So far, in our hunt for volatility we’ve gone where few true-blue investors dare tread. We’ve looked at volatility and exposed its threat to trailing stops. We’ve looked at how you can preview how much a stock is likely to go the wrong way before you should be worried by using ATR —average true range. Now we’re going to talk percentages.

Instead of asking, “does this stock swing by a dollar a day?”—which is a big move on a $5 stock and nothing on an $80 stock, we want to know whether it normally jumps up and down by 10% or 30% and how often.

As we did last week, we are going to rob the traders’ tool chest to get the answer. And I promise you, this one is so easy, you’re going to fall over, gob-smacked with joy at how simple it is.

There’s a little gadget you can find at stockcharts.com and similar sites that I long ignored. I use technical tools a lot for The Optionist, to find options trades, so I’m apt to borrow what works for investing help, too. All’s fair in love, war and trying to beat the market, right? And though the overlay called “Zigzag” looked neat, it didn’t help me unearth a stock about to go ballistic. It’s mostly used by people who do Elliot Wave predictions, which I most certainly do not.

In fact, all the “Zigzag” thing seemed to do was trace and simplify what a stock had already done. It showed how many times a stock reversed up or down by a selected amount. … Then the light dawned.

How often a stock reverses by a certain amount is a pretty big thing to know if you are considering one for investment. It might even make you change your mind about buying it. And you would definitely want to manage a stock that has a habit of dropping 30% a couple of times a year differently than you would a stock that hardly ever falls by 20%.

Let’s say you are feeling really risk averse. You want something calm but good for a special trust fund. You would rather have a stock that climbs slow and steady, as long as it doesn’t give you sleepless nights by going down more than 12% very often. You have two stocks that seem to have the qualities you’re looking for. Which one is better for your purposes?

Look at these two charts. To make the Zigzag easy for you to see, I have reduced the price to “dots.” The line you are looking at is the Zigzag tool if it is set at 12%…

First a tech stock you might expect to be volatile, Taiwan Semiconductor:

Then a stock you might expect to be fairly stable, Nike:

What a surprise. Taiwan Semiconductor doesn’t drop 12% any more often than good old Nike does. But, as you can also see quite easily, when it does fall it tends to make bigger moves. Since I set the Zigzag chart for 12%, each time the line changes direction, it means that the stock moved at least 12% the other way. Or more.

This is the one catch with Zigzag. The lines just keep going as long as the price stays on its trend. But this little problem is easily solved.

Just change your Zigzag setting.

Let’s say you are still trying to decide between Nike and Taiwan Semi. They both go up and down 12% or more about as often. Do either of them have a habit of dropping 25%? Easy to find out. In Stockcharts, you just go to the overlays for Zigzag and change it to 25%:

And instantly, you will have your answer. Could there be anything easier than this?

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