Know the Numbers Before You Trade

Posted on Thursday, January 2, 2020 at 9:38 PM

Every new year I update a spreadsheet that consists of recent average ranges and benchmark ranges for many stocks, ETFs and commodities. Most charting platforms have the ATR indicator (average true range) to make the task of updating easy. One reason for comparing historic and current data is to identify trend potential. When recent day and week ranges are far below the benchmark (long-term average), odds increase for a breakout or onset of a trend. Under these circumstances buying options or the underlying tends to be a better strategy. On the other hand, when recent ranges are far above the standard, a consolidation phase typically follows. Thus, selling premium or executing option spreads may be better strategies.

Once a trend begins traders want to know how long the move will last, both in time and distance. I frequently use ATR to set targets over various time frames. For example, let’s say a market has had similar and below average ranges for a five-day stretch. When a breakout signal is realized the first target (T1) is the length of an average day. When T1 trades, move risk (stop loss) to cost. With this strategy you will scratch the trade for no loss if the trend does not materialize. If the trend does continue to extend, T2 is set at the average week range. When that price trades, risk goes to T1. Each market has traits and this management technique is ideal at the onset of trends.

The ATRs I prefer for comparisons are as follows:

  • 14 days vs. 200

  • 9 weeks vs. 50

  • 7 months vs. 18

  • 5 quarters vs. 9

Find time for research to create your own spreadsheet of average ranges of your favorite stocks or commodities. A good trader prepares and has pertinent data available to set risk and targets immediately after a position has been entered. To get you started I’ve attached recent ranges for some popular ETFs.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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