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How to set the SL by looking at the volatility!


Fabian
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Hey guys, I’m writing this post to give all of you a little bit more input on Beta, which is in my opinion essential if you want to set a good SL!

 

I try to make it not too long and dry, so bear with me 😉

 

I will explain everything with screenshots from the website finviz and highly encourage you to use it too: https://finviz.com/

 

So what is Beta:

Beta measures the volatility of a stock, so how fast the prices changes. The Asset that defines Beta is the S&P500, the Beta of it is 1 sometimes it’s also displayed as a “-” like we can see in the example of the SPY (the ETF of the S&P500).

 

Let’s look at an example where the Beta is higher than one and also what it means:

 

BtYqL1J9kSBZ91xyppg1VfwsaShVqLXmzjyzsLjfqrN2YGk3IDJny3INQ7PZAzb081D7iaT5LVkLhKfqAH9FlYzlBJNY_95H-IenrhkauR1w2SA-EOZg9Ld8Tybwbf3mKN4A7dxH

 

 

 

A prime example for a high Beta stock is Tesla, with a beta of 1.98. This means Tesla is way more volatile than the S&P500, therefore if we trade Tesla this also means we have to give our SL more room than we would have to with other stocks! How can you approach this problem? You could buy less shares of Tesla, which reduces your overall risk, and then you can set a wide SL or you buy the same amount and set a wide SL, but you trade other assets with a tighter SL, that your overall risk exposure doesn’t get too big!

 

rgVQfdanh5eWVF3RhW4QtUT6ClkS3SP-LQsExm2lYSwrxmIhafV868upkIzBsluAPsm0Qe6Ttpq433RZWhnebWleRl5QgxAy3VUnDGVZ2TGoGpWPhkW9M9e5XZKB9AUi6PGK0Acl

 

 

This would be for example the perfect counterpart to Tesla. It has a Beta below 1 this means it is actually less volatile than the S&P500, and therefore if we trade MSCI Inc. we could set a tighter SL.

 (btw. I will soon post a little trading idea on MSCI Inc. 😊!) 

I hope this explanation of Beta helps you to better adjust your SL’s by looking at the volatility, therefore the Beta of an asset.

 

Have a great start into the new week!😊

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