Swing Trading (days to weeks) | John McNichol | 12-15-20 | Using ATR-Average True Range for Stops
good morning everyone john mcnichol here and welcome to swing trading days to weeks we'll go ahead and we'll take a look at the market and focus on short-term trades days to week so stick around all right good morning to everyone that's live with us today quite a few here with us such as price action timothy michelle yoko harold joel mike ron kevin lp chris mary sarah tony and everyone else we got cameron may helping us out on the chat with us uh if you have any questions i am unable to get to he'll be more than happy to help you also notice at the bottom of the screen also on the title my twitter handle if you wish to follow myself along with other fine instructors such as cameron may i'll share that with you on the chat let's take care of disclosures we'll get right into our session today options not suitable for all investors please read the pre-provided copy of characteristics and risks of standardized options full spread straddles other multi-lake options strategies often involve greater more complex risk than single leg option trades and in order to demonstrate the function out of the platform we will be using actual symbols keeping in mind t ameritrade does not make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account solely responsibility now we have a a demo account for practice trades uh looks like a real account but it is not you're encouraged to practice what you learn with tools such as the paper money application which is for educational purposes and successful virtual trading during one time period does not guarantee successful investing of actual funds during later time periods market conditions change continuously a stop loss order will not guarantee an execution at or near the activation price once activated they compete against income and market orders as always all investing involves risks including the risk of loss there's our agenda we'll go and review the market open we're going to go ahead and discuss average true range commonly referred to as atr as a potential method that some traders may utilize for practicing setting stops and targets and we'll also go ahead and implement some practice trades based off of that discussion and let's go ahead and bring up the thinkorswim platform as we'll go ahead and take a look at the market open a lot of things going on this week folks between uh uh well uh we've had the uh electoral college uh vote we've had uh pfizer the pfizer vaccine uh being distributed uh both my sisters are our ends i think my one sister will be getting something today and my other sister sometime within the week so that's good news for them uh also moderna uh i believe uh has a tentative approval and may see uh that approved for emergency possibly this week we also have the fed uh coming out wednesday uh which may uh lean towards uh supporting the market as well as uh the uh through congress uh another uh stimulus bill uh potentially coming through so uh we're seeing at least a bit of recovery uh from yesterday yesterday was an example of uh potentially although we'll see what today does of a swing failure as prices did trade higher and they kind of faded back still staying above the the high of the low day which is commonly referred to as we hear calling a cohold close above or in this example trading above the high the low day at least the lows are still tentatively holding as the s p is up about three quarters of a percent uh looking at the nasdaq uh nasdaq as well which did not go down uh as the market did now one of the things that we had discussed yesterday in the futures class and this is applied uh can be applied universally is these long range days those long range candles the midpoint may act as areas of support and resistance and that occurred yesterday actually relatively earlier coming after the equities open where prices kind of traded up into that range about midway and then faded um the nasdaq still maintained uh above the high the low day those of you that join me for the technical analysis workshop last week a common pattern that we also discussed here the harami inside day so we had to bounce from monday did fade going in the afternoon but yet held and as far as the opening on the nasdaq opening near the higher range looks like it's uh opening uh above the mid part of that candle the market's only open for five minutes you know a little bit of a you know fade on the opening but relatively small as we're right uh close to the opening at the moment with the nasdaq being up about three quarters of a percent as well uh looking at the dow djx that has been more consolidating more sideways for quite some time even going back to early november as prices are still kind of hanging around the highs from last month after making a new high yesterday prices did fade right back in that high range and possibly supporting the principle that broken resistance has a tendency of acting as new support as we're seeing more of an inside day harami uh holding that previous high so still a bullish uh sign overall for the market thus far and finally looking at the russell up about three quarters of a percent again after making intraday high uh faded and a relatively smaller uh consolidation depending on how one looks at this you know started off as being a little more of a pennant as prices were kind of squeezing in we saw that pop and then faded back in and now potentially uh breaking higher here today looking at some of the sector action over on the left here across the board we're seeing an energy on the s p 500 sector leading being up about uh one and a quarter percent followed by information technology and materials all up a percent or more and uh the only uh sector showing negative but close to being flat would be the reits off about about a fifteenth of a percent and with areas uh lagging kind of more on the defensive area with utilities real estate consumer staples communication services uh lagging as well possibly a lot to do with the reopening trade risk versus the stay at home but nevertheless uh showing up positive looking at some relative strength uh numbers uh over the last month uh energy continues to be a big player being up about 21 over the last month uh followed by performance in financials and information tech although relative strength dipped a little