welcome everyone this is John Shelly as director of research and development for
I'm a day trader. com I'm going to talk about Average True Range ATR I'm going
to talk about how they're actually created and how you can use ATR to set
up an entry applause as well as a profit objective but as you know we must review
our risk disclaimers trading carries a high degree of risk and trading may not
be suitable for all persons past returns are not indicative of future results
please review our risk disclaimer very carefully additionally I place our
hypothetical disclaimer as well in I am a day trader.com we create a great
amount of research and the creation of indicators and strategies like other
research firms we use hypothetical data to create our discoveries please review
our hypothetical disclaimer very carefully we start with true range this
is the highest value of either the high of today minus the low of today a normal
range are the close of yesterday minus the low of today are also the highest value
of the high of today minus the close of yesterday you have these three potential
calculations and winners the highest value is going to be used for true range
of course the average true range calculates the average of the true range
now I agree there is a difference between an average true range and an ATR
and based upon Welles Wilder calculations many platforms however use
the average true range to create the ATR now you're looking at the chart and
you're getting an idea of what the ATR is used for here we're looking at a
daily price action of a stock Microsoft now notice that we have a
huge gap above the previous day now the range of the day is much smaller than
the actual change from the previous day so the ATR uses this calculation so they
can give you a true volatility value based upon each day for example this was
a big gap up here in Microsoft then there was a big gap down that range is
much smaller than the differences between the low and the close of the
prior day same thing over here big another gap up
well that range is relatively small as connected to that high and the close of
the prior day so true range and then average it is so you can get an idea of
the true volatility from one day to the other now here I'm showing you the
average true range as a indicator and as you can tell when they had those huge
gaps that had an increase in the ATR values and sure enough that indicator is
going to be getting to move up and you can begin to see that prices are
beginning to dis relatively go flat and the ranges begin to get smaller and
smaller also the ATR begins to fall because the
ranges themselves are getting smaller and smaller
again the ATR is calculating the volatility of this particular stock
Microsoft I'm showing you a couple of stocks again this is AAPL and forward
and there's a reason I'm showing the prices for a long time ago because the
Ford was actually underneath $2 so it's a very small range but it was a very low
price but look at the average to range it's going to still calculate the ATR
based upon the range and the very small range of the price of Ford so you can
see during the prices move around that the ATR rises and falls this is rather
normal same thing for AAPL a much higher price at that particular
time and the ATR was actually as high as eight dollars and 80 cents on an average
day AAPL at that particular time was moving at 8 dollars and 80 cents that is
beginning to rise up when there is larger larger ranges and beginning to
move down when these ranges on an ATR was very small so as you can tell
ATR goes down and up all the time and changes of volatility now let me begin
to show you how you can use ATR notice that the prices this is the two moving
averages and you see the price that began to move up and reach these level
highs here now I could use that based upon price but this is the wheat
commodity and so the price would be exactly the same is regards to FCX a
very volatile stock and yet notice that the price is actually moved very similar
in regards to price rise in regards to the moving average this rise was the
same number and regards in terms of average to range so prices moved up for
the moving average and it rallied about four point five average to range and
here if I was actually following this particular stock and it also reached the
highs well this rally was of actually four point six average to range so I can
actually follow the price action in wheat which is totally different than
this particular stock but I get an idea exactly on the size of the range from
above the moving averages so I can actually use these to look for a
particular profit objective in regards to whether or not it's wheat or whether
or not it's a stock let me show you another use for Average True Range we
have a moving average is rising up and this is AAPL
I'm showing you the Australian dollar for X now notice the price rally from
this moving average which is the same and it begins to rise to average to
range above the moving average four and six and you can see that when prices get
above six average to range prices begin to have a larger correction in regards
to the trend now notice average to range rise of two four and six average to
range so as you can tell on AAPL it got overbought at basically six average to
range above the 50 period simple moving average using the same strategy of using
ATR here I'm looking at the Australian dollar and I'm seeing this rally but how
high it was six average true range so in other words I have the ability to
measure how high prices are from the moving average not based upon price
