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Using ATR for Risk Management

Jun 6, 2025

Overview

This episode of the Investing with IBD podcast focused on the concept of Average True Range (ATR) as a risk measurement tool for individual stocks and portfolios. Hosts Justin Nielson and guest Mike Webster discussed how ATR can be used to manage volatility, set stop losses, and optimize portfolio composition, with practical examples and actionable tips for implementing ATR-based strategies.

Understanding Average True Range (ATR)

  • ATR measures the typical daily movement of a stock, including gaps, to capture true volatility.
  • Expressing ATR as a percentage (rather than dollars or points) provides a more relevant comparison across stocks of different prices.
  • ATR helps traders gauge what is "normal" movement for a stock, highlighting abnormal strength or weakness.
  • Historically, a 21-day ATR percentage is favored by the hosts, though 14- or 50-day periods can be used for context.
  • ATR is not directional; it simply measures the magnitude of movement.

Practical Application of ATR

  • High ATR stocks are more volatile and require careful position sizing to manage risk.
  • Lower ATR stocks (e.g., under 4%) are recommended for newer traders or during uncertain market periods.
  • Portfolio ATR is calculated by weighting each position's ATR by its portfolio allocation and summing the results.
  • Cash holdings reduce portfolio ATR, and thus overall risk.

ATR and Market Conditions

  • ATR thresholds for portfolio construction are dynamic and should adjust with market trends.
  • During corrective or transitional market phases, prioritize low ATR positions and higher cash allocations.
  • In "power trend" environments (when key moving averages are aligned), higher ATRs and leveraged positions can be considered.
  • Monitor ATR for broad market ETFs to benchmark and frame individual stock risk.

Portfolio Management Using ATR

  • Regularly track and graph portfolio ATR to identify comfortable risk levels corresponding to personal or account style.
  • Reduce exposure by trimming high ATR positions when decreasing risk or raising cash.
  • Use post-analysis of ATR and equity curve trends (relative to their moving averages) to refine entry, exit, and exposure decisions.
  • Rely on ATR over beta for risk management, especially in concentrated or growth-oriented portfolios.

Example Stocks and Trade Management

  • Discussed specific stocks (e.g., RCL, Duolingo, Toast) in context of their bases, ATR, and current technical setups.
  • Emphasized waiting for optimal entry points and the importance of context, group strength, and stock "character."
  • Suggested using ATR and recent trading activity (like gap moves or earnings reactions) to guide risk and trade management.

Key Takeaways

  • Incorporate ATR as a core part of stock selection, position sizing, and portfolio risk management.
  • Adjust ATR targets based on market regime and personal risk tolerance.
  • Pair ATR analysis with traditional fundamental and technical criteria for stronger decision-making.

Action Items

  • TBD – All listeners: Gradually incorporate ATR into trading routines and test over weeks/months before full implementation.
  • TBD – All listeners: Track and review personal or model portfolio ATR regularly to refine risk management.
  • TBD – All listeners: Review power trend criteria and adjust ATR exposure as market conditions evolve.

Questions / Follow-Ups

  • Consider developing or seeking ATR-based analytics for recent earnings moves.
  • Explore further automation or tools for tracking weighted portfolio ATR.

Full transcript