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2011issue C1110-14

ATR bands around support and resistance for stops and targets

Treat a chart level as a planning band rather than a single print. Once the market has failed to make a new extreme, average true range turns that floor or ceiling into entry, stop, and target zones so the risk-reward decision is finished before the order is placed.

  • Treat support and resistance as a floor or ceiling where the market fails to make a new extreme, not as an exact printed number.
  • The nearby major round figure matters more than the exact printed support number, because many participants are likely to use it as a shared entry and exit area.
  • Use the current average true range as a volatility ruler that converts a support or resistance line into an entry ceiling, a stop floor, and a target band instead of a single tick.
  • Accept the position only when the planned target band is a multiple of the planned stop-loss band, so the minimum gain outweighs the maximum loss.
Entries in this reading3 entries
Risk-reward ratio29 readingsCurrent trackATR position sizing44 readingsSupport and resistance178 readings

A chart level is a planning band

Support can be treated as a temporary floor after a double low, with later retracements testing that area before price moves away. A bounce off a prior high can mark resistance, and prices that wander can still tend to return toward established levels when a trade is planned.

The exact printed support number is less important than the nearby major round figure that many participants are likely to use as a shared entry and exit area.

Editorial: first lock the idea that the market has failed to make a new extreme, then treat that area as a planning band rather than a single price.

Support and resistance as a floor or ceiling

Support is a price area where the market repeatedly fails to make a new low. Resistance is a price area where the market repeatedly fails to make a new high. Each is treated as a floor or ceiling rather than an exact print.

Average true range as a volatility ruler

Use the current average true range as a volatility ruler that converts a support or resistance line into an entry ceiling, a stop floor, and a target band instead of a single tick.

A distant entry against a far support line is impractical. An acceptable long entry band is the support level plus one ATR, and an acceptable short entry band is the resistance level minus one ATR.

The same ATR width can extend the stop. A long stop band is support minus ATR, and a short stop band is resistance plus ATR.

The same support-plus-ATR construction can be reused on later retracements to the same floor.

A weekly coffee illustration

In the weekly coffee illustration, support at 56.234 with ATR 4.04 produced a long entry band of 56.234 to 60.274 and a stop band of 56.234 to 52.194.

A target zone at reentry

Once support has established itself, ATR at reentry can define a target zone. In one illustration ATR 0.39 produced a target zone of 98.87 to 98.09.

Check the planned gain against the planned loss

A planned profit-to-loss ratio of 2.48 to 1 means the minimum gain is 2.48 times the maximum loss, and that illustration omitted slippage and transaction costs.

A risk-reward ratio is a pre-trade check that the planned target band is a multiple of the planned stop-loss band, so the position is accepted only when the minimum gain outweighs the maximum loss.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
18 of 36 in the ATR position sizing track
201350-56 pp.Next on ATR position sizingAlgorithmic head-and-shoulders construction with bounded exitsA mechanical detector locates milestone-points, draws a neckline when the stated conditions hold, and places a setup label after the last qualifying bar.
All readings on this track · 36 readings
  1. 1988Constructing unsigned true range for directional models
  2. 1989Evaluate an always-in ATR breakout as one procedure
  3. 1992Variable lookback and average true range as a trend-filter construction
  4. 1993A random-walk index that uses true range as its scale
  5. 1993A shared harness for trend-filter construction
  6. 1998Finish a trend with a volatility trail, wave permission, and a slower-frame veto
  7. 1999A trend filter that switches tactics and scales ATR targets
  8. 2001Filter higher lows with linear regression, then judge the exit
  9. 2003A Mechanical trading system is a maintained procedure, not only an entry trigger
  10. 2005Construction of a volatility-bounded long entry
  11. 2005Six-zone encoding of open, high, low, and close
  12. 2006Normalized average true range as a pre-entry volatility bound
  13. 2006Chandelier exits, ATR position sizing, and trailing stops
  14. 2007Constructing a rule-based entry with Relative Strength Index and ATR position sizing
  15. 2008Constructing a zero-lag TMA and heikin-ashi crossover as a complete rule set
  16. 2010Use the session-range percent stop as a pre-trade filter
  17. 2011OCA exit groups, trailing limits, and ATR stops
  18. 2011ATR bands around support and resistance for stops and targets
  19. 2013Algorithmic head-and-shoulders construction with bounded exits
  20. 2013Constructing ATR-scaled swing pivots and linear-regression divergence
  21. 2013Constructing volatility bands from typical price
  22. 2014Constructing true-range contraction filters before expansion
  23. 2015Constructing touch plans from modified true range
  24. 2015One checklist for breakout entry and ATR risk
  25. 2015Percentage true-range construction for cross-market volatility filters
  26. 2015Construct a percentage true range for cross-market volatility
  27. 2015Percentage true range as a pre-entry exposure filter
  28. 2016Constructing ATR-filtered breakout entries
  29. 2017A dividend date as a pairs-trading classroom
  30. 2018Range-based volatility as a true-range construction
  31. 2018Moving average support and volatility-band construction
  32. 2018Construct a lifecycle breakout from compression
  33. 2018Pair the book first and let volatility or range set the size
  34. 2019Trend systems need a no-trade rule
  35. 2020Average true range as a shared unit for size, pairs, and stops
  36. 2020Volatility sizing and target-risk leverage as a pre-trade gate
By fieldStops and loss limits46 readingsBy year201177 readings
All 44 readings tagged ATR position sizing
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