Ep. 323 Why Average True Range Is A Bigger Deal Than Ever Before, And How To Use It
59:10 Share

This IBD podcast is brought to you by Directions Daily Leveraged and Inverse ETFs. Whether you are a bull or a bear, you choose the direction. Visit direction.com.

Investing in the funds involves significant risk and should only be utilized by investors who understand the impact of leverage and actively monitor their portfolio. They are not designed to track the underlying index for more than a day. Before investing, carefully consider a fund's investment objectives, risks, charges, and expenses contained in the prospectus available at direction.com. Read carefully. Distributor, Alps Distributors, Inc.

Hello and welcome to another episode of the Investing with IBD podcast. It's Justin Nielsen here, your host, and we are coming to you live at 5 p.m. Eastern as we do every Wednesday. This is June 4th, 2025, and we've got a special show for you today. You've probably seen them on a lot of our Investors Business Daily shows, whether it's the SMT on Fridays,

our swing trader status update on the second Tuesday. And also on IBD live, it's Mike Webster, our, uh, senior market strategist or something like that. You know, you got, I think I just got a new business card. It said random dude. Yeah. Yeah. That makes sense. So, uh,

Well, it's been a while since we've had you on the podcast. I mean, you're appearing on so many things. And I should also mention that we had Joe Fahmy on last week. You were just on Joe Fahmy's podcast, which was a great show. And Joe Fahmy's, what is it? Joe's Happy Hour. Joe's Happy Hour, yeah. So I've got to watch his most recent episode because he had the magician on that came to our table when we went out to dinner one night. So.

Oh, very cool. Yeah. I haven't watched, I've seen all the episodes except for that one. I'm behind on that, but, uh, Joe Fahmy, a good friend of both of us and, and of IBD. And, and that was a ton of fun doing that, that podcast with them. I really enjoyed it and looking forward to, uh,

when you're on there as well. Yeah, absolutely. So let's get into it. Today, we're going to talk a little bit about ATRs. And that stands for Average True Range. And what, you know, a lot of

We've been talking about this for a while. We talk a lot about it on Swing Trader. We talk a lot about it just in general when we're discussing stocks and how you have these high octane names sometimes that are a little bit harder to handle, especially if you have a portfolio full of them. So we're going to talk about ATRs in conjunction with markets, with stocks. And then, of course, as usual, we'll get to some stocks at the end that are on your radar right now. But why don't you start out with just kind of a simple example

explanation of what an average true range is, why you turn it into a percent as opposed to just a dollar value, and why you're using that instead of points, percent, all the things that people normally look at stocks, the way that they normally look at them. Good questions. So I like to kind of just

Think of what's really important and then use tools for that if they're available and if not, build them. And so the average true range is not anything I invented. It came about decades and decades and decades ago. And it just measures the distance that a stock travels on a normal day and it counts. It takes any gaps in their range.

So it's not the day's range, but it's the true range and the average of it. So if you gapped way up or gapped way down, it's going to look at the close from the day before.

And that's how we feel, right? When we're in the market and you're trading something, if it's slow and pokey, it doesn't move a whole bunch on a normal basis on a normal day. And if you're trading high, you know, high octane stocks, the heat that we always talk about that we kind of gravitate towards, that's all, they're all over the place. And so when you're comparing, you know, a 7% move on a slow pokey stock that maybe trades on average,

2% a day on its range versus something that trades 10, 15% on average, that 7% is totally different, right? And 7% was a very important thing to Bill O'Neill, the founder of IBD and cutting your losses at a max of 7% is really like at the core of what we do at IBD to cut our losses on

But there's cutting your losses quickly, which I still use the percent for, I'm aware of. But everything else I do in terms of the ATR, and like you said, points are just silly. I haven't used the point move on something since the 90s. At that point, I switched everything over to points.

the percent instead of points because a $10 stock that moves a buck is totally different than a thousand dollar stock that moves a buck. You know, it just looking at the dollar thing is,

is irrelevant, really. It's like, and especially now, because I mean, you know, a few decades ago, you felt like a lot of stocks would split enough to kind of keep their price, you know, their share price, you know, not too high. There were some stocks that just didn't care. NBR, for instance. Yeah. But most stocks kind of

you know, kept it under a hundred dollars. You know, that seemed like, you know, once you got over a hundred dollars, they're like, okay, we're going to split. So, so people can afford our, our stock in round lots, but yeah. And then that whole round lot thing, most people watching don't even understand that back in the day, if you traded anything less than a hundred or anything, not in increments of a hundred, you had to pay an extra commission. A hundred shares. Yeah. Wow.

These days, commissions are free. So it's that's not even in people can trade fractional shares that they want. So it's it's just a different world now. And so I've switched everything to percents, just like I switched share volume to dollar volume, because, you know, how many dollars were really flowing through the stock? Because if

If it trades a million shares a day and it's a $10 stock versus a million shares a day on a $1,000 stock, that's really, really, really different, right, to how much money is flowing through. So I just try to keep things as meaningful and simple as possible. So I'm converting my mind from percent to average true range, and I've been doing that over the last number of years.

