Swing Trading Days to Weeks | John McNichol | 10-1-19


Morning everyone John McNichol and you’re here for swing trading days to weeks our subject is AT T. our average true range how can be used for swing trading so stick around. Well good morning once again folks thanks for being here whether you’re here live or listening to the archive session good morning you Ron Ashley. Serious and Basil. J. being here. For October first two thousand nineteen you can see my Twitter handle on the screen there if you wish to follow me that’s the address there now if you go ahead and follow any of our other instructors here at TD Ameritrade education you can follow them as well typically it is their first initial last name underscore at TDA dot com let’s go ahead and take care of disclosures and we’ll get right into it. Not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid. And substantial losses carefully read the previous brought a copy of characteristics and risks of standardized options. Spread straddles and other multi leg option strategies can entail substantial transaction costs include multiple commissions. And packed a potential return also advance option strategies often involve greater more complex risk than single leg option trades and investors. May wish to contact a tax advisor regarding the tax treatment applicable to those spreads other multi leg option transactions. Now in order demonstrate the functionality of the platform we will be using actual symbols keeping in mind. TD 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 is solely your responsibility. Transaction costs are important factors should be considered when evaluating any trade and the paper money software. Is for educational purposes only successful virtual trading during one time period does not guarantee successful investing of actual funds during a later time period as those market conditions change continuously. As always all investing involves risk including the risk of loss now while this webcast discusses technical analysis. Other approaches include fundamental analysis may assert very different views. Now the S. stop loss order will not guarantee an execution at or near the activation price once activated they compete with other incoming market orders. All right Scott says good morning did you get snow well believe there’s definitely snow up in the mountains I did not see any snow in the mountains immediately to the rear of my house there. Her Montana think some places got about forty inches of snow so that’s a pretty big early snow even for Montana standards there. Let’s go ahead and take a look at the thinkorswim platform and see what we got going on here today. I. S. and P. is up about ten points. Hi technically break in kind of that downward slope that we have seen. Over the last. Over the last a few. Days here let’s bring up the actual S. and P. S. and P. five hundred cash index there. And as we try and get our sentence here. Just want to go in highlight this level just a little brief flag here. There’s a little break out that the downward slope over the last couple of days some traders refer to this as a bounce as prices trade above the high of the low day. Or in this case the inside day that is a typical set up as far as a bounce set some swing traders may look for. And that’s kind of tied into our discussion point for today we’re gonna talk about eighty our average true range. We’re going to discuss what it is. We’re going to discuss on how a trader may apply it. And the learning objective for you is after understanding AT our average true range is being able to practice with that to utilize that to set a stop. All or even a potential target I the use of that indicator could be for multiple four four at multiple types of set ups and you as an individual trader can decide on what is more applicability U. K. so ATR what it does how we can apply it for both potentially stops as well as targets that’s our topic for today. So let’s go ahead and take a closer look at this. I’m gonna go ahead and bring up. The ATR which is actually on the chart now I do have a share chart here I’m gonna go ahead and share it one more time make sure that we have the same indicators on their nice feature of the thinkorswim platform where we can go ahead and share a different tools. So I click on the share icon. I’ll select chair that’s going to create. A unique identifier it’s a six character identifier now. I’m gonna go ahead and paste that into the chat now it does give kind of a an H. T. P. address however for your purposes not necessary. All I need to do if you want to bring up a similar chart. Is go to set up in the upper right hand corner of the platform. Once there select open shared item. And on that open shared item you can go ahead and type in that identify now this is case sensitive so we have a number three capital P. put in G. number seven six. Lower case X. and the number six we’ll click on preview. And click open that will open up a chart that should look similar. Two one I just shared with yet. And from here if you’d like to save those settings are you can go up. And right click on the chart. And upon right click in are you can go to style. And save style the from there you can