Average True Range vs Stock’s Beta | Podcast Episode #256

0:07
Hey, I’m Ryan Mallory, and this is my swing trading the stock market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market, and I’m ready to show you how. Hey everybody, this is Ryan Mallory with Swing trade in the stock market, and today’s episode is going to be a good one. We have a guy that sent me literally like a book for his email, but I’m gonna get through it.

0:41
It’s maybe a little bit of a long email, but it’s a pretty interesting email nonetheless. We’re gonna be talking about it a few different things here. So first off, he says, Dear Ryan, thank you for your podcast. You’re ever persistent nagging about managing your risks saved my trading career before it even really got started. That’s why.

0:56
I talk about managing the risk on every episode. He says, part of me for my writing style is I am severely dyslexic and it takes a lot for me to be able to be understood. If there are questions, please just ask. I promise I won’t be offended. Well, first of all, your email is actually very well composed and very meticulous too, may I say.

1:13
First, prepare your gag bag. I am currently enjoying a Maker’s Mark and Coke. Hey, if you’re gonna have a jack and Coke, a Maker’s Mark is not a bad choice to include in it. Maker’s Mark’s pretty good. Especially just like your, you know, run of the mill maker’s mark, very solid choice for a Jack and Coke. He says, Second, I won’t bore you too much with my history as I am sure you have heard similar.

1:31
I got into trading because of FOMO, but not the one you are currently thinking of. In 2009, I owned 200 shares of Amazon AMZN at $75 a share. I had to sell the shares because my wife got a promotion that required a multi-state relocation. Moving a house and two kids ain’t cheap.

1:48
No, it’s not. Did it have disposable income until 2021 because all of that just went to my kids. Now they are growing and are out of the house, which means the early trips to Treasure Island, Florida just got way cheaper. Anyway, I have a work friend that got into the Doge frenzy when it was skyrocketing from the sub 0.01 cent mark and showed me the price of Amazon.

2:12
I had to run to the bathroom. I was about to be violently sick, not really, of course, but seeing it showed me that there was money to be made. Not having a clue as to where to proceed, I followed my friend. I watched the news, read the articles, lost a lot of money, and Doge, made a lot of money in AMC when it squeezed, joined a day trading group where I learned about support and resistance.

2:34
I couldn’t follow anything else he taught me as his method was horrible. However, the support and resistance led me to big profits on AMC as it bounced around in the 40s and 30s, I got out of trading for several months as my work schedule changed and it threw my whole routine off. Now, I am a member of a different group that I like very much, not really because of the methods or the trading style, but because his ability to teach is top notch.

2:56
I’ve learned a lot. I’m also a member of your Patreon group. I didn’t really join so much for your lists, but I wanted to see how you draw your Charts. Examples are sometimes the best teaching methods. I have learned a lot from them too and really enjoy reading your analysis. And by the way, if you’re wanting to be part of that, that’s swingtradingthestockmarket.com.

3:14
You can get all my stock market research each and every day, which includes my list of bullish and bear stocks that I’m following each week, plus you’re gonna get my list of trade setups each day and of course, the charts that This guy mentions here and updates on all the indices and main stocks.

3:32
So, by the way, we didn’t talk about what this guy’s name is. His name, he actually mentions it at the end of the email, but he says he wants to be called Rutherford. Rutherford continues with my current group teaches a lot through hour-long classes once a week where special events and methods are taught or talked about. He is an outstanding instructor except for two things loss management and the mental side.

3:50
Just for clarity purposes, he is not talking about me. That’s where you come in, Ryan, he said, I am now on the 2nd listen through of your podcast. I listened to them from the beginning once and I am now going back through them for the missed nuggets. I just finished Merl for the 2nd time.

4:06
OK, now, for the meat of this behemoth of an email, yes, it is a behemoth of an email. Tomorrow is Fed day. So obviously, he wrote this before the FOMC day from last week. He says tomorrow’s Fed day. I’ve been enjoying riding the wave down. I saw the oncoming storm right after the CPI was released and bought some SPXU and TWM.

4:24
Let them go today for a good percentage. Does the Fed changing interest rates usually affect the whole market or just the banking and tech stocks? It seems like this time I checked the heat map on Finvis, the whole market was affected, but I didn’t know if that was a common thing or not.

4:39
I got burned last CPI release and I am determined to not let that happen again. Nothing terrible. I just had two positions open that hit their stop losses, wiping out a 4% gain because I didn’t realize the CPI was released separate from the FOMC report. This time I watched. Is it safer just to treat the FOMC statement like an earnings report and just get the heck out for a week?