And it's hard because, you know, we're both hardwired to think in terms of percent. And then you're trying to think in terms of, OK, well, it doesn't matter that I'm down 3% today. I'm down a full ATR or I'm down a half an ATR. You want to think of it differently. So anyone who's going to start thinking

using ATRs, do it gradual. Just start looking at the ATR. Be aware of it before you start implementing it as part of your daily trades because it'll throw you off. And I would say that for any new instrument, you really want to test something out for weeks, if not months, so you have a really strong understanding of it.

But anyways, it's just a way of measuring what's normal and natural for a stock. So what's normal for a stock is very important. We're always looking for anything that's abnormal, abnormally weak or abnormally strong. Um, and using the ATR is, I think a great way of, of doing that. Yeah. And I just want to kind of, um, back up a little bit to kind of make sure people understand that concept of the true range, just to kind of get back to those, uh,

the first principle. So CrowdStrike today is a good example. Okay. It had earnings. And when you look at this and you calculate the range that it closed in, it closed in the upper half of its range, 60%. But if you took the true range, because really,

You know, it came down all the way from the previous day's close. So what the true range does is it says, okay, I'm going to take the maximum of the high of the day and the previous day's close, and I'm going to take the minimum of that day's low and the previous day's close. And...

take the difference of that and that gives you your point total. Then of course you can average that out over whatever time you want to use. In our case, we often use 21 days. And then you can put that into percentage terms by,

okay, what are those points, those point values relative to the share price? And that's how you do that conversion. And again, this is something that, as you said, goes all the way back to Wilder, who did a number of different technical indicators. And I think this was back in the 1970s. So it's something you can easily look up the formulas on this. But maybe we can kind of also talk a little bit about

When you look at this, and I'm just going to scroll down here because we took the market surge growth 250, which not everyone knows that you had a lot to do with. It was based on the whole thing. I didn't have a lot to do with it. I had a base on screen that you initially were doing for Bill O'Neill. And then I would put all of those on Bill's screen after you came up with the

the criteria and, and worked with him on making sure he didn't miss anything. Cause that was his goal. I want to make sure that we slice and dice it all of these different ways. Uh, and there were 33 different screens that we'd run, uh, all the time and put those in Bill's computer for him to look at. Um, but I took that growth, uh, that growth to 50. I put it into a list here and, um,

We're just going to sort it by the 21-day ATR. And where you can find this is if you go to Market Surge and you create a customized column layout,

And then you just, you know, for instance, I have this on my, I have a special like MA distance one. And so I have the 21 ATR right here. I pulled that from our price and volume. So you have all of these different price and volume things that you can choose from. One of them is a 30-day ATR percentage, a 50-day ATR percentage, and

Um, the 21 day ATR percentage is what I pulled. And, um, you know, that's, that's what I'm using here. And so I just have this in the list as one of the columns. And now that it's in there, I'm going to go ahead and expand this out and I'm going to zoom in just, uh, just a tad. So folks can see it a little bit easier. Um, but I've sorted this by the 21 day ATR percentage and you can see that there's a very big difference in what a stock normally moves a stock like Oclo that moves, uh,

on average, about 12% a day versus something like, you know, at the bottom of the range, you know, a Disney that moves about 2.5% per day. So very different. So how do you use this

ATR for your individual stocks like this. Well, a couple of things on that. Can we go back to that, the list of where you were showing them how to put the ATR in? I just wanted to point one thing out there. Absolutely. And I will say for the growth 250, it's now 44 screens that I've put in there. It was 30, 33 to begin with. And then over the years, you know, things have changed. Yeah.

So, yeah, as we often do, we iterate, right? That's your favorite word. We come up with something and we say, oh, you know what? That's pretty good, but can we make it better? So I'm going to go over, again, back to the wrench, back to our customized column layout. This is our MA distance. What was the other thing that you wanted to point out? Yeah, go up to price and volume.

And then go down. I just wanted to go down to where the ATRs are. I just wanted people to know, don't use the one that says average true range, because that will be in points. So just to keep things simple, do the one that Justin has the, the 21 day ATR. If you want to use a 30 or a 50, that's a,

I prefer using the 21-day. Historically, people have used the 14-day one. That's what is in most programs, but we're a little bit different here, and we like to lean on 21 and the 50. So that's why we're using that with this one. So that always tends to confuse people. So I wanted to make sure they're using the right one. So pull up that first one, the S-B-E-T. Okay.

And I will say, I do have a tiny position in the Oclo that you mentioned. Oh, I thought you were going to say SBET. I'm like, wow, you're brilliant. The Oclo scares me enough with a 2% position. So look at this. It's all over the place. Go like four or five days ago, that big blue day. How much was that up?

171%. Is that all? Okay. So you know you're playing. If something goes up, whatever something goes up, I always think it can go down more than that. So if something goes up 50% in a day, I think, wow, it can go down 70% in a day. So I want to stay away from those. So one of the things is using this to screen or for when I create the IBD Live watch list every day,

Depending on what the market conditions are, I will put an artificial cap on there. So for these days, because we're in a power trend right now, I'm going out to the riskiest side and we go all the way up to an 8% ATR.

Which is pretty aggressive. So we're not going to put the Oklos of the world in that list just because they're too volatile. And certainly this one is not going to go in there. Let's go back. Let's pull up the Disney that you had mentioned that only has a two. Two and a half. Yeah. Two and a half. So this is more normal type of stocks that most people are going to trade and should trade. Something with really an ATR under 4%.

