I find Average True Range (ATR) to be an excellent tool for determining target prices for stocks, FX, crypto etc, especially when I want to manage risk and set realistic expectations for price movements.
While ATR doesn’t predict direction, it measures volatility—how much an asset typically moves over a given period.
Here’s how you can use it to set targets for stocks:
1. Setting price targets: You can use the ATR to estimate how far a stock might reasonably move in your desired direction. For example, if a stock has an ATR of $2, you might set a target price that’s 1x, 1.5x, or 2x the ATR above your entry point for bullish trades. This helps align your expectations with the stock’s natural volatility.
2. Adjusting to market conditions: During high volatility periods, the ATR will be higher, suggesting the stock has the potential for more significant price swings. In contrast, a low ATR indicates tighter, more stable price movements, which might warrant closer targets.
3. Combining with other indicators: ATR works best with trend indicators like moving averages or support/resistance levels. For instance, you might set an ATR-based target only if it aligns with the key resistance above.
4. Trailing stops: ATR can also help with trailing stop-losses. You can set a stop-loss that trails the price by 1x or 1.5x the ATR to protect gains while allowing the trade to breathe within normal volatility.
Trade Example:
If you buy a stock at $50 and its ATR is $1.50, a modest target might be $51.50 (1x ATR). Depending on the trend, a more aggressive target could be $53 (2x ATR).
While ATR is a great tool for volatility-based targeting, for the best results, it’s important to pair it with your overall strategy and market context.
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