The 150% ATR Rule and My Exact Method to Determine if Stocks Are Overextended

by Roger Scott | Apr 6, 2026

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One of the most common mistakes I see traders make is buying stocks that feel cheap — just because they’ve pulled back a bit from recent highs. But here’s the reality: Just because a stock has dropped, even if it dropped a lot, doesn’t mean it’s ready to reverse.

That’s why I use a precise formula to determine if a stock is truly overextended, or if it’s just getting started on a longer move down.

Let me be crystal clear about this: To be overextended, you have to be 150% of the 10-day ATR (average true range) away from the eight-day exponential moving average (EMA). That’s the rule.

If you’re not 150% away from the eight-day EMA based on the 10-day ATR, you’re not overextended. The 150% ATR rule isn’t arbitrary — it accounts for a stock’s natural volatility. It’s not about gut feeling or eyeballing a chart — it’s about having a consistent, repeatable standard that keeps you out of trouble.

I don’t rely on instinct for this. I have a specific program that tells me if stocks are overextended or not. This removes emotion from the equation and gives me consistent, objective data to work with. That technology keeps me grounded in facts, not feelings.

Why This Formula Matters

The danger with assuming stocks are cheap or due for a bounce is that you end up catching falling knives. Some traders keep saying, “This is the low, this is the low, this is the low,” but the stock just keeps going down.

If you keep thinking that way, it’s not going to end well for you in terms of trading — you’re going to end up buying stocks that are not ready to reverse yet.

When I reviewed my watchlist recently, I found most stocks weren’t even close to being overextended by my standards. Stocks like Tractor Supply (TSCO) and CoStar Group (CSGP) were literally at the eight-day EMA — how could they possibly be overextended?

Sure, there were exceptions. Unilever (UL) was a little bit overextended and McCormick (MKC) showed some but not dramatically so. But the vast majority of the stocks I was watching were positioned well within normal ranges.

The System Behind the Formula

The 150% ATR rule works because it adjusts for volatility. A highly volatile stock needs more room to breathe before it’s truly overextended compared to a stable, low-volatility name.

The 10-day ATR captures that recent volatility profile while the eight-day EMA serves as your baseline reference point. When you combine these two elements — measuring the distance from the eight-day EMA as a percentage of the 10-day ATR — you get a standardized way to evaluate overextension across any stock regardless of its price or volatility characteristics.

The bottom line? Don’t assume a stock is overextended just because it’s down. Use a mathematical framework that accounts for volatility and gives you clear, objective criteria. That’s how you avoid buying too early and getting caught in continued weakness.

I hope that helps!

Roger Scott
Roger Scott Trading

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