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The Average True Range (ATR 14) shows you the average ranges between the High and Low prices of the day in any market over the past 14 days.
Let’s use Anglo American as an example...
The Average True Range (14) for Anglo American is currently at R8.59.
What this means is that over the past 14 days, Anglo’s share price has ranged R8.59 between its highest and lowest price.
There are two observations, we can see, in this chart.
#1: Anglo has been on a strong uptrend since December 2017
#2: The ATR is at R8.59
So if the trend was up and traders bought Anglos how could they have lost money? It’s simple – they did not set their stop loss greater than the 14 day ATR.
Here’s what I mean:
If you bought Anglo at R291 and set your stop loss at R287. This is only R4 away from where you bought it. And with the ATR at R8.59, this means Anglo could move as low as R282.41... This would mean you could be stopped out and lose money!
So this is how the ATR can help you avoid losses.
But before you rush off and start applying the ATR to any share, there are 3 criteria a share must meet for my ATR strategy to work.
I call it my ATR Watchlist criteria
#1: The share must be a top company on the JSE
#2: The share must be in a strong uptrend
#3: The share must come down to go up
In the chart above, you can see that Anglo has been pulling back in price from 22 March 2018 and is approaching the Black Trend Line.
This means we can now expect the next run up with the share.
Once all three criteria are met, you’ll add the ATR to the chart and put in your trading levels.
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Anglo is lining up a strong buy level thanks to the ATR
You’ve now got a powerful trading strategy you can use to place your stop loss and cut your chance of taking a loss.
You can use this strategy on any top trading share.
But Anglo is one that is on my radar as we speak.
In fact, I have my entry, stop loss and take profit levels in place ready to send out to my Red Hot Storm Traders
Always remember, “Wisdom yields Wealth”