The Average Daily Range:
When selecting a stock it is important to know the stocks daily trading range. If the average trading range is only a few cents a day it may not be worth trading. You might be tying up your money with a stock that may not give you a reasonable return.
At Ghost Traders, we use the Sierra Chart platform. One of the studies included with Sierra Charts is the “average daily range”. We can adjust this study to reflect the average price range to any number of days we want. Many shorter term traders require a stocks minimum average daily range to be at least $1.00 to$1.50.
There may be an occasion when a large daily trade range is not necessary. If you intend to hold a stock for a longer term a small daily range may be acceptable.
The criteria for a stock pick should be part of your trade plan, which should also include your strategies. Most experienced traders have a written trading plan and apply proper risk management.
Above is a weekly chart of VFC. This was a longer term trade that broke out of consolidation in 2011. A nice trend began with a steady upward slope. There where no bars that closed below the 50 EMA "Exponential Moving Average" until August of 2015. Many traders refer to the close below the 50 EMA as trend damage and will exit long positions.
After the close below the 50 EMA, VFC bounced back but couldn't break the previous high, creating a double top. Sellers took over and the direction of the trend changed to the downside. VFC began trading below the 50 EMA rather than above. There are only two studies on this chart. The 50 and the 200 EMA. Less is more. Keep it simple!
We must always remember that charts don't lie.