Because you want to think as basic as possible. What is your max stop loss you're going to take? If you're following our system, Bill's system, IBD's system, you're going to have a max loss at 7% to 8%. So let's call it 7%. So if you're trading something that normally trades 7% on a given day, you have to be timing that exactly right or just normal fluctuation is going to move you out of it.

Whereas if you're trading something like a Disney with, let's say, a two-ish ATR, then that can move a lot on the chart where it would be really noticeable before it gets to that 7%. So in general, if you're new to trading, I would stick with the lower ATRs. You can still find a lot of good ones in the three up to 4% that still heat.

but just not crazy heat like the high octane. Anyone who's trading the high octane ones like over an 8 ATR, you really have to be cognizant of your position size because when they come down, you know, they all come down at the same time and it's not fun. You know, they don't go, you know, the whole thought of a diversification, like I'll diversify my account, but I'm aware that

that all growth stocks are correlated when the market's coming in. And we saw that big time in 07, 09, right? Yeah, yeah. The correlations, again, diversification doesn't help you at all because everything is going down. So it's just a matter of like, oh-

Do you have – the whole idea behind diversification is uncorrelated assets, but in crises, correlation of crises, the correlations really gravitate towards one. And it's interesting because the 21 days here on Disney – so remember, we were looking at a 21-day ATR, and that's actually right here, just so happens to be right around the earnings.

you know, gap up that, that, that it had. So this was a big move. I mean, 10% move on this gap up a 4% move on this gap up, but the average is still, you know, two and a half because the,

Of all the tight action in here. So this is actually probably a little bit high for Disney because of those two big gap ups really kind of ramping up what's normally probably closer to a one ATR.

Exactly. You know, I think that's a good point. So whenever you see gaps on there, that is when I will put a 50 day ATR in my list. I didn't want to confuse people, but when there is big gaps, I will put that in there just to see, OK, given more time, what is it normally trade? But.

In almost all cases, you can just stick with just the 21 day and just look at the chart. Whenever there's earnings and you get a big move, you just know to discount it a bit. And also, I'm glad you brought this up, going into an earnings, let's say something normally trades $1.

a 3 ATR, 3% on average. But if I go into earnings, I'm not going to think that that's going to be a 3% move on an earnings day. I'm going to look back over the last four to eight quarters, see what the movements have been on earnings. And I'm going to use that as a guide. And that's something that we want to add to market surge is, you know, just a percent

of the last earnings days. But you can just do it quickly. It just takes a couple minutes. Yeah.

I want to address a question real quick. I try to look at the comments coming in from YouTube, and JCC Chapman was asking about the ATR. Is it a percentage up or down or the total move? So, yeah, this is not directional, right? It's not saying that it's going up by that amount every day, or it's not averaging the up or the down. It's basically saying, how much does it move? What is that total point move?

And that's what it's averaging out. There's not really a direction in there. Exactly. There's no direction whatsoever. And so it is it's just giving you a sense of character. You know, if you go all the way back to like the Livermore days or what Bill would talk about or all, you know, all the legends would talk about how stocks have characters.

And your job is to assess that character and most importantly, know when that character is changing for the better or for the worse and then adjust accordingly. So this is the best way

measurement that I know of to measure the character of the stock. Because if you've got something that has a 12 ATR, you know what you're dealing with. If you've got something that's got a 1.5 ATR, you know what you're dealing with. Now, the other things are then the quality, like what is the relative strength line? What's the relative strength number? What's the EPS? What's the composite? And all those things.

But that's separate. That's saying, is it in position or how are the fundamentals? But just the character of the stock is just so it's so easy to see with the ATR. And so I'm just a big fan of it. And then also the moves. When you're looking at a move, you're saying, OK, OK.

If this was a big move on the day, how is that relative to the ATR? So I'll just think in terms that way. If it's a 5 ATR and it moves up 10%, well, that's a 2 ATR move. If it's a 2.5% ATR and it moves up 10%, well, then that's a 4X, right? So it's

You know, you're always thinking in turn or that's how I think these days. And it's been taking a while to get my brain. It does take a while. Right. Exactly. It's not a, oh, I can just flip this switch in my brain. And now magically I'm thinking in these terms. You have to do some you have to do some translating for a while.

Yeah, I guess if you for the newer folks or the younger folks who aren't, you know, been haven't been doing it as long as both of us have, you know, it would be easier. So if you're new, then that's great. And I would just start this way. Right. Yeah. This IBD podcast is brought to you by Directions Daily Leveraged and Inverse ETFs. Whether you are a bull or a bear, you choose the direction. Visit Direction.com.

Investing in the funds involves significant risk and should only be utilized by investors who understand the impact of leverage and actively monitor their portfolio. They are not designed to track the underlying index for more than a day. Before investing, carefully consider a fund's investment objectives, risks, charges, and expenses contained in the prospectus available at direction.com. Read carefully. Distributor Alps Distributors, Inc.

You know what? I want to transition real quick because, you know, so we've looked at a few stocks on the ends of the spectrum, but I want to kind of get into...