5:01
Next question. I swear we’re getting close to an end here on this. My time is very limited and I am always looking to trim the fat, so to speak. My current routine is to get up, make coffee, be at the computer for opening bell at 8:30 a.m.

5:16
He must be on Central time, re-evaluate wash lists, and renew the stop losses.

5:34
After looking at that. And your posts, it’s about 10 a.m. and time to go to work. I get home around midnight, fire up the computer and tweak the watch lists. It is better to wait until the end of the day, or should I just examine the current positions, or should I glance at them on breaks and the like? I find on my super long days, I just place a trailing stop loss.

5:49
However, I find that when I have to do my gains, they are also muted, not just my losses. I hate that because I can’t seem to find a workaround, so any advice would be keen. OK, in your podcast, you always refer to the volatility. This is his last question. You always refer to the volatility of your stocks in the form of a beta.

6:05
Why a beta is just comparing the action of spy. Why not the average true range? It seems to me that the average true range or also known as ATR is a much better look at the volatility. As it is actually the swing of a stock’s average over the last 14 days. Or am I missing something?

6:28
I am very new, so I completely get it. I could be way off base here, but I am genuinely curious. Thank you for all that you do and continue to do great work. I love the whiskey reviews. I don’t suspect this will make it on your podcast. Well, you’re wrong on that one, which is totally OK. However, my name should be Rutherford the Brave, a character in a song who comes from a race of people practically extinct from doing the things smart people don’t do.

6:45
Sincerely, Rutherford the Brave. All right, so Rutherford, there’s a lot to talk about first. What am I drinking here? I am drinking old elk blended whiskey. It’s not too bad. I picked it up at Total Wine, it was like $53 for the bottle. A lot of them are anything that’s supposed to be decent or, you know, has a, has a good name to it.

7:01
They’re getting way up there in price these days. But Nonetheless, I mean, the color looks good on it, but to the nose, it almost has like a rubbing alcohol smell. I don’t like that. To the taste, it’s more like oak and rye flavors, but there’s not much else. It’s a very strong rye flavor.

7:17
They say there’s like some caramel notes in it, I don’t pick up on any of it, maybe a little bit, but not anything to really write home to mama about. A little bit of kick at the end. Yes, you can make this an everyday sipper drink, but I don’t think it’s really something that stands out. And for the price, there’s way better alternatives like old scout $40.

7:33
I would go with that for an old sipper every single time over this one. So, scale of 0 to 10, what would I give it at 6.0. That’s as high as I can go on it. I almost feel like I’m stretching it a little bit, giving it a 6.0, but cool looking bottle, but it’s kind of a bland bourbon.

7:49
I’m not a fan. So 6.0 for old elk. And for those wondering, old elk is an 88 proof, which gives it about 44% alcohol. Now, back to Rutherford here, I’m gonna actually work my way backwards on this one cause I want to first start off with average true range versus the beta.

8:06
Why do I use beta versus ATR? I know a lot of people use ATR they can track it on their platforms, and it’s going to change quite a bit from a day to day. It’s essentially like a moving average. You’re taking an average true range of a stock, opening price in the previous closing. Price and you’re essentially getting that and you’re averaging it out over 14 days, right?

8:23
So, uh, of course, settings, you can change all your settings that you want on it and you can make it anything you want, but that’s typically the textbook definition of it. So I don’t use it at all. In fact, I’ve rarely ever use it. A lot of people swear by it, but the reason why you use beta, and the beta is going to give you an average.

8:39
Volatility against the overall market, so the S&P 500, for instance. So what kind of volatility does this have? And I feel like it’s even a simpler one to use because it’s just basically a number. So a beta 2 means that the stock’s going to have twice the amount of returns as the overall market.

8:58
So if I’m. Looking to trade a stock, for instance, and it has a beta of 0.5. That means that it has half the volatility of the overall market. But let’s say that Spy and this other stock, stock ABC or whatever, that has a 0.5 beta, have the same exact setups.

9:16
Which one do you think I’m gonna go with? Spy, especially if it’s a bull market. If it’s a bear market and I’m wanting to play the bounce, maybe I actually do go with a 0.5 because there’s less volatility there relative to the overall market. So that’s one option. But it gives me a good idea, especially, you know, if you’re trading in a bull market, I really don’t want to go below the overall market. I want to beat the market.

