Hey girl! Are you still struggling to figure out how much to buy when trading stocks? 😩 Do you always rely on gut feeling, either buying too little and missing out, or buying too much and getting trapped? It’s time to say GOODBYE to emotional trading!😭
Today I am going to share a very useful method of position sizing — which name is ATR. With this, you make profit steadily. 😎
🤔 What is ATR? And how can it help managing position size?
Average True Range, or ATR, is not something beyond comprehension. To put it simply, the is a tool that measures the volatility of the stock in a period (usually 14 days).📈
Imagine, if a stock is very volatile, should we reduce position size to avoid loss? 😨 On the contrary, if a stock trends steadily, and has very small increase or decrease in price, we are able to add position size to earn more.😉
ATR is a very helpful tool to quantize the volatility of the stock, allowing us make wise choice of the position size.👍
🤩 How to use ATR? Step by step guidance!
Don’t worry about the complex of calculating position size using ATR, 4 steps make all done:
- Define maximum risk amount：
- It is the essential step. Think thoroughly about this.💰
- Usually, the maximum lose of a single trade should not overweight 2% of your total capital. For example, if you have a total assets of 100,000 dollars, the the maximum lose per time is 100,000 * 2% = 2,000 dollars.
- Calculate ATR Value：
- Easy to find in your APP.📱
- Leave a comment if you have questions!
- Set Stop Loss：
- Usually be 1x, 1.5x or 2x of ATR. Up to your risk appetite.
- Smaller the stop, riskier the trade.😌
- Calculate Position Size：
- Position Size = Maximum Risk / (ATR Value * Stop Loss)
- Example:
- Maximum Risk = 2000 dollars；
- ATR = 1 dollar；
- Stop Loss = 2x ATR = 2 dollars.；
- Position Size = 2000 / (1 * 2) = 1000 shares.
So easy, right? 😎 With this formula, you do not have to worry about how much position should take, just follow the result!
✨ Why ATR?
- Data Driven, No Blind Guessing: ATR will help you to quantize risk.🤓
- Manage Risk, Get Profit Steadily: ATR position sizing controls risk within your affordable area, protecting you form devastating loss.💪
- Being Flexible: ATR changes along with the stock price, and your position size should also change wisely.📈
- Emotion Free: Trade with a peaceful mind.🧘♀️
🙋♀️ Tips before using ATR
- ATR is NOT a panacea
- Combine with Fundamental Analysis: Check the company before trading.
- Adjust Parameter Wisely: ATR period, stop loss…
- Do not trade frequently: It is harmful.
💖 My personal using experience
To be honest, I was also a new comer before, and had lost lots of money.😭 Later, I started studying on ATR position sizing. Nowadays, I have greatly improved winning rate and trading mentality.😊
I usually use 14-days ATR, and 1.5 ATR stop loss. Before going into a trade, I would check fundamental analysis. After that, I would calculate the precise position size with ATR, and execute my plan.
Of course, I also adjust my position sizing dynamically, according to overall market and the performance of the stock.
Generally speaking, ATR helps me cultivate a good trading habit. I strongly recommend using it.👍
💬 Q&A
A：You can adjust it slightly.
Q：Is that the bigger ATR, the better?
A：No. The bigger ATR, the higher volatility and risk.
Q：Can ATR be applied to all stocks?
A：ATR is more applicable for volatile stocks.
Q：Do I need to execute strictly to the position sizing result?