94 COMPUTERIZED TECHNICAL ANALYSIS

making it likely to be hit by a random short-term move. Placing your stop further
away makes it more likely that only a real reversal can hit your stop.
Targetsâ•… After you buy a stock, depending on how bullish it appears to you, you can
place an order to take profits at +1, +2, or even +3 ATRs. Kerry likes to get out of
his winning positions in several steps, placing orders for taking profits for one third
at 1 ATR, another third at 2 ATR, and the rest at 3 ATR.
It is highly unusual for any market to trade outside of three ATRs—three times average
true range—for a long time. Those tend to be the extreme moves. Whenever
you see a market trade outside of its three ATRs, either up or down, it is reasonable
to expect a pullback.
ATR channels work not only with prices. We can also use them to bracket technical
indicators to help identify the extreme levels where trends are likely to reverse.
I use ATR channels on the weekly charts of Force Index.
+3
+1
+2
–3
–2
–1
A
C
B
AD
FIGURE 24.3â•… LULU daily, 21 EMA, volume with 8 EMA, ATR channels. (Chart by TradeStation)