dennis mccain
  • Home
  • Investing
    • Dividend Kings
    • Div Aristocrats
    • Div Champions
    • Business Dev Cos
    • Monthly Dividends
  • Options
    • Weekly Options

Investing

Ideas and Strategies on Investing.

Previous Articles

Average True Range and Position Sizing

11/14/2013

0 Comments

 
  The Average True Range (ATR) in a volatility indicator developed by J Welles Wilder in his book “New Concepts in Technical Trading Systems”. The true range is calculated as the greatest of the following three calculated differences: (1) The current high less the current low, (2) the absolute value of the current high less the previous close, and (3) the absolute value of the current low less the previous close. The average true range is calculated as a moving average of the individual true ranges and is generally calculated over a span of 14 periods.

  The whole purpose of determining the ATR is to try to understand the average amount of variability is to be expected during an individual period. For instance, if the ATR for a particular stock that is priced at $20 is $4, then the average range of that stock would be between $18 and $22. There are a lot of uses for this type of information. If a stock is stuck within a trading range for an extended period of time the ATR will generally decrease in value. If a stock begins to break out of a sideways movement either to the upside or downside the ATR will begin to increase (it’s an absolute number and therefore does not determine direction). This increase in the ATR can signal a breakout for a stock.

  The ATR can also be used to determine position size when buying into a new stock. As we’ve discussed in other articles, any time I begin buying a stock to create an equity position in my portfolio, I am risking my hard earned money. I always try to control the amount of risk I am willing to assume which I feel is prudent for my portfolio. As an example, suppose I have a portfolio worth $10,000. I hate to risk more than 5% of my portfolio on any individual investment. For me that means $500. If I’m looking at a stock priced at $20 and the ATR is $4 (as in the example above) then there’s a possibility that the stock will waiver between $18 and $22, on average, during whatever period I’m tracking. In essence there’s a pretty good possibility that I could lose $2 per share ($20-$18 = $2). Knowing that and the fact that the most I’m willing to lose on any one trade is the $500 identified above, I’m willing to buy 250 shares of stock of the company I’m interested in. This limits my risk and limits the amount of drawdown of my account to the amount determined before I enter the trade.

  My personal preference for using the ATR is the weekly ATR. As mentioned before I am not a day trader and by using the weekly version of this indicator I’m using a greater ATR and hence this reduces my position size and allows me more maneuver room before I have to close out a position. This limits my downside by simultaneously limiting my upside but if the stock starts acting correctly I can always increase my holdings as the stock moves up. This way I am actually following a developing trend and increasing my likelihood of success.

  J Welles Wilder developed a number of technical indicators in his book “New Concepts in Technical Trading Systems” to include the Parabolic SAR, the RSI and the Directional Movement Concept (ADX). Each of these were developed and used by Mr Wilder long before the computer age but even with all of today’s computing power these indicators still hold up their effectiveness. 

Picture
Technical Analysis Indicators
Picture
J Welles Wilder Jr
0 Comments



Leave a Reply.

    Print Friendly Version of this pagePrint Get a PDF version of this webpagePDF

    Picture

    Author

    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.


    RSS Feed


    Picture
    Top 100 Blogs for Dividend Investors

    Picture
    Follow Me on StockTwits!



    Dividend Growth Stocks
    Dividend Growth Investor


    Picture
    I'm on Seeking Alpha too!

    Archives

    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013


    ADDITIONAL RESOURCES:
    4 Month INDU Chart
    Dividend Ex-Dates
    Bidness Etc
    SharpCharts Voyeur
    StockCharts.com

    FINVIZ
    Seeking Alpha
    BDC Reporter
    Roadmap2Retire
    DivHut
    Dividend Growth Investor

    Dividend Yield

    Stock Market Mentor
    Chart Swing Trader
    Dividend Announcements
    IBD TV
    Stocks to Watch Today
    Dividend Detective

    DISCLAIMER
     I am not a licensed investment adviser, and I am not providing investment advise for you on this site. Please consult with an investment professional before you invest your money. Any opinion expressed here should not be treated as investment advice. I am not liable for any losses suffered by any party because of data or information published on this blog. Past performance is not a guarantee of future performance. Unless your investments are FDIC insured, they may decline in value.

    Picture
Powered by Create your own unique website with customizable templates.