When it comes to options trading, combining technical analysis with precise entry and exit points can make a significant difference in your success rate. Utilizing average true range (ATR) and 50% retracement moves can help you do this on a daily basis in the stock market. If that sounds complex, have no fear. We’re going to break it all down below, and we’ll answer questions like, “What is ATR?”, “Why is ATR important?”, and “How can I find the ATR of a stock?” Then, we’ll reveal a straightforward yet powerful strategy that exploits the average true range indicator to identify potential trade ideas, and 50% stock retracements to find suitable trade entries — complete with step-by-step instructions and a real world example in a Tesla day-trade executed today (September 14th, 2023).
What is Average True Range (ATR)?
Before diving into the strategy, let’s briefly recap what ATR is and why it’s a valuable tool for traders:
The average true range (ATR) is a technical indicator that measures average market movements in a single ticker. Specifically, it calculates the average price range between high and low points over a set number of periods.
Put another way, ATR identifies periods of high and low volatility in a stock. High ATR indicates a stock with sizable price fluctuations, and low ATR represents a stock that is in a trading range, with smaller price movements. Stocks with high ATR often have a higher risk-to-reward ratio, as stock prices tend to rise and fall in a short period of time. ATR helps you measure day-to-day stock market moves, and form guidelines to trade around them.
At Market Rebellion, we use ATR to help craft short-term trade ideas — and then we use options to execute them.
How to Find Stock ATR
Don’t worry, you don’t have to calculate ATR yourself! You can find ATR on most charting platforms or brokerages.
For instance, on Thinkorswim’s free charting platform, you can find ATR under the “Studies” tab, by clicking the following four menu buttons:
On TradingView’s free charting platform it’s even easier — you can find ATR by simply opening a chart, clicking “indicators,” and searching for “average true range.”
But once you find the ATR indicator, you’re probably going to have another question:
How to Read Average True Range
It’s actually pretty easy to read the average true range indicator. When you select the indicator, it will offer dollar-measured average price movements set for the specific timeframe you select. If you’re viewing a 1-minute chart, you’ll see entries for the average true range of each 1-minute candle. If you’re viewing a 1-week chart, you’ll see entries for the average true range of each 1-week candle. You can also change this time frame easily in the settings of your indicator. For instance, if you select a daily timeframe, you will see the daily ATR for the stock. If you select hourly, the ATR will be measured hourly.
If you use the default settings (meaning you select the ATR indicator and change nothing), the ATR will be measured in whatever time frame you’re viewing the chart in. In the above instance, set to the 1-day ATR, we can see that Tesla’s daily average true range is about 11.87 at the time of writing. By default, ATR is measured over 14 periods, no matter what timeframe you select.
Typically, when considering a trade entry, you’ll want to use a timeframe that matches your chart, meaning the default settings will be just fine. That’s what we’ll be using below when we look at a real-life short-term trading set-up in Tesla.
As a rule, you’ll always want to combine the ATR indicator with a catalyst or strategy. Remember, just because a stock can move $X, doesn’t mean it will — and ATR says nothing about the direction that the move will make.
Luckily, there are several strategies that pair well with trading the ATR. We’ll cover one common momentum trading strategy below.
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Wanna go straight to the action? Hear our short-term trading strategy direct from a former floor trader. This Tuesday at 4PM, Master chartist Ryan Mastro will reveal how we combine ATR and technical analysis to hunt down trading opportunities in fast-moving stocks every single week. Lock in your seat for free to see it live.
Can’t make it? Register anyway to get the recorded version of our short-term options trading lesson delivered straight to your inbox.
Momentum Trading Strategy: The 50% Retracement
Now that you have an understanding of ATR, and you know how to find it, let’s talk about a simple strategy you can use to capitalize on ATR, using a painless 50% retracement day trading strategy.
First, here’s a bit about why 50% retracement matters. The 50% retracement level is a key technical point derived from the famous Fibonacci retracement levels. The Fibonacci strategy suggests that, after a significant price move, the stock in question often retraces approximately 50% of that move before continuing in the same direction. When we say “retraces,” we mean the stock reverses half of the move in question. In this strategy, we’ll use ATR to identify those “significant price moves” and a 50% retracement as our entry signal.
Now, here’s how it works:
- Step 1: Identifying Substantial Moves.
Start by monitoring the price movement of a stock — particularly during the first hour of trading. Pay close attention to any significant deviations from the open price, whether that’s up or down. This is especially potent if the stock has a “gap up” or a “gap down.” - Step 2: Identify the ATR
Calculate the ATR for the stock you’re tracking. This indicator will help you determine what constitutes a “substantial move” relative to the current volatility of the stock you’re watching, and it will also help you determine whether the move has momentum left in the tank, or if the run is already played out. The ATR period that works best for this strategy is one that matches the timeframe of the chart you’re viewing, since you’re basing your trade entry on short-term movement in real-time, and you’re looking to enter-and-exit this trade in the same day.