9:31
So I want to have a beta of 1.5 or maybe even up to 2. But oftentimes it’s usually somewhere between 1.5 and 2. But now if a stock has a beta of 4 or 5, let’s say it’s just like real crazy, do I necessarily want to be trading that stock?

9:50
No, because there’s a whole lot of volatility. So let’s say, especially in this market, where we’re in a legit bear market and the market decides to open down 2%, there’s a good chance that that stock with a beta of 5 is going to be down about 10%. So I used the beta to be able to judge how volatile is the stock relative to the overall market.

10:08
Yes, you can use average true range and get some similar understandings, but I feel like there’s that extra step in having to compare it to the overall market. You’re just getting the average true range for that stock, whereas you’re gonna have to actually get the average true range for the market and then compare the two. I don’t really want to do that. I would rather just go with the beta.

10:28
So it’s a good question. I don’t think anybody’s wrong for using ATR. In fact, from a day trading standpoint, it’s probably better to use ATR, but for me as a swing trader, I’m always comparing, you know, if I’m gonna get into the stock, I want to know what the beta is relative to the overall market because it helps me also gauge risk and, and manage the risk better and more appropriately by sometimes just not even getting into the stock.

10:46
For instance, again, if the stock is got a beta of 4 or 5 and the overall market is in a bear market, that’s probably not the trade that I want to take because how extreme the volatility is in the overall market, I don’t want to get just absolutely plundered by a market sell-off.

11:03
So another thing that I found that was pretty interesting, and it was a compliment to me too, and I’m not trying to toot my own horn here, but you mentioned that he’s in one group where the guy does a lot of classes where it sounds like he’s teaching you setups and identifying stocks that are about to make a big move higher and everything. Here’s the thing, I mean, everybody can find a winning trade.

11:19
There’s nothing unique about it and it’s a great way to make yourself look good by saying, hey, did you see that? I pointed that one out two days before it happened, look at me. But Rutherford even says this in the email, and it’s worth mentioning again here, he doesn’t mention the risk aspects of the trade, the psychological parts.

11:45
And I would tell you that successful trading comes down to probably 90% psychological and risk management. So if somebody’s not showing you how to trade using risk management and getting into the psychological aspects of the trade and how to let your winners run while cutting your losers short and really emphasizing the fact that you’re going to have losing trades and to not make it sound like that you can be right every single time.

12:06
If you’re right 50% of the time you can be a really good trader, a really good trader, but in order to get there, you’re going to have to be good at managing the risk, keeping those losers small, letting the winners run. I’ve said this before, and if you guys, especially Rutherford who’s on a second go around, I’ve said this many times, I want to win slow and I want to lose fast.

12:22
I don’t want to be in a losing trade for a long time. I want to find out pretty fast whether or not I’m going to make it on this trade. And then I want to win over the course of a period of time. So, for instance, I’ve done a lot of trades on QID, QLD, PSQ, QQQ, SPY, SDS this year.

12:42
I mean, just a ton of different ETFs, right? On the losing trades, almost every time I’m out of it, probably within 1 to 3 days. And then on the winning trades, like I had one I just closed out today for an average of about 15%, that was well over a week. And so there’s a difference there. When I lose, I’m usually losing quickly, but I’m usually losing like somewhere between 2 to 4%. When I’m winning, I’m trying to get somewhere between 8 to 20%.

13:00
So there’s a big difference there because I’m trying to maximize the reward and minimize the losses, but oftentimes we get it completely backwards. We’re trying to tell ourselves, I want to lose slow and win fast, and that’s at least in my case, my take with the market and my approach to the market.

13:17
It’s the wrong approach because it means I’m letting a loser drag on longer than I should. I’m saying, hey, I’m losing on this trade. I’ve been losing on it for a week and I’m just continuing to let it get worse. And on the flip side, when I’m winning fast, I’m doing it because I’m like saying, hey, I’ve got these profits. I’m too scared to let them go against me, so I’m getting out right now.

13:33
Yes, I have to hold my positions through some market conditions or times where it does make me feel nervous, but I have to follow the charts and manage the risk appropriately, because sometimes I know that psychologically, I can be scared of the market, but that’s more in my head rather than actually what the charts are showing.

13:53
He also mentions too about the CPI report and the FOMC statement. Do I hold stocks through FOMC? Yes. I held QID last week through FOMC and it turned out to be a pretty good trade as a result. I held RWM as well, but I had smaller positions going into it. I had definitely taken some profits off the table, but I still had some that I was working with there.

