Sometimes you're faced with a swing trading setup, but the stock is on the volatile side. Do you skip the trade?
It's hard to cut losses quickly for stocks that move a lot. But the possible gains are hard to pass up. One way to manage the risk is to reduce the position size. That how we handled Tempus AI.
How To Handle A High ATR Stock
Tempus AI recently carved out the right side of a cup base after a volatile reaction to earnings (1). It first cleared a line of prior resistance (2) then soared 20% in just under a week (3). The base depth itself on Tempus AI wasn't excessive, at just 29%, but the day-to-day movements made the stock potentially hard to handle. Its average true range (ATR) was over 7%. That means an average day saw more than a 7% move from highs to lows.
Yet, when we saw the upside reversal at the 10-day moving average (4), it was hard to pass up on one of our favorite setups. How do you keep a loss closer to a maximum of 3.5% when the stock moves more than 7% in a day? Go with half the position size.
Make no mistake, there is a sacrifice. If Tempus AI rallies like a rocket, the smaller position means our participation is limited. But we still get to participate. It's an acceptable trade-off in order to limit risk to the portfolio.
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As Tempus AI moved higher after the upside reversal (which was a 10% move from high to low), it joined the current trades list on SwingTrader with a half position (5).
Handling The Tempus AI Tempest
The next day, we had an 11% gain from our entry at the intraday peak (6). Normally, that would be enough to take at least some off the table for a full position. With a half position, it can be more difficult. Taking profits into strength can quickly leave your position size inconsequential when it already starts off small.
Still as it started reversing, we ended up locking some profit while we were still up 5% from our entry. By the end of the day, the stock closed down a little more from our trim but in the middle of its range.
When it started falling the next day we locked in the remainder of our gain (7). It was only down another 1% from our trim, but we knew that the moves in Tempus AI were so fast, we could take a loss if we let it go too much further. If we had waited until the end of the day, we would have round-tripped the trade and lost our profit.
While Tempus AI continued lower (8), the selling seems to have stopped. Because we took a profit on this already, we can keep it on our radar for another potential trade with an eye toward keeping the risk in check like we did with this trade.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
