While setups and entries usually get the most glamour among traders, professionals know a big part of trading is how or where you exit your trades.
Traders often ask me how I identify targets for my intraday trades. I routinely respond with “ADR targets”.
Those of you familiar with my teachings understand that I am a huge advocate of trading based off price and volume data. When I use indicators, I want them to be price- or volume-based indicators, as these offer true market-generated information.
The same goes for targets. I want to use actual price-based information to help me identify the targets that have the best odds of being reached in any given day.
That’s why I use ADR targets for a majority of my trade exits.
What is ADR?
ADR, or Average Daily Range, is fairly self-explanatory – it tells you what the average daily range (low to high) has been over a user-defined period of time.
For example, if a stock has daily ranges of 2 points, 1.5 points, 1.75 points, 2.25 points, and 2 points over the last five trading days, then the 5-day ADR would be 1.9 points (2 + 1.5 + 1.75 + 2.25 + 2, divided by 5).
Finding Targets with ADR
ADR gives you reasonable expectations for estimating the upcoming day’s potential range. If the 5-day ADR is 1.9 points, then you should expect the daily range to be roughly 1.9 points in the upcoming session.
Far too often, novice traders are looking to score a home run on every trade, which is akin to hoping for a 5-point day when the average has only been 1.9 points. While most professionals are booking profits at around the 1.9-point target, the novices turn a winner into a loser as they try to give their trade a longer leash in order to reach their “pie-in-the-sky” 5-point target.
Again, the ADR value helps curb your expectations, and provides extremely reasonable exits for both bull and bear cases.
The ADR Method
I created the ADR Method to help me identify extremely reliable bull and bear targets for any given day. Use the following rules to identify the most basic ADR target:
- Calculate the 5- or 10-day ADR. I typically use a 10-day ADR for most standard calculations, unless a 5-day is warranted.
- Identify the overnight high (ONH) and the overnight low (ONL) of the symbol you are trading. For example, if you trade the E-Mini S&P 500, find the high and low from 4:16pm ET of the prior day to 9:29am ET of the current day.
- Project the ADR value higher from the ONL to find the daily Bull Target.
- Project the ADR value lower from the ONH to find the daily Bear Target.
If you are trading an instrument that doesn’t have any valid overnight price activity, then project the ADR value higher and lower from the prior day’s closing price.
While the complete ADR Method includes a multitude of calculations to help tailor your targets day over day, the rules above offer a very basic ADR target approach that should help get you started with this powerful form of identifying targets.
As a matter of fact, my complete ADR Method approach tested out to be 87% accurate during a 6-month test period of the E-Mini S&P 500, which is why I continue to use this approach daily.
You can learn more about The ADR Method HERE.
Give me your thoughts. Are you currently using this method or a similar method in your trading?
PivotBoss | Own the Market
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