name it whatever you’d like. You can click check to include the studies. And select save. IRA save this here and what’s that saved I if you go ahead and right click on any chart. You should be able to go to style. And load style. As you can see I’ve created quite a few styles. Based off of a lot of different classes that we teach and you can select that style and bring that up. Okay so what is ATR ball few ways we can look at this if I go ahead and go to the- Baker which enables you to add studies if you want to do this on your own. And over in the upper left we’ll type in ATR. There’s the indicator there if you click on the question mark the question mark will give you a background. Up what that indicator is and we can see that the ATR study calculates the average true price range over a time period. The trip price ranges a greatest of distances between the high and the current low. So think of your candles. And from the extreme hi to extreme low it between the closing the current height. Or between the close in the current low now by default the average true range is about fourteen period. Now that’s a period that we can use although some traders may go ahead and adjust that. Any indicators added on the lower part of the chart. So we go ahead and take a closer look. For instance on S. P. ax. The current value for the ATR is showing at twenty nine twenty six so that what’s what’s that is implying is the average range for the S. and P. five hundred. Is about twenty nine points each period and since we’re looking at a day that would be each day. Now if we go back and take a look a little further back. You can see that ATR value can change. I typically during periods of higher volatility it would be no surprise that the average range of that price action may be higher. No currently with the S. and P. with this average range being at around twenty nine points yeah that’s kind of around the midpoint you know going back to earlier this year. You can see during extremes when markets were selling off that range. What’s up words close to sixty points. So how does that translate individual stocks let’s go ahead and bring up let’s say apple. And we can see even on individual stocks that average range may vary over time current ATR average true range for apple is a little over four dollars. No other times it’s been around five. There are some higher vol periods even upwards around six or seven. So how can that be potentially helpful. For an active trader I on utilizing that indicator well since that indicator is a bit dynamic what it can do is basically compensate for the volatility of a stock. When some traders may set a stop you know kind of by default set a stop you know 1% below the low war you know 3% below a certain area there yeah those percentages are very fixed. That may work well for some stocks that are relatively low or moderate volatility but if a stock as higher vol I DO a smaller stop may not be as practical. So what the ATR does is a bit more dynamic if we’re to utilize this as an example for a stop when. Things are less volatile this stop maybe a bit tighter when things are more volatile that stock may be a bit wider trying to compensate for kind of that day to day or period period movement of the stock. Okay now looking at some of the questions there. Diane you’re never late and Cole says what is the best time to use with ATR well since ATR is a technical indicator Cole. It can be applicables to any time frame I it would be typically applied to the time frame that one is trading so since we’re looking at a daily chart we’re looking at daily ATR. If someone was more of an investor looking at longer term. We can go ahead and change. That period maybe to a weekly and you can get an idea of what. Date weekly ranges which on apple is about ten dollars. And even some option traders all there’s various tools where you can look such a standard deviation and probabilities there yeah if I change this to a monthly chart. You can get an idea of what the average range of that stock baby on any given month. Now I can also highlight some of the potential upside as well as some of the downside risk on a month to month basis so the case of apple yeah twenty one dollars yeah that’s a little shy of about ten percent. Of the current price. Right now that we understand a little bit more about what. The ATR is a let’s see if we can go ahead and apply it. On some individual stocks. So let’s see I will go ahead and looks like apple’s doing pretty good today after pushing out of a little bit of a fall in wedge there. Seven to trade up in that channel. I’m to bring up. E. a- this is a stock that we had a. Tweeted yesterday as far as. Illustrating different patterns that we discuss in technically speaking every Monday at three PM eastern time Electronic Arts had a double bottom. Kind of rallied up to the top of the channel and counter retested that looking for a potential bounce looks like it’s kind of faded a little bit at the opening there. Was some traders may be looking for is looking for price to trade above the high of the low day hasn’t quite did that. There are some earnings coming out later in the month. And let’s look at a couple other ones here. So you have any other