bit on the financials still doing well over the last four months financials could be an area that may benefit one way or the other uh with the stimulus and also with uh what the fed may have in store all right so with that in mind let's go ahead and take a look at the atr uh by the way folks uh you know if you notice on the left hand side some of the productivity tools that we may reference are shared in the scratchpad and also if you follow on twitter we have a pin tweet right here with the background on many of those different productivity tools and so you're welcome to utilize them welcome to go ahead and modify them make them your own and so let's go ahead and get into our discussion on 18. i did that again sorry about the intro again i got fat finger there on the transitions uh so uh atr uh indicator stands for average true range uh what the idea behind this indicator is you know identifying you know what's the average move of a stock on a given day some of you may utilize stops stops are a common technique that active traders may use on short-term trades but one of the problems with stops uh is you know where do you set those stops now we've given some examples of uh identify a low day or identify support and then set a stop a percentage below that uh that may be you know a dollar amount uh maybe a certain percentage and some of our examples we've utilized uh one percent uh below that low day uh what atr attempts to do is you know not every stock is the same uh you know there's volatility some stocks may fluctuate greater than others and so by just having a a default uh stop for every stock you may not line up now we do use a little discretion where you know that low is expected to be uh the lower point of that range and therefore you know a stop is put outside of that range but what if there was you know something that may be a little more uh systematic based off of what the current price action is doing and enter the atr so let's go ahead and take a look at that on the platform i have actually already added it on on top of some of the other indicators by the way there is a shared chart here and one can go ahead and utilize that as well so if i go ahead and let's say copy this we'll go to the setup open shared item and this chart's configured more for a lighter background uh so if you have a darker background you may need to you know manipulate the colors you know then here's the chart with some of the different moving averages i've utilized macd and relative strength now if i want to add the atr one can go ahead and select the beaker by clicking on that beaker we can go under studies and actually we don't need to search very long you can start typing it in atr but it's right at the top they are alphabetical and there's atr i'm going to go ahead and click on the little question mark this is how you can learn about these indicators and if we go ahead and take a look at the list uh thanks ricardo i just saw the joke on uh me uh bringing up that intro uh yeah mike has a tendency doing that as well too and i only seem to typically do it when he's helping out on the chat but so that was kind of one-off with cameron here all alright so we got average true range study that calculates the average to price range over a time period uh it even gives kind of the formula behind that let's try that again and the default periods 14 period we'll go ahead and utilize that default period 14th period uh common in a lot of oscillators that's half of the lunar cycle or monthly cycle 28 days if you scroll down a little bit more you want to learn more you can click on that and that will actually take you to the learning center which is in the background right now but i'm going to go ahead and double click and add this indicator and we'll go ahead and we'll click apply i'll go ahead and we'll do okay and so there's the indicator on the chart you know from there uh you know notice probably on your display it's it's thinner than some of the other lines that i have you know you can always put your cursor on an indicator nice little trick uh right click and you can edit that indicator change the period uh make the line different line style or just make that line thicker change the color if you want click apply all right so there's an example with that atr i already have it on the other chart here so we'll go back to that and uh i'll just bring up some as simple as apple if we go ahead and we take a look at this indicator over time notice that indicator does change what it's accounting for is it's accounting for as the daily ranges of the stock may get larger the atr should rise as those daily ranges get smaller the atr would fall now while we're on the subject for those of you that are more uh longer term uh considering things of not from days to weeks in this discussion but more weeks to months possibly longer the atr may be looked at in extremes as well particularly in spikes or peaks in that atr over a longer term a lot of times you'll see this coincide with price action possibly selling off usually atr ryzen atr more volatility more volatility has a tendency of a current uh in more downward markets and so you know these indicators can be applied universally we can also see generally speaking as far as overall as far as trends that you know apple is more volatile uh now um compared to where it's been in the past and actually that's kind of a misnomer i shouldn't say volatile uh a little more the daily range is more uh now that is going to be a natural occurrence for stocks like apple that may go up a bit more parabolic you know it was trading at around uh split adjusted around fifty dollars back in 2018 and it's trading upwards around 126 now so by natural the daily ranges may be more all right now let's go back take a look at a near-term chart and so if we look at the current value for something like apple uh apple is showing up uh as an atr of let's see if i get that out of the way get this drawing tool that keeps getting in the way and for some reason i can't seem to get out of the way there we go uh so down here you can see the atr value for uh apple gosh darn it you could see that atr for apple showed up at three dollars what that implies is if you look on a bar for apple the difference between the high and low is that daily range and so over the last 14 periods it's averaging out that an average daily move for