What happens when you have a lot of stocks acting together? So just as an example, I've gone over to this list. And what I did was I just put in some ETFs. We've got all your sector spiders, your 11 sector spiders in here. We've got everything from your triple leveraged TQQQ, which I do have a position in that, our triple leveraged UPRO, which I

I also have a position in that, and both of those are on SwingTrader. So this is your Qs that are triple leveraged, SPIs that are triple leveraged. Gold miners are actually up there, right up with the leveraged, as is the semiconductor ETF. And then at the very bottom, you've got SPI at 1.29 and XLP at 1.11. So this kind of shows you how...

And you know what? Just for fun, I'm going to throw in, what is a China ETF? Just for fun. FXI. FXI. Yeah. I was thinking of KWeb, but yeah. Yeah. I own some KWeb. And I do own the TQQ and the UPRO that you mentioned and SPY and Qs as well.

Yeah, so here's K-Web up at 2%, which is actually for K-Web not that bad. And so, you know, probably some of that has to do with the fact that it's actually been relatively tight here over the last few weeks. But so let's just talk a little bit about this. Do you ever use like, oh, OK, spy apps?

This is what SPY is at, 1.29. And I feel like that's fairly typical for SPY. Although in April, you know, especially after Liberation Day and then April 9th, where, you know, we had the NASDAQ up 12% in a single day, even SPY was up over three for its ATR at that point. So do you ever kind of use this as a gauge of, OK, this is what SPY is at.

what, you know, what kind of stocks should I be looking at or what kind of risk does that add for me? Well,

Well, all the time. So I'm always comparing it to just the way people would do PEs versus the S&P 500 has been a kind of a standard for decades before we were born. You know, they say the S&P, let's call the S&P PE 20, for example, and you're trading something 25. Well, then it's rich, you know, or if it's

15 PE for your stock, then it's, you know, undervalued, you know, that's the general concept. Uh,

And so I think in the same terms with this, I'll always look at, even though I really should look at the Qs because that's more in line with what we trade. But for some reason, I'm just wired to look at SPY. It's silly. But I'll look at that and I'll see it. Like how far away from that is it? How many times is it? And if you're trading something, you know, it depends on what type of environment you're in. Let's just pull up the Qs.

Um,

So we are in a power trend right now and something that you and I developed along with Charles Harris and anyone who's interested in what a power trend is, you know, in detail, they can watch, you know, we've got a bunch of podcasts and stuff like that on investors.com on it. But in a nutshell, it is when the market tends to trend for a longer period of time. And the three of us came up with the very simple rules of your low being above your 21 day for 10 or more days,

your 50 day, which is your red line in an uptrend and your 21 day, which is your green line above the, the, the red line, the 50 day for five days or more. And then of course, you know, we have the thing of has to start on, on a day that's blue. So that's your basic thing. And then, you know, it doesn't turn off until the, the 21 day crosses back below the 50 day. In most cases, there's some exceptions, but that's the time when, when you're in a power trend, you're,

Good things tend to happen. The best moves in the market have really happened during power trends, and that's how we designed it. You don't know what the beginning of a power trend is, if it's going to be a special one or not, but you want to think in terms that it could be, just like what Bill O'Neill did with when you're coming down waiting for a follow-through day when you're in a bear market that we had, which was a market crash. People

I don't hear a lot of people talking about that. We just had a market crash. In my opinion, we did. But pull it up on a weekly chart. It's a little bit more obvious there with some of those bad weeks in there. How much was that bad week down the week before the bottom?

down on 9.87%. Yeah, in one week for, you know, like, after it was already down and underneath your 10 weeks. So I look at that as a crash. And there's two of us have looked at, you know, all the markets in detail. And this is very abnormal. And the bounce back without looking back is very abnormal. The only other time we really saw it was during the COVID recovery phase in 2020. So

But with that said, we're in a power trend. So you want to keep an open mind that really good things could happen during a power trend. So you want to start shifting away from the lower ATRs on balance into your more medium ATRs.

even a sprinkling of your high ATRs. And we'll talk about it in a little bit about from a portfolio level of how to manage that. But really there's a time and a place for higher ATRs and a time and a place for lower ATRs. So when you're underneath the 21 day range,

You know, or you're in any type of corrective phase, you you want to lean towards low ATRs like three and under, because that's when you get chopped up. And if you're getting chopped up or even a sideways time frame, like the December through February, where we're just in that little flat base going back and forth.

you know, doing a post analysis, what I should have been doing during that time frame is focused on very, very low ATRs because there was still enough evidence to continue trading in there. Like we know now that it didn't work out, but at the time there was enough evidence that you wanted to be in the market, but really that's the time to be dialing it back with

Very low ATRs, even more than what we were doing. And so every cycle you just learn and you're like, OK, you know, next time I'm in this chop zone, I'm going to go to low ATRs as well as a high cash position. But now that we've really breaking out of this cup with handle, obviously.

Pull up QQQE, which I did buy, I think, for the first time today. I don't think I've ever traded it, but it's a nice little cup. This is the Q's, but equal weight and a nice little cup with handle that it's trying to break out of. So, you know, trading that as well. And I'm sure the ATR on that is very low, just like the other ETFs. In fact, yeah, why don't you put it in there and see what it is? Because I didn't look at it.

