Finding great candidates in an uncertain market can be a very complicated process…
But sometimes picking the right stock is as simple as looking at a single day’s activity.
I call this my “Spit the Dummy” strategy.
And it could give your portfolio the profits boost you’ve been looking for…
One of trading’s biggest contributors to the world of technical analysis is J. Welles Wilder. Born in the 1930s, his pursuits included mechanical engineering, real estate investing, and what he is best know for, technical analysis. He is the father of several technical indicators that are now considered to be among the core indicators of technical analysis. Among them are Average True Range (ATR), Relative Strength Index (RSI), Average Directional Index (ADX), and the Parabolic SAR.
And while all of these are powerful tools, today I want to focus on Average True Range (ATR).
ATR is an excellent indicator to uncover unusual price activity that can lead to catching some nice moves. The way to think of ATR is that stocks tend to make average daily moves. When they’re ready to make a move, they tend to do so with a move higher than the average.
Wilder calculates the daily true range (ATR) of a stock by taking the greatest of the following:
- Current High – Previous Close
- Current Low – Previous Close
- Current High – Current Low
In essence, this formula takes into account any gaps that may have occurred from the close from the previous day providing a true measure of a stock’s daily trading range.
Average True Range (ATR) is typically taken over a 14-day period using the following formula:
ATR = [(Prior ATR x 13) + Current TR)] / 14
This provides a smoothed average of TRs over a 14-day period.
(Note that ATR can be calculated on any time period like weekly, minute, etc.)
But that’s enough math – let’s dig into what ATR can do for you…
Think of it this way. ATR can tell us when a stock is unusually volatile, behaving outside of its norm.
Here’s another way to think about it:
In England, there’s a saying “The baby’s spit the dummy!” which means in U.S.-speak that the baby has spit out his/her pacifier and is crying.
When a stock that has an average daily price movement suddenly moves bigger than normal, this is often a sign of more movement to come. When this happens, the directional play is to go with the direction on the day of the unusual move.
For example, if a stock pops up and the daily true range (TR) is higher than the ATR, go bullish. If a stock makes a down move with the daily TR higher than the ATR, go bearish.
The chart below on Garman (NASD: GRMN) illustrates what I’m talking about…
At the bottom of the chart you can see both the TR (gray line) and the ATR (blue line). When TR spikes above ATR (the baby’s spit the dummy), the play is to go in the direction of the daily move.
Notice that on GRMN, this strategy called some very nice moves.
Simple.
Foolproof?
No – nothing is. But this paired with other technical analysis tool will set you up for major profits.
And while it’s true that there’s no (actual) crystal ball out there to tell you exactly what will happen in the stock market, you can predict where a stock or ETF is moving.
That’s right.
With the right tools, you can determine what a stock’s price will look like tomorrow, next week, next month, and beyond. Now, I go much further into depth on this in my America’s #1 Trader Cash Course. Because I believe it’s critical for you to know and understand the number one way to play the stock market, despite what Wall Street’s been telling you for years. If you haven’t accessed this course yet, you’re missing out. Click here to get the details on my course today.
Good trading,
Tom Gentile
America’s #1 Pattern Trader
P.S. The “flipping stocks” revolution is taking Wall Street by storm. And if you’re not in, you’re behind. Find out how to start “flipping stocks” today, right here.
