"How far can it go?" This is the eternal question traders ask themselves, driven by their greed and fear emotions.
By Alan Knuckman
Wednesday, August 10, 2016
The reality is that a market move can always go much higher or lower than you think. Anything can happen though, more often than not, a more predictable set of results are the regular reality.
The ATR (Average True Range) puts the daily performance in perspective. This measure is not a directional indicator but a window into the recent range. The ATR is the largest of either the high-to-low range, previous close-to-the-high, or previous close-to-the-low. It was designed to show consolidating or expanding daily price ranges in the dynamic open outcry futures markets of days gone by.
The Welles Wilder ATR indicator was initially a 14 period moving average with shorter or longer time periods utilized by traders for sensitivity. Current electronic markets that trade nearly 24 hours are able to digest financial information with minimal price gaps which are the result of efficiency. Extreme differences from the close to the open have been largely reduced but not eliminated.
The ATR can give guidance into how much is left for a “typical” day’s move. It can be valuable when evaluating the risk to reward of strong trending action to quantify the expected magnitude. The ATR is a guide to what moves are more typical from the recent price action. This information can be used for informed entry, exit and stop-loss placement knowing what has happened in the past sessions.
Knowing how the market has moved in relative terms is one step in a disciplined approach in determining where it is going or not going.
A binary option strategy encompassing ATR profits from forecasting where prices should and/or should not go if past performance is indicative of future results.
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