apple is about three dollars and seven cents and so what uh so and this is a relatively shorter term uh is you know one may take that value and possibly utilize it to set an upward very short target and possibly set it below as a potential stop when there's a bounce or possibly a breakout and again this is a shorter term example if one's looking for more of a larger move possibly do a multiplier of that like one and a half times or two times if someone's looking at for a trade for a longer period well apple right now is actually breaking above their highs that long vertical that we did in the breakout class uh is looking pretty good as we were targeting for the price to be trading above 125 and staying above that so a good move there if we go ahead and look at other stocks uh at xlnx you know here's xylinx notice that the atr is different here we're seeing 4.95 we bring up uh some of the energies uh looking at konica whip phil phillips beforehand interesting uh energy being up it looks like energy's actually backed off a little bit with uh let's see looks like information tech leading now looking at a triangle on conocophillips so if we look at the atr atr shown a value of 1.82 and let's see what else we got and then on the financial side example wells fargo notice wells fargo has a daily uh as an atr showing up at 90 cents if you go ahead and look at a a chart and put your cursor on a bar you'll see the r value that r value is the range for that particular bar so atr takes a variation of that range and averages it out again over the last 14 days so let's talk about uh applying this let's take a look see if anything else says pop there are a few setups uh some of the stocks that i just brought up see if there's any stocks that are bouncing uh at the moment there's proctoring gamble coming off some lows but notice the trend being down we're looking for bullish swings we're looking for more of an uptrend although with procter and gamble breaking down this could be potentially be a bearish swing to the downside if it rolls over and you know we've done an example of some bearish trades uh for example uh polti homes was one of the ones that uh i think we did last week anticipating the breakdown hasn't quite done it it's still flagging uh kind of near that support did start rolling over yesterday looking to see if that will pop below and i believe we did an example of a just a long put for january the problem is with long puts or long options if the price doesn't move that time decay will eat away at that option there are other alternatives such as spreads that may slow that down and i discuss those in the long verticals and diagonal class every thursday in fact i also have an example of a put diagonal uh on this practice trade for that class so you're welcome to stay tuned for us there now looking at the chat good discussion there uh there was mention about mmm which is the market maker move and if you know you may see this on not many stocks if you see this this is typically going to be revolved around earnings uh and typically when uh there's a larger volatility on those shorter term options versus the longer dated ones it would pop up that's the implied move based off the options market for a fixed period of time and you know this is also another way folks since we're on that and appreciate the discussion i'm not sure who brought that up with cameron but if you look at options for an individual stock another way of looking at implied moves is over here on the left hand side look at the dollar value plus or minus so the options market implies for instance for pulte if i go 30 days out is implying a move about four dollars and 48 cents now so whether some traders may utilize that as a target or at least an understanding how much price can fluctuate that may also be helpful on where someone may likely set a stop if they're concerned about getting kicked out of a trade all right and i won't go down to rabbit hole with keltner channels but there are other indicators that incorporate that volatility uh such as keltner channels bollinger bands things like that but let's go ahead and apply uh atr and appreciate the feedback there another uh avenue to learn more about uh technical indicators is on our webcast uh every right well every day you're gonna learn something new on technically speaking but if you go to education and go to those webcasts look at the calendar technically speaking's every day at 2 pm eastern time and you'll see there are various subjects i do the breakouts and reversal patterns every monday it's some moving average crossovers yesterday uh in this class uh you know we'll do options trades on top of stock trades pat maloli does options on his technically speaking class and pat also does advanced charting techniques too where we'll utilize different indicators a great way of staying in tune and also based off of time frame james as a companion does weeks to months so more of the intermediate to longer term trend trades a great way to marry up different strategies and different techniques again this would be more days to weeks very shorter term and find another example there trying to find a little more of a a clear bounce there i think i may do is go back to xilinx that's a clear pop there now this is also a little more of a gap now if i was to look at this atr which is 4.95 uh one may be projecting a move that's 4.95 above the current price and set a stop that's about 4.95 below
that um so in the case of the gap uh may not be as good of a candidate looking to try and capture it as that price trades above the high that low day and try and capture that momentum so notice if we look at this setup as far as a flag you see up that pullback after a sharp move up one two three days uh characteristic of what type of bullish candle reversal when price opens lower and trades into that range more than halfway or that pearson line and whether if one enters based off of that candle or waiting for price to trade above the high of that low day notice as we're looking at at this point you know the atr is at around uh a little bit below where it is right now you know around 488 you know just under 490. then when the price does trade above let's look at the range of this day so looking at uh the high of that day was 144.97 so from that point if we did 144.97 from the breakout point 144.97 minus i'll just do 490.