- Step 3: Set Up an Alert
If the stock’s price moves more than two times the ATR in a single candle within the first hour, set up an alert for a 50% retracement. Most brokerages and charting platforms allow you to set alerts — some will even allow you to trigger automatic trade entries on those alerts. A 50% retracement simply means that the stock “gives back” 50% of the move that it made initially. In other words, if the ATR of a stock’s one-minute candles were $0.50, and during the first hour of trading on a thus-far single-direction day, the stock moved $1.00 or more, you could measure a 50% reversal from the peak of that move, and consider that area (if the stock returns in a short period, within the first hour of trading) as a potentially viable entry point for a continuation of the original move.
- Step 4: Executing the Trade
Once your alert is set up, you have a clear signal to consider a trade. Here’s how to approach it: - Long Trade: If the stock retraces to 50% of the initial move upward (from the open) after triggering the alert, it’s a potential buying opportunity for call options. This retracement often signals a temporary pullback before a continuation of the upward move.
- Short Trade: Conversely, if the stock retraces close to 50% of the initial move downward (from the open) after triggering the alert, it’s a potential opportunity for put options. This retracement suggests a temporary bounce before further downward movement.
- As a rule, you’ll want to use options with a timeframe that lines up with the amount of time you’re planning to spend in the trade. This strategy uses short-term, intraday trades — so you’ll likely want to arm yourself with short-term options. To counter (some) of the potential theta decay, you can opt for near or at-the-money strike prices.
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We know, it might sound complicated. Here’s how it works in action, with an example from a trade executed today in Tesla.
Real Life Example: Trading 50% Retracement with ATR in Tesla
A perfect example of this momentum trading strategy took place in Tesla today, without really needing any sort of “catalyst” or news event — that’s a good thing, because it means we can trade purely on the technicals without any additional noise or variables. Here’s how it went, play-by-play.
Within the first hour of Tesla’s trading day, the stock charted a massive green candle with a body that measured +$1.24. At this time, the ATR relative to the chart was 0.5218. In this instance, the move was more than two-times the ATR — which is what we identified that we’re looking for when we laid out the strategy above.
Upon seeing this, we measured a 50% retracement of the move from the close of the candle body, with the hope that the stock would retrace before moving higher, and that we could use that 50% retracement level ($271.81) as a suitable entry for a bullish continuation trade.
The stock did just that — retracing the move before rallying higher.
If we chose to enter the trade at $271.81, we would have been able to capture a gain of as much as +1.56% in just over an hour and a half. That said, the at-the-money $270 options expiring 1DTE rallied from an entry point of $4.25 to a high of $7.30 — about 71.8% higher.
However, in trading, perfect timing is nearly impossible. That’s why it’s important to manage our trades effectively.
Managing the Trade (For Options Traders)
Instead of trying to pick the “perfect exit,” as options traders, we often look to roll our position once it has accrued a percentage of profit that we’re comfortable with, allowing us to continue hunting the trade without risking all of what we’ve put in. Theoretically, an options trader could repeatedly roll their position, capturing their potential profit in chunks, until the trade runs out of steam.
Even then — disciplined traders will often cut the option they’re holding if it loses a certain amount of value, even if it’s a roll, rather than letting it expire worthless. As a rule of thumb, if an option loses 50% of its initial value, that’s often reason enough to cut your losses on that particular trade — especially if you’ve already made plenty of profitable rolls leading up to that point.
The Bottom Line
For fast paced traders, strategies like this can make or break your trading strategy. In fact, just having a trading strategy separates you from most day traders out there, who are simply hopping into a big move with no idea about when they plan to get out. Unfortunately, stocks don’t just “go up” — and without the technical analysis know-how, it can be hard to separate the trades that have “already-ran” from those that are “just revving up.”
That’s why this week, we’re unveiling our short-term trading strategy, which uses ATR, technical analysis, and more, to show you how to identify key levels in a stock before we ever enter the trade. These levels can give you insight into the difference between a common retracement of a big move, and a trade that has run its course. To discover our strategy for free one time only, this Tuesday at market close, register here.
Ready to cut to the chase? See how we combine ATR, technical analysis, and options know-how to get in and out of fast moving trades before they run out gas. Instead of charting it yourself, Rebel Pit does the work for you, with easy-to-follow “enter here, exit here” trade ideas every single week, crafted by former floor trader and CMT Ryan Mastro.
Try a month of Rebel Pit momentum trades today.
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Every week, we deliver two options trade ideas to you, alongside step-by-step instructions about how and when to execute the trades.
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- Detailed Trade Write-Ups
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Rebel Weekly
Every week, we deliver two options trade ideas to you, alongside step-by-step instructions about how and when to execute the trades.
What you get:
- Detailed Trade Write-Ups
- Trade Explanation Video
- Entry, Exit & Stop-Loss Triggers
- Chart Analysis & Technical Levels
- VIP Friday Virtual Cocktail Hour
- SAVE Over 58%
- Swing Trading
- Beginner
