Averages are given a bad reputation in the technical analysis world. They are often touted as being a “lagging” indicator. The cross-over strategies are touted as ineffective. The only category where ANY positive recognition is given would be regarding trend determination.
But this isn’t entirely true. What if you could look one trade period into the future with a high degree of accuracy? In order to do so, you would use “averages”.
Everything that I do centers around averages. Various types of averages – not just a simple moving average.
No, this post is not about how the EMA is better than an SMA and how to use a HMA in place of a WMA. This is about “averages”.
How well do you know the stock you are trading?
Over the last 21 days, what has been the average price range per day? What percentage of the price does this value represent?
Over the last 21 days, what has been the average volume per day? What is 1% of this value?
How far away from the “trend” average is the current close? That is the equivalent of how many trade days?
While in consolidation, what is the average daily range?
Why is this information important? It can tell you much about your stock.
The average period traded range (APTR) is the average of the (high – low) for the last X trade periods (I generally use 21 days). This behaves like the speed limit on road. It also provides potential range data for the follow on trade period.
On November 20, 2020, IMGN for the last 21 days had been trading with an APTR of .3069 per day. The close on this day was $5.99. I can than estimate that on Monday November 23, 2020. There is a very good chance that IMGN will stay between a low of $5.68 (5.99 – .3069) and a high of $6.30 (5.99 + .3069). There is also a very good chance that even if IMGN breaks beyond one of those two prices that it will close between those two values.
This APTR of .3069 is 5.12% (.3069 / 5.99) of the stock price. What this then tells me is that during the last 21 days, every day, IMGN has been moving on average 5%.
The APTR for the last 21 weeks is .6429, or on average 10.73% per week.
Let’s say for example, IMGN is in a bullish trend (prices are above the moving average used for trends), if you purchased LONG 100 shares at $5.99 you could anticipate between 5% – 10% gain (if trending) and 3% – 6% if in consolidation. The mean of the trending percentages is 7.5% and the mean of the consolidation percentages is 4.5% And the mean of both means (or all four values) is 6%.
If you set your take profit 6% above your entry at $6.34, you have a very high chance that you will lock in 6% profit. Doesn’t appear to be good enough for you? Would your bank give you 6% return within one or two weeks? Would your bank give you 6% return within one year? The answer to the last two questions is a resounding HELL NO.
IF (Capital letters there!), IF you could average 5% per trade. IF (still capital letters), IF you could average one trade every 5 days (one trading week). You could potentially turn $10,000 into $109,000 within 250 trading days or approximately one trading year. That 5% would potentially become a 1046% return on investment.
Of course, there is a little bit more than just that to generate a successful trade – such as understanding through price action when to take a trade. You don’t just jump in and grab the first buying opportunity available because you need to know a little bit more about the “when”. I have just point out the “what to expect”.
How do you eat an Elephant? On bite at a time.
How do you become financially independent? 1% at a time.
While the rest of the trading world is trying to hunt down large gains and losing while holding on to trades that are dying on the vine or having loses of small percentages multiple across their trading activity. Trades that at one point were of 7% profit – but no one has ever taught these traders when to exit or what to expect from a stock.
While the rest of the world is chasing unicorns, you could be taking small 5% – 10% bites out of the market.
That is the power of using an average.
Orion Price Prophet 