So, yeah, QQE right there at about 1.46. So at the lower end. Yeah. And that's a nice thing to just kind of balance. Let's put some leverage on that.

That would be nice to have a double, you know, just like the RSP that I trade. I think I have a position in that is the equal way to SPIA, which someone would come up with a double. And, you know, you bring up a good point because there was a question in the YouTube comments about, you know, what is the average percentage ATR that you use, you know, and, you know,

does that change? And it really does change based on the environment. And just as an example, you know, for SwingTrader, a product that you and I both work on, you know, that is offered by Investors Business Daily, when the follow-through day happened on this day, we started with

QQQ and spy the single leverage or yeah, the no leverage versions because, okay, you already had a very high ATR environment. It was at the beginning and you kind of wanted to make sure you weren't going too far ahead of your skis. But then as the

The market kept on checking off these boxes. You you changed and said, OK, well, now I'll look at ATRs that are, you know, in these different ranges. So it really is kind of a it depends answer to that question. Yeah. And a great point. And so one of the things folks should keep in mind is just there's three key moving averages that that kind of dictate what type of environment you're in, the 21 day exponential and

and the 50 and the 200 simple. So your black line, your red line, and your green line.

When they're not in the right order, meaning the right order is your green, your 21 is above your 50 and your 50 is above your 200. When they're not in that order, then you want to go with lower ATRs because you're in a transition period or you're in a correction period. So now we're not in a correction period. We're in a transition period where we had a bear market and we're transitioning into ATRs.

you know, a bull market and where we've got this power trend going. So while you were underneath both your 50 day and your 200 day, and that 50 day is underneath your 200 day, you want to go with your, your, your smaller ATRs, or if you're using ETFs, your single weighted ETFs, as you start getting above the 50 or above the 200 day, then you can go into your doubles ETFs.

And then when you get above the 200-day and you're above the 21-day, then you can go into your doubles or triples. We really want to see that 50 get back above the 200-day, but it's going in that general direction nicely, as quickly as anyone could have expected.

So but once that's up and we're in the new high ground, then you almost you pretty much just do doubles and triples. But it's just think of it in terms of just those three moving averages. Are they stacked the right way? And are you where are you in them? And when you're above all of them and they're in the right direction, then you can go heavier with with higher ATRs.

And in reverse when you're underneath them or they're not stacked properly. Yeah. And again, those triples right now, 3.85 ATR for UPRO and 4.82 for TQQQ. So it's like, OK, I can I can handle that type of risk.

risk. One thing that you mentioned that was at the bottom, the SPY ATR was in the threes. So that was the U-Pro at like nine, meaning that you're expecting... No, thank you. Yeah. And with SwingTrader that you and I do, we like to keep our stop loss around 3%, give or take, 3% to 4%. Even though we look at things in terms of ATRs that we also are cognizant of the percent loss.

And so what we'll do is we'll go in there and, um, you know, just, uh, adjust accordingly. Um, but anyways. Yeah. So, um, I, man, we, we could talk about a lot of this stuff forever. This really needs to be like a three hour, uh, three hour long podcast, but I don't have to do dinner for a couple hours. Yeah. If you want to see, uh, if you want to see our producer MJ freak out, then, uh, yeah, just keep, keep on talking like that, Mike. Uh,

Well, I was born in a small little town. Right. But I want to get into, because one of the things that we do on Spring Trader is we do kind of take a look at our...

you know, it's a model portfolio, of course. It's not like we're using real money, but we treat it like it is real money. And we will kind of take a look at, okay, our ATR, not just for our individual stocks, but how it's all acting together. And so one of the ways we do that is by coming up with a portfolio kind of ATR. And

In this case, here's a very simple way to do that calculation. You take your weighted ATR. So for each stock, you'll take what the ATR percentage is times the weight in the portfolio. And that'll give you the weight for the ATR for the stock. And then you sum all of those up.

And then that's going to give you your ATR. Now, what about when you are only partially invested? Let's say you're 20% invested. Well, what that ends up doing is you kind of end up having a huge portion of your portfolio that's just

Right. It's ATR is zero cash is by definition a zero ATR. And so so that that portion is, you know, kind of kind of zeroed out. And so whether you use you could either do this with a some product, you know, so where you take one column of your ATRs and one column of your weights and do the some product or do them individually and sum them all up. But the benefit here is that you can kind of see, you

how that can really make a big difference in your ATR. So maybe you can walk through this slide real quick. These are just using the largest market cap with different weights. Let's say you had a 15% weight in your largest market cap. And of course we have, this is old data, by the way, this is just for illustrative purposes. So,

We're using old data, but just to make the point of here are the ATRs that Tesla was at the time, a 7.5, all the way down to Berkshire Hathaway B shares down below 2% and how that would –

kind of translate based on how you treated the weight for each um for each position assuming they were all equal weights so if you can um kind of walk through that sure and as you said this is you know a few months old um data but the concept is uh remains the same so

Just think on the left, that's 150%. So you're 50% on margin. The one in the middle, you're fully invested with no cash. And the one on the right, you've got a 50% cash position. And so each one of those, like the Apple, for example, is at this point at a 2.95% ATR. So it traded on average about 3% a day.

