An easy way to calculate the “daily” risk in dollars for owning a stock or index
Using ATR is a simple and easy way of determining how many shares you can afford to own and still be able to sleep at night.
According to Investopidia, “J. Welles
Wilder … introduced the world to the indicators known as true range and average
true range as measures of volatility. Although they are used less frequently
than standard indicators by many technicians, these tools can help a technician
enter and exit trades, and should be looked at by all systems traders as a way
to help increase profitability.”
I might add that ATR also helps the average trader to calculate and understand the amount of risk you are taking by holding a given stock or index position.
What Is the Average True Range?
ATR is an actual number that represents a stock's average daily price range movement. "It is the difference between the high and low price on any given day. It reveals information about how volatile a stock is. Large ranges indicate high volatility and small ranges indicate low volatility. The range is measured the same way for options and commodities - high minus low - as they are for stocks."
Here is the link to a page where the ATR is calculated for you. Just plug in the stock or index that you are interested in and it will do the rest, including create a chart for you.
Click this link to see today's ATR for the exchange traded fund FAS > http://stockcharts.com/h-sc/ui?s=FAS&p=D&b=5&g=0&id=p34322475323
FAS - Direxion Daily Finan. Bull 3X Shs Exchange Traded Fund
In this chart
on the upper left you will notice the notation --ATR (14) 4.726. That tells you
that the fourteen-day ATR for FAS averages $4.726 each day.
That means that if you have 100 shares you are risking $473 dollars a day.
If you own 1,000 shares you are risking $4,726 a day.
For another example, lets take a popular stock like Cisco Systems; symbol CSCO.
Click this link to see today's ATR for Cisco Systems - CSCO > http://stockcharts.com/h-sc/ui?s=CSCO&p=D&b=5&g=0&id=p34322475323
CSCO - Cisco Systems, Inc. (NASDAQ)
In this chart
for Cisco you will notice that the ATR is 0.579. This tells you that your
risk for holding 100 shares of CSCO would be about $57.90 a day.
If you owned 1,000 shares of CSCO you would be risking about $579.00 each day you hold it. That works for you on an up day if you are long the stock and the market goes up.
If you own 1,000 shares and Cisco Systems has a down day, you can plan on being down $579.00 that day.
Using ATR is a simple and easy way of determining how many
shares you can afford to own and still be able to sleep at night.
Use the "comments" section below if you would like me to answer any questions related to ATR for you.