stocks that may be bouncing. Utilizing some of our sample script here. And some of that is it right on the left hand margin go hand scroll this down for those of you that. May be new to the class welcome. Here’s some of the shared script for the columns you can repeat some of the same steps that we did with the chart. And you’re looking for some stocks that may be. Bouncing you know off the support. Some potential CAHOLDs. Jenner A for some stocks that. Maybe up trending and bouncing or breaking out. I here’s Texas Instruments here. Texas Instruments are kind of like a few other stocks had been kind of sloping down there. Or Sam price you know break above the diagonal resistance. Seven do an example. Ana what that was that’s Lowe’s is try to look at Texas Instruments looks like it’s switched on me there’s Texas Instruments basically have a breakout. Sometimes that happens when a quotes are updating. Looks like at prices breaking above resistance. Interesting pattern that we review and reversal patterns looks like we may have a Cup and handle formation. Which shed some traders consider to be a bullish pattern. And here they may go ahead and target the distance between. That support as well as to that resistance. Now one way we can possibly apply ATR. Is let’s say using it as a potential stop. Now if we look at eighty are currently on Texas Instruments shown at two sixty three. One can take that number or multiple of that and possibly set a stop. Now with that two sixty three A let’s go ahead and calculate that. From the current price. Let’s switch our gadget to a calculator. And if we had. We’ll go and start off by. I set in the ATR I if we do it based off of the current price the current price is at one thirty one seventy. One thirty one point seven. Minus that value. Two sixty three we’ll just change it to two sixty four. Minus two dollars and sixty four cents. And that’s how work let’s try it one more time. One thirty one point seven five minus two dollars. And we have a little bit lag here my dress a little differently. Mine S. three is a charm. Two dollars and sixty four cents. I that would come out to be an- one twenty nine fourteen. One twenty nine fourteen so I can go ahead and. We’ll use our drawing tool and we’ll just go ahead and mark that. On the chart. All right for some reason still have a little bit of a lag here but will push through it. One twenty nine fourteen. And we’ll go ahead and mark that. Okay now. What we can do is we can put in a stock trade we can put in an option trade let’s say we go ahead and do an example of an option trade. And I can go ahead and go to the trade tab. I will go out and look at an option you know over the course of at least greater than a month. And I and I went ahead in the list nationally put that on. Based off of the current price or the entry price. Not off the low but off of the entry price. Or potential entry price. Well if the current price and minus the ATR off of that which should put it below the low of the day. Now can one go ahead and put in that. ATR below the low absolutely it would be a wider stop. But this case we’re going off of that current price. Now I will go and look at an option. Let’s take a look at an option that’s a. It’s currently about the at the money there. Now if one wanted they may go in the money if there looking for to capture more dollar for dollar with the underlying move. All of the premium would be more in this case. Let’s go ahead I’ll do I’ll actually go with a seventy delta here some I go ahead and right click. Every do a buy custom. Yes stop. Buy custom with stop. And right here one can go ahead and set a stop based off of the option price but actually what I’m gonna do is we’re gonna tie this to the stock price so I’m actually make this a- market. GTC. And then we’re gonna go ahead and put in a conditional order some to click on the gear next that order. And in here we’re gonna go ahead and put in. The stock. And if you click on it automatically loads the mark which is essentially the current price. And look in less than or equal to. That stock price and I believe as far as on. The stock price on the go and say this for a second. Bring up the chart that was one twenty nine fourteen. So click on that gear. And make sure the stock is less than or equal to one twenty nine fourteen. Make sure it sticks. And bring that up someone hit confirm and send no it did not say it is why we do confirm and send. Under the order conditions. That should be the stock price it’s currently showing zero. So we need to go back and edit that. For some reason I’m having a little difficulty on. Get in the computer to work as fast as mate. Which is. Should not be an issue. All right. So again putting in that price one twenty nine fourteen one two nine point one four. Hit enter its stock now click save. Now. As far as position size we can position size this. To a maximum loss. Or can position size this based off of your theoretically how much the option would be worth. You know if it goes down that much for simplicity. Prices are to a maximum loss. Which would be nine hundred dollars on this practice account we have a net liquidating value of three hundred and fifty eight thousand. So let’s say do a