If you had a 15% weighting in that and 15% weighting in all of those and you sum them up, that gave you your portfolio ATR around 6%. So it gives you a sense of, okay, on average, I could expect if they all did this movement around 6%. That's not exactly the...

It just gives you a guide to work off of. And once you start working with these numbers, you can find the sweet spot that works for your personality. Because my personality in one of my accounts is different than a different one. One that I'm very aggressive in. Another one, I'm more conservative. And so everyone is going to be different. And you might be different in different accounts as well. So that's one on your far left. A 6% ATR, that's heavy, man. That's hard to deal with.

And you would only do that if you're doing really well for the year and you've got what I call chips. You've got chips that you can play with, meaning you're up on the year. When you're up on the year, you can trade differently. When you're up on the year and outperforming the S&P or whatever your bogey is, then you can trade.

trade more aggressively. Now, if you're down for the year and you're underperforming the market, well, then you're going to want to trade more conservatively. So you start moving over to the right. So the one in the middle, all the same stocks with all the same ATRs, but just a different position size. You can see that lowered your ATR from 5.99, so 6% down to 4%. Now, as you pointed out, the cash component

has a zero ATR. So that any cash in there will really, that's a way to really reduce your portfolio ATR. And so by having a 50% cash position on the one on the right, your ATR is now only two on your portfolio. And that's something you can, most people, the average person could deal with and probably deal with a little bit more than 2%. So this is something that

We do on SwingTrader, we're looking at it all the time and adjusting which stocks we are going to go and which ETFs we're going to go based on what impact that's going to be on the portfolio, on the model portfolio that we both run. And this is a big tool. And I put a ton of weight into this because if everything's going well, you don't need it. But when when

you know, you've got problems in the market. You're going to wish you had something like this. Yeah. And to that point, I'm just going to share real quickly a slide from our SwingTrader product. And this is something that we do ourselves. You know, that when we're looking at things, we calculate, okay, here's our performance. And I'm just using one of our

charts that we have on our chart dashboard that we use internally. And this shows our 50-day, last 50 days. So this is starting March 26th. We'd already kind of moved forward to the next day. So this isn't through June 5th, I should say, because we don't know the future, but we had already kind of reset our stuff for the next day. But you can see how, okay, we were

with our portfolio had a very low ATR weight all the way down to zero for most of this, because let me go ahead and show another chart here real quick. This was our percent invested. So when our percent invested, when we were completely in cash,

As we were for most of March, most of April, we actually went to cash on February 21st on SwingTrader. And, you know, we dabbled in a little bit, but not in a big way until after the follow-through day, as you can see here. So that's when we really started ramping up. And you can see that reflected in our portfolio ATR weight.

where we were at zero, we finally got up to kind of one as we got our follow-through day, and then we started ramping up. We have come down sometimes in a big way, just in terms of reducing exposure when things look like they could come in a little bit. But overall, it's been at times pushing it a little bit.

to the point where we've actually been on margin a number of times here in May, for a good portion of May. Yeah, so I think you did a great job walking us through that. Go down to the next chart, if you don't mind. So you want to build this, don't act on it, you know, do the same thing that Justin does with these spreadsheets for us for SwingTrader, and just...

Just graph it out until you get a sense for where your sweet spot is because you'll start feeling uncomfortable at a certain level. And when we were getting close to a 5 ATR in the portfolio, even though we sidestepped the bear market and we're very happy with how we were doing, it was still a lot of risk. And then what happens with that is sometimes

Then when things start rolling, you overcorrect is what you see what we did there, bringing it all the way down to under, you know, down by one ATR. So in hindsight, when you'll use this for a post analysis and say, you know what?

I probably wouldn't have sold as much if I hadn't just been pushing it too high. So lots of what you're doing is like a post analysis going, okay, well, I didn't like how I did that. How can I adjust it? And so we'll look at this. And when we're deciding to peel things back to reduce our exposure, we'll look at our highest ATR stocks and see if those should be sold first. Because if you've got,

you know, 10 stocks in the portfolio and two of them have got a 6% ATR and, you know, two of them at a two ATR and the rest in between. Well, you want to, if you're trying to raise cash to reduce exposure, you want to go all things being equal, go with the six ATRs and remove those. Now, if you're trying to ramp things, then you don't want to add more two ATRs in there because then go back to the other slide.

then your green area, your percent invested will start getting higher than you want because you don't want to be 200% invested in there. That's still a level of risk even if the ATR is at 2% because if you've got some sort of...

a big risk event in the market that this is going to happen being that deep in you, you want to look at both. So it's not one or the other it's, it's looking at both. And then what you have up on the top of it, that we talk about the two of us talk about every second Tuesday of the month with our swing trader update that we do here on, on YouTube through IBD is look at those moving averages of your equity curve. So the equity curve is in purple and,

there and our 10 day is in yellow in the 21 day of the equity curve. So that's not the 10 and the 21 day of

of the S&P, it's of our equity curve and use those along with it. So when you're trending above those moving averages, that's when you go deeper with your, a higher ATR on your portfolio. And when you're coming underneath those, which you will, then that's when you want to, you know, contract those. And so it's a really good tool from a portfolio management standpoint. And I think it's much better than beta. I think beta has,

A lot of people use beta because it's the old school way of doing things. Study beta and you'll see that there's problems all over the place. It's a good concept for portfolio management from a very, very big, you know, hundreds of stocks in the account. But that's not what we do. But for what we do using beta is just I don't think it's a good risk measurement.

