AVERAGE TRUE RANGE ATR INDICATOR
The Average True Range ATR Indicator allows you to locate Narrow Range Bars (NRBs) very easily. Follow the NRBs to expansion bars...and work those expansion bars for profit.
Expansion bars can yield some excellent day trading results. Having a tough time finding stocks to day trade? Think about about adding some NRBs to your watch list. Consider looking for NRBs that are also Inside Bars. You're bound to find some great stock day trading action!
Most traders, if they use this indicator probably use a multi-day setting like 10 or 14, but as you can see by these charts, with a setting of 1, it shows you immediately with no lag, when you're looking at a very narrow range bar. It's very simple to set up a custom scan for these narrow range bars, should you decide to use them.
Lets go through an example of one way you can use the Average True Range Indicator to locate possible day trading setups.
On this next daily chart of URBN below, you can see how the ATR Indicator is showing us that the range of this bar on Nov 2nd is extremely narrow compared to bars over the last few months.
What else do you notice about that bar? That bar is also an inside bar. In addition to that, it's part of a triangle being formed on the daily chart. Look back several days and you can see that there was a strong, three bar thrust upwards with wide range bars.
The big picture, along with this NRB, is telling me that volatility has currently subsided and to expect a possible thrust to the upside sometime soon.
And that's what happened with the wide range bar that followed.
But how could you have gotten into this trade knowing about the NRB that the Average True Range Indicator was pointing out on the daily time frame?
Well, lets take a look at the Nov 2nd & 3rd, 10 min. chart of URBN below. If you expected increasing volatility in the near term, we could take note of the chart pattern that was easily recognizable at the end of the day (Nov 2nd) prior to the big move. There was very clear resistance that offered a place to put in a buy stop order, should price breakout.....which it did.
This is a great example of price expansion coming out of a constrained narrow range bar. One way to make money day trading stocks is to find these kinds of opportunities and take advantage of them. Ride these waves of price expansion!