AT: Here's why ATR is a horrible indicator
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Read time: 2 minutes Let’s talk about a trading mistake that’s costing traders money every day. A lot of traders rely on ATR (Average True Range) to gauge how far a stock can move in a day. It sounds logical—ATR calculates the average range based on historical price action, using highs, lows, and closing prices. But here’s the problem: ATR is completely backward-looking. It doesn’t factor in implied volatility (IV), which is forward-looking. It doesn’t account for market events like earnings, FOMC, or unexpected volatility shifts. And worst of all, it ignores market maker behavior, dealer positioning, and option Greeks—things that actually dictate how stocks move. Why Expected Move Beats ATRA much better way to forecast movement is expected move, which is derived from options pricing. A simple model for expected move using a straddle is: Expected Move = ATM Ask Call Price + ATM Ask Put Price Example:Let’s say SPY is trading at 500 and you check the at-the-money (ATM) options for a given expiration:
Then, the expected move is: This means the market expects SPY to move $16 up or down by that expiration date. ✅ Unlike ATR, expected move accounts for future volatility. How to Choose the Right StrikeOnce you have a proper expected move, you still need to pick the right strike. Inside TGE Max, we favor the 38 Delta contract. Why? ✅ It’s the sweet spot where vega is not to high and not too little. Key Takeaways
Trading is about precision, not guesswork. Start using models that reflect real market dynamics—not just backward-looking math. /Ruben P.S. Here's a YouTube video: How To REBUILD After Losing $148k Trading Options |
Ruben @ Alfa Toro
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