This IBD podcast is brought to you by Directions Daily Leveraged and Inverse ETFs. Whether you are a bull or a bear, you choose the direction. Visit direction.com.

Mm-hmm.

And we're going to go ahead and transition because I think we need to go over a few stocks because that's what we promised. I want to make sure we have time for that. And I also want to acknowledge that I was seeing some comments from Revere Asset. So Don Vandenbord, of course, we've had on –

I bet he live. He's been on this podcast. Um, he's actually going to be on the podcast, I believe July 16th. Uh, so good to see them in the comments. Um, I'm sure we're going to be talking about ATRs with Don when he's on as well. Uh, but let's get into some, uh, some stocks and I'm going to go ahead and start with, um, well, let's see. I, I think I just lost my market surge, so I'm just going to have to put that back up here. Uh,

But I was going to start with RCL, if you don't mind, just to get you prepped. I do have a position in this myself. So do I. And we do have it on SwingTrader as well. Yeah. And OK, here we go. Tell us what you're seeing here on RCL. Yeah. So it's a bit extended. It's 4% from its pivot and even more from kind of your alternative pivot as it was breaking the downtrend.

of the handle. So I wouldn't suggest buying it here, but you really want to look at what stocks have

really worked and then put them in a separate list and then wait to see if they give you another entry point. Now, sometimes they don't give you another entry point, but most of the time they will. Either a pullback to the 21 day, kind of a shakeout with an upside reversal, going sideways, all sorts of ways to get back in, to get into a stock if you've missed it. So I wouldn't buy it here, but let's go to the weekly for a second. And

In isolation, this large base, how deep it is, would really turn us both off from what we learned from Bill that, you know, a deep base is how deep is that base? Looks like it's about 41 percent. OK, so that's on the excessive side. Normally, you know, anything more than 30 percent, you're like, oh, this is pretty deep. But in context, the NASDAQ was off like 27 percent, give or take.

during that time frame. So it gets a pass because of that. And lots of bases that we're looking at right now are a lot deeper than what we feel comfortable with. We felt comfortable with the base that it had before the bear market. How deep was that one?

This one was just 15%.

which happens. And then is now moving back up in position. Now, one of the things I don't like is that it did not hold the 200 day during the bear market. I have a positive bias towards ones that did hold the 200 day. That is a big deal for me, but you can't get everything you want.

The other thing I like about it is the leader in this space right now, we don't have to go through all of them, but the CCL and the Norwegian and the Viking and all the other ones in the group, this is the best looking one. Well, Carnival looks similar and Viking coming back up, but pull up Norwegian. That one was...

I don't know if it's specific to them, but that's just kind of not acting. One of these kids is not like the others. There you go. I remember that game. Yeah. Does Nicholas play that? No, that was from Sesame Street. Oh, that was? Okay. I remember hearing it. I just didn't know what it was from. Okay. So let's go back to the RCL. So let's do it on a weekly and go look at the quarterly numbers real quick.

So on here, what's problematic is the sales growth is going from in the 60% down to single digits. So that's what we don't like. And you can also see with that earnings line up there, it was growing at a certain rate and now it's flattening out. So that's a negative. But you also want to look at the context of things. We had the COVID situation that kind of shut down this industry. So it was taking its time kind of

coming back from all that mess and everything. I know that was a number of years ago, but still, I think it has some lingering impacts in this whole sector. But on the right side of this base, you have several weeks up in a row. We like to see five days off.

or five weeks or more up on the right side, another thing that we learned from Bill. And so, you know, you've got that going for it. It's not a perfect looking base, but it looks very interesting. And that RS line is above both of its moving averages with a strong RS number. So certainly one to be looking for as a way to get in.

I also wanted to make sure we had a chance to go over Duolingo. This has been a tricky one for me. Look, I've got an 875-day streak on the app. I really enjoy the app, and so I have tried this a number of times, some good.

a lot bad, to be honest with you. Not real bad. It's just I basically sell it right before it starts moving. You know, I finally kind of lose patience with it and then it turns around and moves without me. So... Oh, that doesn't just happen to me. Oh, I thought it was the only one. Yeah. And in fact, I'm trying to remember if I still have a position in this because yesterday I didn't particularly like the action of that downside reversal. I was buying it

uh, you know, on this, uh, bounce off the 21 day moving average line. We also added it to swing trader. Uh, so I was buying it off the, after the restriction period. And, um, I think, I think that day kind of spooked me, but this is still, you take a step back on that weekly chart. I mean, you can't ask for tighter, tighter closes than that.

Dude, it looks so beautiful, man. It really does. I don't have a position in it. I traded it the same way you did with that upside reversal and then sold it yesterday. Just because when you're failing like it was on the daily, you don't know how much lower it's going to go. But when you step back and look at this weekly, it's not that bad.

It is a beautiful thing. So I would say this is in the spirit. It's not a high tide flag, but in the spirit of a high tide flag that you ran up from, you know, the low 300s up here, you know, into the mid 500s and you are holding dead tight.

