How to Trade High ADR stocks
I discuss three entry tactics for trading high momentum stocks. I also give insight on multiple entries that can help from getting stopped out too early.
Before we get started, what is ADR in the context of Stock Trading? Average Daily Range (ADR) calculates the Daily Range (High & Low) and finds the average over a period of time.
4% is considered a high ADR, however they’re plenty of 10+ % stocks that setup all year.
Why is this useful?
In Momentum Trading, our goal is to make as much money as possible, over the course of a few days or weeks. Finding and trading high ADR stocks means you can achieve that goal much easier because they move in such wide ranges.
Here comes the Art and Science of position sizing when trading high ADR stocks.
Low of Day
I use the Low of Day (LOD) as my stop loss, although I typically will cut a trade short if it loses steam too soon. As long as the distance from the LOD is less than 60% from my entry, it is a valid entry.
1/2 Gap Up
If a stock is gaping up 8%+ placing your INITIAL stop at 1/2 the gap, can save you from getting stopped on due to Open Range Volatility. (move to LOD once the Opening Range is set)
ADR% Stop
Another technique is basing your stop on the ADR of the stock you are entering. If the stock’s ADR is 14%, placing a stop at 4% is likely going to get hit in the Opening Range. Again, move stop to LOD for the swing.
Entering too big and too early is a sure way to get stopped out before the true direction is set. Using a Tier Entry Sytem (TES) will help prevent this. If I am entering a stock right at open (<10 mins into session), I never put in my full risk at first.
I will place a Tier (1/2 my intended risk) and once the range breaks out, or the move confirms, I will place a Tier 2 (1/2 of what I own). At this point if the move is super strong, I will place my stop at the LOD and call it good. However, the option to place a Tier 3 is valid if there’s some pullback, but understand your average will increase causing some inbalance in your Risk/Reward.