that would end up being a stop somewhere at around 140. and notice here that's kind of putting it 1407. notice that's pretty much putting it just uh at or below not by much but just a little bit below that low so the atar kind of try and put it out of that range if you look towards the upside do 144 two 0.92 four dollars and ninety cents i messed that up four dollars and ninety cents that would be 149.82 and notice how that hit that intraday pretty much on the same day now that brings up a a good point here if we go ahead and did something like this on that given day theoretically one would have entered and exited the trade on the same day now that would be a day trade uh not everyone may be authorized to do day trades one needs a uh have a margin account or typically be a margin account and have over twenty five thousand dollars in equity so keep that in mind if one's utilizing very short-term term trains in general on when those trades are initiated um if one's trying to avoid doing a day trade then the idea is potentially enter in towards the end of the day now problem with that uh for some short term traders is that it may be a a bit more of a higher price than one would anticipate but even notice here if the same method was applied going into the close uh we have a close of uh one those are 149. if we were to add about 490 on to that uh that would put us at around just shy of about 154 and notice it actually did that the next day too so even if you had opened going into close the next day or open going in the close of this day and closed it the very following day that would not be a day trade and that would be a profitable outcome so something to potentially practice with folks let's make sure here there are some questions on automating as far as trades uh there's not a automated method as far as getting in getting out on a multiple basis each trade needs to be set however one can use alerts for indicators to place a trade as well as getting out i may explore that a little bit more maybe with the moving average crossovers i have done it for a while but in the conditional orders that may be our follow-up for next week [Music] trying to find something to utilize the atr uh you can only do this on a real-time i believe you can only do this on a real-time platform paper money may have the feature but there is a study feature where you can trigger a trade based off what the indicator is doing you do want to make sure you have those settings right um it is a little complicated and you may not be uh happy with the results if you program it wrong so what we do is uh we basically plan to trade based off the price action that we see on the chart all right so let's go ahead and take a look uh trying to see if i can find a good setup we can work off of let's do it on wells fargo so we look at wells fargo we're seeing a little bit of an inside day so price consolidating looking for a breakout of this range so let's say we go ahead and take a look whether one looks at it more horizontal or looks at it more diagonal where we did have price breakout but faded yesterday this is common for a few stocks so basically break out of this inside day to the upside some traders if they're a little more conservative you know may look for it to actually break above that previous day's high alright so we see a little bit of a range here on lines of that you know kind of triangle and we're going to utilize the atr down here now those are not a a big value relatively lower price stock as far as law and lower vol but we'll still be able to do this so let's say we're going to go ahead and trigger a trade uh as it goes about uh 20 cents above this resistance so right now looks like it's about 29.30
uh let's do about 20 cents above it that would be 29.50 so i'm gonna go ahead and right click on the chart we're going to do a a buy custom with stop we'll do a kind of a conditional order on this one and both for the entry and the exit so on the entry we're going to go ahead and change this to a stop limit i started talking about these uh last week in swing trading and on the technically speaking remember a stop is a worse price and a lot of you familiar with a stop loss in a bullish trade which is set below the price when you're looking to sell because if you're selling at a lower price that is a worse price some traders may be looking to enter at a higher price to capture that momentum hence a buy stop and so that's what we're utilizing here to capture the price as it breaks higher if it does so with that i think i said that price level was a trigger price of 29.50 so i'm going to plug that in or 29.5 right there and then the limit would be you know how much above that price you're willing to pay and some people may put a little bit of a buffer on there so let's say in this example i'll do it by about 10 cents that way if it gaps it will not fill unless it comes back down to that marketable price and we'll leave that as a day order uh because the reason to get into trade may change if it breaks down today or the price continues to slide back may have a lower entry or if it's continue going more sideways may look for more of a breakout this can be applied to options as well uh colonel tm make sure you go back and look at my archive sessions uh for this class as well as in technically speaking and i do an example with an option as well all right and uh we'll we'll do the same as f and as far as the uh utilizing the atr you're still going to do it based off of the stock however keep in mind on options uh there's probably a little more slippage you may not be getting the desired outcome that you want particularly with relatively smaller moves all right so we got that entered there uh let's go ahead and look on the sell order we're gonna change this to gtc for good till cancel and then again we're going to go into the gear notice it doesn't appear until you put your mouse on there so i'm going to go ahead and click on that now this is going to require a little bit of math here if we're doing let's say 90 cents we're going to go ahead and take that entry price and i'll do it based off of 29.50 we do 29.50 plus