half a percent that would be about eighteen hundred so let’s do two contracts. We’ll do two contracts will do to. With that chain link so we know that we’re- selling as well as buying the same amount. And they will head a confirm and send. Double check. Basically we have if the stock goes at or below that particular price. Now the next step once we place the trade would be managing the trades. There’s different forms of trade management there let’s talk a little bit about utilizing that ATR. What one can do is I just a stop. All right maybe that was one of the issues we had there we’ll get rid of that. Is looking at the ATR and adjusting. Your stop based off the ATR value each and every day. So if the price goes higher let’s say it goes to one. Thirty three. Then one can go ahead and take that ATR minus that amount. And then essentially raise the stop on this one let’s say it’s one thirty one. Yes thirty six. And what you can do is go to the trade tab. I should say on the monitor tab. I here’s our working orders right here. And in the case of. That position you can right click. Cancel and replace order. And modify. The stop. By changing it here. Now there’s another way that we can actually apply in visualize this. Another indicator that is in the platform. Now I make calculate. A little bit differently but I it may be a little simpler for some traders to use. There actually is a ATR trailing indicator that one can apply to the platform so let me go and show you how to do that. The good charts here. And I’m gonna go ahead and we’ll click on the beaker. And then go over. The studies here and you could see it right on the top of the list ATR trailing stop. You click on the little question mark a little more about that. There are some calculations as far as a modified versus an unmodified indicator. Modified attempts to smooth it out. And if I go ahead and add this indicator. We’ll go ahead and. Tweak it a little bit not currently showing a- out of five five period three and a half that’s three and a half times the ATR. Now we’re using an application of one ATR. So let’s say I go ahead and change the period. I’ll make it on modified let’s see what looks like. We’ll change the ATR to fourteen. And the ATR factor two one now you know utilize AT ours is not exclusive to swing trading a lot of trend traders may apply this method as well however they may use more of a multiple of that ATR like one and a half to. Three three and a half times. Trying to be patient as we know prices don’t go straight up they may pull back swing traders are trying to get out relatively quickly after a news. And so therefore maybe utilize in a smaller value. So we got fourteen one there we’ll go ahead and click OK and apply. So as I zoom in on this. Now notice in this example. The tech for the HR is a little bit lower than the one that we manually calculate it. That’s probably because price may have backed off a little bit from when we had first went ahead and put in that trade. Now notice what happens if prices going higher. Then we can go ahead and raise that stop me go back in the case of Texas Instruments let’s look at a previous swing. There’s a previous swing here where price trades above. What typically go to the big screen on this one but it these indicators are a little bit smaller there so want you to have the benefit of being able to see it. On the screen. So there would be potentially that initial stop. As price goes higher. The stop is a rise in with it. Now stops are always adjusted up not down and also keep in mind that just because we put in a stop there’s no guarantee that it will fill at a specific price we already know that we had put in a market order. It’s going to fill at the next available price. And then notice as we’re looking at this that your price is not gone below. Any of these previous levels. Came pretty close on this day right here. And it would be on this day that that stop potentially would have been trigger and that’s probably coincided with a I candle reversal. So this is one method that one can apply. As we go out of for a swing trade. Where I want to just go ahead focus on the entry and then utilize the stop as an exit as price goes higher and higher and higher you would adjust itself. That way I yes versus having a pre determined target if the swing keeps moving up then the stop is there the basically capture it as it comes back. Now some traders may still want to utilize a one cancels other where they can still have a price target where they wish to sell at but then go ahead and raise the stop as well. To basically reduce risk or possibly lock in some of the gains if the price does not hit that target. Let’s show you if we can have some time we’ll do that one as well. Let’s see what else going on let’s look at your questions there. Thanks Diane. No worries cocoa says John I knew this class the explain a bit about the five thirteen column what is the five lessen the thirteen. So these indicators are. Basically show in moving averages you can see the moving averages that are currently on my chart I have a red for a five period blue is a thirteen and green as a fifty five there’s some traders may use moving averages. To identify trends and kind of confirm