Traders,

Average True Range is a popular charting indicator that measures how much a stock moves during each candle. If using a daily chart, the ATR reflects the average daily range. For example, the S&P 500 currently boasts an ATR of $4.19, which means at $420, the fund currently moves in a 1% range per day.

Here’s how traders might use that information.

-Targeting: A 1 ATR profit is a realistic short-term target for swing traders that want to tighten stops or take partial profits after a favorable move.

-Entry Trigger Buffer: Some traders use a percentage of the ATR, such as 10%, to add as a buffer for triggering into a new trade. For instance, if the SPY prior day’s high is $420 and you want to buy above it, you might add 41 cents to provide confirmation. Thus, your buy-stop order would be $420.41.

-Stop Loss Buffer: Using the same logic, you could place your stop loss 10% of the ATR below support. For instance, if SPY support was $400, you could place your stop at $399.59 to decrease the chance you get shaken out by noise.

For an in-depth look at these and other applications of the ATR, check out this week’s Tales of a Technician blog.

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Chart of the Day: S&P 500

Note the ATR on the top left of the chart reflecting $4.19 as the average daily range. Friday’s powerful rally definitely increased the average.

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