Tales of a Technician: How to Use Average True Range (ATR) | Tackle Trading: The #1 rated trading education platform

Tales of a Technician: How to Use Average True Range (ATR)

Today’s video provides a comprehensive review of how to use Average True Range (ATR). It includes the following:

  • How to calculate it
  • Why it’s a volatility gauge reflecting the stock’s personality
  • How to use it for triggers, stops, and targets

Average True Range (ATR) Notes

Calculation: Last 14 bars – capture the average size per bar. It considers gaps as well. The range over the day.  

Stock’s Personality: Low-volatility, low-priced stocks have a small ATR. High-volatility, high-priced stocks have a high ATR

Volatility Indicator: Rise as stocks fall & falls as stocks rise.

Targeting: 1 ATR

$50 stock with an ATR of $2.50. Rise 3 days in a row.

Buffer (stop & trigger)

Entry – Trigger – Buy above prior day’s high ($52). How far above prior day’s high?

  1. Wait to rise 1 ATR above prior day’s high – too slow b/c it already ran a bunch.
    1. $52, Buy at $54 (1 ATR above)
  2. Wait to rise 1 penny above prior day’s high – too quick b/c not enough confirmation
    1. $52, Buy at $52.01
  3. Use a % of ATR such as 10%.
    1. $52, Buy at $52.20 (10% of ATR above prior day’s high)

Stop Loss – Sell below support. How far below support?

                A)Wait to fall 1 ATR below support – maybe that’s too far.

                                A) Sell stop at $48

                B) Exit if stock falls 1 penny below support – maybe too close.

                                A) Sell stop at $49.99

                C) Use a % of ATR such as 10%

                                A) Support at $50.

                                B) Sell stop $49.80

ATR is $2.

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