some of that whether upward or downward momentum. We utilize it as in this class to look for stocks that may generally be trending that’s one reasons why we looked at Texas Instruments it was showing up more in the green. After clicking highlight another one. Where the five is greater than the thirteen it’s green because they’re both above. The fifty five period moving average. Are above its intermediate average. I think go ahead and take a look at the archive in the webcast you can look for my name. And David. Would be August twenty seventh. I did a session that was called trend and bounce scripts I actually covered for my good friend Ken rose who teaches a class on that that is actually later on this afternoon scripting studies on thinkorswim which is going to be at five thirty PM eastern time. And if you go to the web and look at the archive. It’s about a just shy of about a thirty minute session you can go ahead and get take a deeper dive on it. That that doesn’t give me as much time to permit today. By clicking on the archive. Instructor John McNichol and if you go ahead and look down. The list there should be dated August twenty seventh. There it is scripting studies trend trend and bounce scripts so the first script is an example for trends and breakouts and the second script is looking for the CAHOLD price close in or trading above the high of the low day including including Harami is or inside days. Also would have a tendency of doing I want to add that if you right click. On any of the column headers. And select edit formula. I usually provide a background on what each of those scripts represent. Right so if we found that helpful. Friends is one example looks like a go pro may be breaking out a crossover let’s take a look at that one. Looks like rallying up relatively cheaper stock although some traders may go ahead look for a flag trade look for a bit of a pullback. It’s triggered today because both the five into thirteen of crossed above the fifty five kind of more of a reversal pattern. A little more of that inside or not inside but an inverse head and shoulders. And a lot of times average crossovers may precede. The formation as well as the breakout. Patterns so can get tool to trying work with and you know you don’t have to be hamstrung by those particular periods you can go ahead and look at that recording and you can learn on how you can change those values yourself and make it a useful for you and Ken rose does a great job with this class each and every week. Right so get one example here let’s see if we can do a- couple others here. Utilizing that ATR. Well looking at. I Netflix I Netflix is potentially showing a bear flag although we have an earnings event that is coming up. Some traders may be looking for prices to trade down below the low of a high day. So this would be a set up. Our but nothing trigger in at the moment. Look at the end of video. Here’s the video feel technology stocks and have been you know a tent in to bounce. After kind of sliding down over the last few weeks there’s no no guarantee that this bounce or swing would translate into taking out those previous highs. Although some traders may look to target that. Let’s see if prices actually breaking out nollie of the trend. But trying to trade above that resistance looks like it did in kind of fallen back which kind of points towards some the pros and cons on your entries you enter in into a trade earlier into the day you know the condition. Such as a break out of price trading higher you may fade and the reason what got in the trade in the morning may not apply in the afternoon. Some traders may do a wait till the latter part of the afternoon and see and if the price is actually in fact. Going above that level. Now the caught it on that is. Well if the price opens in goes strongly higher throughout the day one may be missing out on that momentum. So there’s any pros and cons with that think about what you’re comfortable with and more importantly practice with this is what basically helps you build up your confidence. A what type of techniques may work for you. All right so what else we got here. I got yum yums another one and these are just different you potentially different set ups. Yes and prices have been generally more sliding back you know we may see more potential breakouts then kind of the classical bounce. And we’re having a triangle that’s for men at its challenge support this is something I can break either way. You know their players may look for a break below support. Always traders may be looking for reversal and a break above. Now prices are trading below the low of the high day. If someone was inclined to be more bearish it is below the fifty five they may speculate that price may I anticipate that it may break lower. But let’s go ahead we’ll just do this as an example that we at least have an example of a polite. I’m gonna go ahead and we’ll take a look at the trade tab. Well look a young. Look at the put side this time. And we’ll go up a little bit in the money now there is a larger spread here some traders may stay away. A from liquidity I yes the difference between the bid and the ask is a little on the large side. I here we got a spread of about fifty