90 cents that'll be 30 and 40 cents if we go ahead and subtract it do uh 29 point five and minus 90 cents that'll be 28 and 60 cents so we go ahead and bring up that gear again i'll click on that and i'll bring up your conditions you can actually place up to three conditions here i'm gonna go and click on the first box go to the method and notice it defaults to less than or equal to so since it already defaults to that we'll focus on potential stop now keep in mind stops are not guaranteed to fill at this price once it hits that trigger it will create a market order they'll compete against income and market orders there could be some slippage with that i'll click to the next box mark and we'll do greater than or equal to then we'll go ahead and put in the target now again keep in mind this would be happening intraday potentially day trading rules would apply if it fills and exits on the same day if you're trying to possibly limit that and there is you can submit an order at a particular time you can attempt to submit this uh towards the end of the day end of the trading day make sure it meets your time up at the top uh however if the price does move earlier in the day you are going to miss that move but it is another technique that one can apply all right so with that in mind uh i can go ahead and click save and do a confirm and send and sent and so now that'll be a work in order this will not fill unless wells fargo breaks out of that triangle and it'll attempt to capture a quick move now this is not a a method for everyone but one way of potentially modifying it is look at ranges or a should say a multiple of that atr so as an example you know wells fargo here is a a triangle measuring from that support to that resistance uh in this case uh you know that's a move of about don't bring this up you know that's a move of about a buck 82. now notice coincidentally that is about two atr so if it's based off of a previous move or a previous swing you know one may adjust that accordingly and let's say i do that if i go back to that order go to work in orders i can actually right click on that existing order cancel and replace we'll go to the gear and let's say on that upper target i'll i'll add another 90 cents uh so that should be uh 3130 i believe we'll leave the stop the same and then confirm and send now basically we're targeting that similar move but we got a relatively tighter stop now what can happen is if the price goes ahead and breaks out and moves higher then what we can do is adjust the stop one atr below the closing price on the day so if the price goes ahead and demonstrates some momentum we can raise the stop one atr below the closing price the price goes higher raise it one uh one atr below the closing price until it hits that target okay another variation of this is is not having the uh is not having the uh target at all and then just basically adjusting almost like a trailing stop based off of that atr and that's actually a challenge that i'm looking to uh possibly put in play by not necessarily an automated way of doing it but uh taking that atr and incorporate that into a a stop placement that one can practice with the paper money so we went over uh a couple examples on utilizing the atr in the case of wells fargo so what we tentatively did for this practice trade is set up a buy stop if it breaks through the triangle to try and capture that pattern move and which equated out to be in about two atr we went ahead and set a tentative stop which would be one atr uh below uh where that entry price is so that way if it fails it will fail fast uh if the momentum is there and price goes higher then one can adjust that level one atr as an example below the closing price and to do that is the same that i did before uh go to that monitor tab find the work in order also as well over on the left inside of your monitor tab on your open positions you should be able to see those there you can do it from there as well by right clicking and cancel and replace if i go back monitor tab right click cancel and replace order you go into the gear and you'll go ahead and you know do the math you know let's say the price goes higher and the next day the price closes at uh get out of here for a sec yeah after an entry the price goes ahead and closes at uh thirty dollars and eighty cents uh what one can do is go ahead and take that atr and subtract it off of that price uh that would potentially raise the stop up to twenty nine ninety all right so we'll see how that plays itself out i would encourage you to do this on some other practice trades as well as we go ahead and round out this session let's take a quick look at the market so s p still kind of inside the range of yesterday probably would not expect uh as much momentum going in with the fed tomorrow but looks like nasdaq still doing pretty good still hanging around the highs the dow still kind of inside let's see if the russell is behaving much like the uh the nasdaq russell's still doing very strong uh as we're still outside of that pennant and just below those highs all right so let's go ahead and wrap things up folks what we did is we went ahead and took a look at the market open uh keep an eye for the fed tomorrow uh we discussed average true range we'll do a follow up with this next week see if i can integrate an atr stop into the mix there and we'll see how it done with our practice trade and we'll probably do a series of a few types of trades integrating that atr on an ongoing basis just so we can get a bit of a sample in there and then we'll continue reviewing practice trades uh i was a little remiss on that as far as the practice trades i did touch on one of them that was phm on pulte homes still kind of hanging around that support and the other one we had done recently which may be pushing higher is nucor which after entry is kind of consolidating and eating up some time as the price is going a little more sideways we'll reevaluate that next week as well all right i'd like to thank cameron for helping us out on the chat thank you cameron uh thank for thank you joel mike david er wayne and everyone else for your support remember in order to demonstrate the function out of the platform we had to use actual symbols keep in mind td ameritrade does not make recommendations or determine suitability of any security or strategy through use of our tools any investment decision you make in your self-directed account is solely your responsibility have a good day folks we'll talk to you again real soon bye now you
2020-12-21 12:38