You know, obviously, Bill would want 100 percent gain or, you know, or more. And that's not what we have. But still, at least from the point where you would start counting, you know, looking at the flag. But this is really beautiful and tight. Let's go back to the daily for a second.

So how I would look at this is if it can take out yesterday's high, that's what that's going to be my, you know, entry point. Now, if it comes down one more time to 500 and has an upside reversal, I would prefer that.

And one more, just to wrap things up, let's take a look at Toast. Here we have a nice move that this had off of earnings ramped up very quickly. And now the pullback, I mean, it's staying above this earnings gap and getting support right there at the 21-day moving average line.

And like Duolingo yesterday, it did have kind of a downside reversal. I had a position. It kind of shook me out there. It was an outside day closing at the lows. But I'm still watching this one. That intrigues me, the fact that it's potentially getting support at that 21-day. Yeah, same thing. I did get shaken out of it yesterday. And you look at it and go, yeah, it's an outside day, downside reversal, failing at

you know, where it should have moved up. And so you back away from it if you're a fast learner.

But the support it's getting at the 21 day is, is great. And if it can make it back above yesterday's high, that's probably something that I would be getting back into. And I just really like what they're doing. And Bill would always, you know, teach both of us that you want to go into something that's, you know, saving people money is a really good area to go into. And that's what these, um,

This is doing it's saving restaurants, you know, primarily from, you know, higher labor costs, because when they put this in their their restaurants.

The restaurants, it can really speed things up and you don't have to you can either get more people through there or you don't have to have as many, you know, people working. So it's great. It's efficient. And those are the types of things that we've seen through a lot of our models. But doesn't mean it's going to work. But, you know, lots of the best stuff are just sticking straight up in the air. So, you know, we wanted to have a few that were, you know, viable in the near future if they move up.

Yeah. Well, hey, I hope that people get a lot of things to kind of think about in terms of how they handle their own portfolio, how they look at the risk. Again, we have a lot of ways of looking at that risk. It's so important to keep that top of mind because...

That's how you live to fight another day is by making sure that you're never taking on so much risk that you can no longer play in the game because you got knocked out or so injured that, you know, you just can't play anymore. So hopefully people can use that ATR and really understand the level of risk that they're taking with their individual stocks and also with the market and kind of know where to gauge their portfolio as well.

Absolutely. And thanks for having me back on the show. And I really appreciate it. And you do such a great job with absolutely everything you do. And everyone watching should know what is your nickname? Goofy? No. Something like that. That was from Disney. I'm still stuck on our Disney stuff. The Saint, because anyone watching...

Justin is, I've seen, known him since 1998. I've never seen him even once do anything. We met by sharing a room in Philadelphia for work. Yes. That was so, that was so much fun. Yeah, that was, that was good. I brought my, it was almost like a sleepover. We were like up all night talking stocks and like that.

I had brought my Jesse Livermore. I just recently got Jesse Livermore's How to Trade in Stocks, which is probably one of my favorite. It's in my top three books. And I brought that. I was going to read it on the trip, but we were hanging out, so I didn't get to read it then. It was just so much fun. And it's just great working with you. And it really puts a smile on my face. So thanks for all that you do. And people wouldn't understand...

The IBD would not be what it is if it wasn't for Justin. And 99% of what he does is behind the scenes. And it's just people don't realize we just couldn't be the organization that we are, nor could Bill have done everything that he did without Justin. So thank you for all that you've done. Wow.

Well, and Hey, uh, same, same, same back at you, but buddy, uh, there's so many things that you've created, uh, um, whether it's, you know, so who do you have next week? Great. Yeah, right. Exactly. Um, but anyway, uh, before, before, uh, the producer just kind of shuts us down, I'm going to go ahead and end it there and just say, thank you so much for sharing your knowledge as you always do. And as a reminder, there's a lot of places where people can see you do your stuff. Um,

you know, not only are you on the Friday SMT, although you won't be there this week, I'm going to fill in for you. Uh, we also have that swing trader status update that we do on the second Tuesday of every month. That's free content, uh, for, for people to take a look at. Uh, you've also got your Webby rambles, uh, that you do, uh,

very regularly that you just are kind of sharing information for free on YouTube. So a lot of places to follow you, you know, on your content. And then also go ahead and give people your handle in case they don't have that on X. Sure. Well, I'm on IBD Live every Monday, Wednesday, and

Friday. There's not too, right? That's so much fun with, uh, three other people each time. And, uh, we have Eve Bo back coming on this Friday. We always have a special guest, uh, every Friday, my Twitter handle or X is M Webster, 1971 in the Webby rambles on podcast that, that, um, I'm doing is, um, on, uh, my Webby 5150 YouTube channel. And I do, um,

I do an episode every week. I think I'm up to like 22 or 23 now. So hopefully people will watch that when they have time. It's a good sleep aid. Well, thanks again for all that you do, Mike, and appreciate you coming on the show again. Thank you.

Okay, that's going to wrap it up for us this week. Make sure you tune in next week because it's going to be all about what is the big money doing. We've got Scott Bennett coming back on the show from Investing with Rules. And so that's going to be a great time to take a look at how he views the market. And he's, I'm sure, going to share some of the stocks that are most intriguing to him. So hope you join us for that. Thank you so much for joining us this week, and we will see you next week.

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