cents. That exceeds about 10% of the ask price that some traders may use as a filter so then we’ll go ahead and just. Move on from that one. Let’s see a couple other ones. To get Facebook and look at eBay. Facebook ad kind of form into a little bit of a- little more of a bearish flag. We have a an inside day now it hasn’t traded below the inside day. Not as of yet. City bank. If we can get that up. I even a going into earnings is set up as a- potential bear flag here. I know it’s a bit of a shooting star formation on this is early on in the day now for illustrative purposes only do this anticipating. That this may be a bounce. And it just paid in does not necessarily deliver. Any lies the ATR in this case so looking at eBay let’s see if the spreads. Look a bit better. And they do we’ll go closer seventy delta I hear the forty one strike two seventy three to seventy seven. All right click and we’re going to do a. A buy custom we’ll do an OCO bracket. I actually don’t have to do an OCO bracket in this case since we’re gonna do it tied to the stock or a conditional order. We’re gonna right click. And we’re going to do a- buy custom. With stop. We’re gonna change that market order expand this out. Or the stock market to a regular market. GTC. And then we’re gonna go ahead and plot. Two potential exits. One could be the actual swing for the target and we use the ATR for a stop. And that ten hours straight again so just measuring from a high down to a low. A duplicate this. And we’re going to go ahead from that lower high. In this case would be target in around. Looks like just about thirty seven. So not a huge move there but certainly illustrates the point. And as far as utilizing the ATR. The ATR point is actually plotted now knows in this case it’s actually plot it inside the range of the day some traders may look to basically put that initial plot above at least a high. And if we’re looking at the current. H. R. about eighty cents. I we can use that initial stop of been basically thirty nine. Eighty one or thirty nine eighty two. So let’s go ahead and do that. So may go ahead and click on our order here. It allows me to. Click on the gear and we’ll put into conditions. One was a desired outcome. So eBay mark now less than or equal to that’s going to be the target. Prices member this is an example of a bearish trade. I’m to go ahead and plug in. Thirty seven. And then on the opposite order we’ll save it goes greater than or equal to that’s our potential exit based off the stop. We’ll do. Which currently should be. Thirty nine eighty. See if that sticks. There we go and we’ll click save now if I go ahead and actually hit confirm and send we should be able to see those conditions. If the stock goes at or below thirty seven. It all close out the option or if it goes at or above thirty nine eighty it’ll go ahead and close out the option our members there are transaction fees. And since this is a market order we don’t have control over the price it will fill at the next available price. We’ll go ahead and we’ll click send on that. All right so when we got that filled we’ll see how that plays out. So hopefully you learned something new today folks. As a gun bring up our slides here. So yeah what we did was we went ahead and discussed on what the ATR is average true range. Where we can identify what the average price activity is for a stock on any given period we use an example of a daily chart. With that we can see that as a stock may become more or less follow tile. The stop can be more dynamic all will will do is it’ll enable us to possibly set stops that are relevant for the trade activity of that stock. Also show you on how you can add that ATR trailing where as you after that initial stop as the prices going higher you have a visible marker that one can identify where a potential stop can be raised to. Now this is just one technique of Benny that one can apply to kind of more systematically. Set stops and kind of hopefully remove or mitigate some of the emotions that we have and maybe save some time for some of those calculations here having a physical rep this of a visible representation on the chart so as prices going higher we can adjust those stops. In the context of a swing trade. Let’s say you have a digital questions here same thing coming across. But remember folks in order to demonstrate the functionality of the platform we had to use actual symbols keeping in mind TD Ameritrade does not make recommendations. Or determine suitability of any security or strategy through the use of our tools any investment decision. You make in your self directed account is solely your responsibility. And as mentioned I. Take what you learned today and apply it. Go ahead and maybe do a few practice trades utilizing the ATR. Whether as a stop. A trailing stop. And some traders may even use that as a target maybe target one ATR or a multiple of that. And see if what your results are. So then join us next week folks looking for spend some time with you again John McNichol signing off and coming up at the top of the hour. It’s going to be Barbara Armstrong with getting started with futures so stick around thanks everybody

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