since one is a stock one is a currency but instead it is based upon average true
range let me show you something else that you can do with ATR I'm showing a
particular strategy that looking to sell underneath returns into a bearish trend
you've entered this particular trade I'm showing an example of two stocks now
they're totally different this is a stock of 26 dollars and the Google at
that particular time was above 600 so in this particular case I'm using the
ability to put a profit objective based upon average true range of this
particular stock so I can use the same entry same strategy exit at the same way
but it's based upon average true range rather than price from our entry levels
so as you can see I can now take a look at different commodities different
stocks even different currencies and have an
idea of where to look for potential profit targets or stop losses based upon
the daily average true range ATR for example AAPL at that particular
time was $8.50 exxonmobil on an average day on that
particular time the average true range was 90 cents Bank of America at that
particular time on an average day the average range just for one ATR was 24
cents and so you may wonder how can I use and trade each one of these
different stocks exactly the same way because their price and their movement
is totally different well it's basing it upon not price but
it's based upon a 1 Average True Range entry so if I enter a trade and put a
profit objective of one ATR I know exactly how high if I'm being long I'm
going to look for a profit objective I'm looking for a profit objective $8.50 one
ATR well what about if I went long ExxonMobil well how far do I go for this
particular trade 90 cents what about Bank of America so I'm looking for a
trade for Bank of America 1 average you range
just like the other two stocks but what's my profit objective one ATR in
this particular case of 24 cents now let's put this information in regards to
our normal trading for crude and our tech charts here I'm showing you a
couple of trades here and regards to based upon a 34b we have a bearish trend
and we're now having closes underneath the 8 exponential we're going short on
several possible trades I'm showing you in this particular case a profit
objective of 8 cents basically a fixed amount but let me show you that there's
another way not putting a profit target of eight
cents a particular setting for an eight cents but use it as an ATR target now we
have the same entry as we had before but now instead of having a profit objective
of a certain amount of sense we're going to put a profit target at 2.25 average
to range from our entry so as you can tell prices came in where do we exit
based upon 2.5 average to range underneath our entry price now in this
particular case the volatility was very similar in regards to these targets
based upon an 8-cent profit objective versus the use of the 2.25 ATR
volatility doesn't stay the same all the time now we're going to take a look at
another chart in which the market was more volatile at that particular time
we're still going to take the 34b as sales but our profit objective now is
based upon average true range not 8 cents and you're looking at the profit
target reached is 15 cents instead of 8 cents well where did the 15 cent get
calculated from 2.25 average true range and it's because at that particular time
the market was more volatile the ranges of the day were much larger and so the
profit objectives were also getting larger and larger not based upon price
and not based upon a certain scent level but based upon our size based upon
average to range so as prices began to move down now we would not be looking a
profit objective of 8 cents you would be looking at profit objective of 15 cents
here's another 34 b sell what was our profit target it's not 8 cents it's not
a fixed amount it's based upon ATR in this particular case of profit objective
of 13 cents finally I want to show you how you can use an
ATR as both your entry and your profit objectives in any market in this
particular case I'm talking about a stock let's say that we have a Previous
demand our support price action so prices begin to fall and there's
actually a zone that if prices comes in properly bounces back up and doesn't
violate that band then I look for an entry of a trade based upon prices
touching this zone and then beginning to rise where am I going to take profits
it's based upon you got it average true range how many number of shares am I
going to enter once again it's based upon how much dollar risk you want to
take and the use of average true range so I'm looking at an example here that
prices have come down it heads down bounce off this zone it is triggered
into a long trade now notice it got down but the stop-loss is was not triggered
what was it based upon you've got it averaged true range we also had a rally to
a particular price level and it was based upon average true range so in others
every piece of this strategy was using Average True Range how many number
shares what is the size of the stop-loss what is the size of our profit objective
and then of course we have a break-even part of the code as well but every piece
of this automatically can be executed based upon average true range now as you
can tell I'll be discussing average true range in many many different ways I'll
be talking about using ATR not only our commodities but in regards to Forex
stocks bonds different products that were going to be taking but we're going
to use average true range as our stop loss levels and our profit objectives
other than a fixed amount of points are ticks this is John shelly at I'm a day
trader.com