Thanks for writing from Australia, Martin! Beautiful country ... I spent 2 weeks there and can't wait go to back.
My goal with this formula is to determine if the 1st 1-min candle is too extended from VWAP. For example, in the screenshot below, the setup for orb-up is great (gapped up, above VWAP, etc) but the 1st minute candle is a bit extended from VWAP. ATR is ~$4, and the orb ~ $0.90.
I suppose it's not a perfect science, rather it's more about experience understanding all the price actions. Thank you.
Yeah without running a bunch of backtests vs my visual experience I can't say.
It's 5am my time so my brains not working full speed (joys of trading from Australia) but I'm not really understanding what you've written, hypothetically lets say [$100 PDC (likely to be minimum) + $5 ATR] / [$106 as it's had a huge gap up on news - VWAP $105] so it would become $105/$1 = $105 which doesn't make sense?
I assume what you're trying to say is if the stock runs it's ATR then you'd hit 5R if you didn't partial? I'm not going to say it won't work because I haven't tested it but a couple of things to think about:
1) On a gap up it'll most likely be the PDC that's the minimum. On big enough news it could've easily gapped it's ATR or like 10c away or whatever, that doesn't stop it being an ORB target so you'd have to cater for that scenario.
2) Lets say a stock like Tesla (wide ATR) gaps 0.2%, this would be most likely to pass your formula as it has a lot of room to it's ATR. However, what is going to make that a strong ORB candidate? with a small gap which potentially means people are jumping in with no strategy following the price or someone is pushing the price trying to trap people going long before flushing it. Granted it might not be on your watchlist for an ORB but just highlighting you'd need to be careful of it being biased in that type of scenario.
3) Stocks in the current market don't often ORB and run it's ATR without probably stopping you out (assuming you will move to breakeven like most traders do).
4) Targets are not necessarily an ATR, if you end up back in a value range or hitting a strong daily level it'll probably struggle to run through it quickly. I'd want to input my target into the formula based on something I pick out on pre-market.
5) While you say 5R, that's assuming you don't partial. It's not really a 5R trade as most will heavily partial on an ORB strategy, it seems like you're trying to turn a momentum based thing into a hold for an hour or two strategy. It can happen but if it runs quickly and gets extended then you get the situation of heavy profit taking and parabolic reversal traders (like me) which can end up pushing at back to VWAP and below, while it wasn't from an ORB see Tesla yesterday just before 10am as an example of a stock that moved too much too quickly and gave me a lovely short from all the trapped longs who chased it (most of those types of trades for me do come in the first 5-10 minutes from ORB style trades). Trending stocks tend to be slow grinding movements rather than momentum.
Once you get it sorted try it on todays QQQ though, that was a bit extended for me from memory.
Just some personal experience though as I approached trading from a formula standpoint initially (although I wouldn't have listened to me either as I back myself to accomplish anything), I'm an analyst/finance guy by trade and thought I could mathematically break everything down and take trades based on formula. My answer would give me an X probability and I'd grade the answer which means I'd put on Y size and then once I got it working I'd build a trading bot and go travel the world. I built automatic pre market decisions and levels based on daily/weekly/monthly pivots etc, highlighted confluence levels (all pulled automatically). In my practice testing I had all sorts of data recorded like wick length % and it's impact on the ORB, had probabilities based on X,Y,Z combination of criteria for different strategies. Ultimately I spent about a year on it part time, in short it didn't work, there's too much nuance to markets unless you have the size to push everyone around like hedge funds.
Absolutely, gaining the skills in reading the tape is the key.
For now, I wrote this short ATR formula to estimate whether the 1st min candle is too extended:
[Minimum (PDC, PML, LOD) + Daily ATR (14)] / [Current price - VWAP] >=5.
... It's saying that it's not too extended if at current price, I have room to reach 5R
Not sure if 5R is too aggressive or too conservative.