Average True Range

One of my favorite leading indicators is the Average True Range (ATR). There is technically two different thoughts on ATR, but I like to use the leading version instead of the lagging.

• ATR gives you an idea of the typical move a stock may move in a day

• If price has risen $2 already and has a $5 true range, there may be room for it to grow

• This is not absolute, and a stock does not always move by the ATR, but if a stock is up $10 on a $5 ATR, I would be cautious about entering, looking to take profits, or looking for reversals. At this point is pushing its upper limits and may do one of three things:

  • • Hold, contract, or push ahead

    • For conservatives, avoid entering in the same direction of the movement if it has moved greater than or equal to its ATR

    • Consider playing a reversal if price action calls for it

    • Consider holding if you are a long term holder or swinging through for a longer term; intraday does not matter to swing traders looking at weeks to months

• Catalysts can throw ATR out the window and you could see exponential moves that hold throughout the day

• Some will use an ATR Indicator, but I have not seen any useful practices of the ATR. Check them out on YouTube and decide if it fits your trading style.