Last week, TradeSmith wrote How to make a killing in pizza. He discussed a trade in Domino’s Pizza (DPZ) using the tools and research that have been introduced this year in TradeStops.

Today we’re going to slice that trade and show you the step-by-step process he used to make this happen.

The chart shows that DPZ hit a low in 2008 below \$4 a share. It triggered an SSI Entry signal in early 2010 at just under \$10 a share and has been moving higher ever since. (Note that the chart uses a log-scaled “y” axis … each gridline is a 100% gain.)

This is a great example of the power of investing with momentum and “unlimiting” your gains by staying invested for as long as the stock continues moving higher.

Another important element in the success of investing in DPZ is the concept of “doubling-up on the way up.” This means adding to the position every time the stock moves 2 Volatility Quotients higher (for instance, if a stock trades for \$100 and the VQ is 10%, then the stock must rise 2 x 10%, or 20%, before adding to the position).

Another element that made this trade so compelling was the pent-up momentum in the stock after crashing in 2008. The Volatility Quotient spiked throughout 2008 from the 20% level to above 40% and plateaued there until 2011 when it began moving lower. Our research has shown that these types of moves can act as fuel to propel a stock higher over a multi-year period of time.

We determined that at each entry point along the way, we were going to buy \$250 of risk. In other words, we wanted to take \$250 of risk in each purchase of DPZ. How did we figure out what the investment should be?

The Position Size Calculator makes it easy. Here are the parameters we want to use to determine the amount of stock to buy. For the initial purchase of DPZ in 2010, the price of the stock was \$9.73, and the Volatility Quotient for DPZ was 43.13%. This is how we set it up in the Position Size Calculator.

Why did we use a Trailing Stop of 43.13%? Because that was the VQ for DPZ at the time that the SSI Entry signal was triggered in 2010.

Now let’s calculate this and see how many shares we could buy.

The analysis shows us that we could invest \$574 and buy 59 shares of DPZ for our \$250 of risk.

You can do the same analysis for the other six purchases of DPZ. Remember, you’re only going to take \$250 of risk in each position.

And here are the results through December 15th of buying just one time when the SSI Entry signal was first triggered vs. buying at the Entry signal and then each time that DPZ moved 2 VQs higher.

And here are the results through December 15th of buying just one time when the SSI Entry signal was first triggered vs. buying at the Entry signal and then each time that DPZ moved 2 VQs higher.

This chart shows the results of each purchase.

We’ll be giving you more examples of this type of trading strategy in the future.

Nobody knows how long a stock can continue to move higher. And at some time the run will end. But in the meantime, we need to find ways to make as much profit as possible as our “once-in-a-lifetime” stocks climb higher.