14:12
And yes, that’s a perfect example of I was nervous holding into the FOMC, but I also knew too my trade parameters. I also knew where I was going to get out if I was wrong. I also knew where I would probably trim some more profits at. So I had all those things in place. And so even if I’m nervous, yes, that’s emotions and that’s the stuff that people say, oh, you shouldn’t have any emotions when it comes to the market.

14:29
Well, that’s bull. You’re not gonna be able to get rid of all the emotions when it comes to trading, but you can recognize when it’s just you feeling nervous and it’s you that’s feeling anxious versus whether or not your positions indicate. Now, if I had a full position or let’s say if I was 100% allocated going to the FOMC, I would have been petrified.

14:45
And so I would have had to have scaled back dramatically there because I also know at that point, I can recognize that I’m anxious, but I’m not gonna be able to put those to the side and just follow the charts. I’m going to let the emotions guide my trading because of the high volatile nature of the market, my oversized exposure to the market and the big headline risk that I’m about to go head on into. But because I had small exposure, because I had trimmed some profits even off of the small exposure, I was able to manage those emotions.

15:03
So it’s more about managing the emotions, not eliminating the emotions. And so do I say, hey, I’m not going to trade at all during FOMC week or when the CPI report comes out? No, not at all. I mean, if it’s Thursday afternoon, the CPI reports coming out Friday morning before they open, am I going to necessarily jump you know, head on into a brand new trade? Probably not, but CPI report hasn’t always been that.

15:21
Big of a deal for the overall market. I mean, it wasn’t until really this past year where the CPI report took a front and center focus with the overall market. And so yeah, it is a big deal now, but at some point in the future when inflation does get tamed or hopefully, that report will probably play a much lesser role in the market just like with the FOMC.

15:39
In a bull market where it’s quite predictable what the Fed’s going to do and there’s no need to raise rates, FOMC is kind of a, it still has its volatility to it, but it’s not a major, major event. So it’s really about the time that we’re trading in right now to where CPI report, the PPI, the FOMC is taking such a major role in this overall market.

15:59
And his last question, and I’ve skipped all over this email, he’s just having issues with working and he’s trying to go to work, but he’s also finding that using trailing stop losses while at work, he’s not seeing necessarily a major difference between the gains and the loss as well.

16:15
That’s actually not a bad thing considering the market we’re in. I mean, this market has been an absolute dumpster fire for 99.9% of traders out there so far this year. People are losing bad. So I mean, even if you’re flat on the year, you’re doing a pretty good job. But trailing stop losses are always a problem because you’re not necessarily putting those things below key support levels.

16:35
In fact, most of the time, once the stop loss starts getting pushed up, they’re getting pushed into some of the worst possible places you can think of. So for me, as a swing trader, I’m holding positions somewhere between a couple of days to a few weeks depending on how successful they are. I’m looking to always put my stop off at below key levels of support and then adjust them each night.

16:54
And usually I’m not adjusting too much intraday. The other thing I think that’s also good to do, and of course, some of you guys probably feel like I’m beating a dead horse here, but I also like to take profits along the way, you know, and so I just had two positions that I closed out and I trimmed them 4 times before ultimately making a 5th trade that closed it out completely.

17:13
So I initially sold out with 1/3 of a position. Then I trimmed a 1/4 off of the existing position, then 1/3 off of that existing position, then another 1/4 off of that existing position before finally closing it out. But along the way, I was making sure that I was capturing as much of the profits of that run up in QID and RWM as possible.

17:33
So, covered a lot with this podcast episode. I hope you guys were able to take something away from it. And if you have any questions, feel free to send me your questions for this podcast, ryan@shareplanner.com. I do read all the emails and I do enjoy getting them so that I can answer your questions on this podcast because a lot of people have the same exact questions and so it’s good for people to hear the perspective of other traders just like yourself and make sure to check out swingtradingthestockmarket.com and leave a 5 star review on whatever platform you’re listening to me on.

18:04
Thank you guys and God bless. Thanks for listening to my podcast, Swing Trading the Stock Market. I’d like to encourage you to join me in the SharePlanner Trading Block where I navigate the stock market each day with traders from around the world. With your membership, you will get a seven-day trial and access to my trading room, including alerts via text, email.

18:23
And WhatsApp. So go ahead, sign up by going to shareplanner.com/tradingblock. That’s www.shareplanner.com/trading-block, and follow me on SharePlanner’s Twitter, Instagram, and Facebook where I provide unique market and trading information every day.

18:39
If you have any questions, please feel free to email me at ryan@shareplanner.com. All the best to you and I look forward to trading with you soon.