow-through US Dollar selling for the second straight day.
Bitcoin Weekly Forecast: The worst may be behind us
Bitcoin price recovers slightly, trading at $65,000 at the time of writing on Friday, after reaching a low of $60,000 during the early Asian trading session. The Crypto King remained under pressure so far this week, posting three consecutive weeks of losses exceeding 30%.
Weekly column: Saturn-Neptune and the end of the Dollar’s 15-year bull cycle
Tariffs are not only inflationary for a nation but also risk undermining the trust and credibility that go hand in hand with the responsibility of being the leading nation in the free world and controlling the world’s reserve currency.
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