Smart Trailing Stops are about to get smarter.
As you know, I designed Smart Trailing Stops to tell us exactly how much wiggle room we need to give any stock in order to not be stopped out of the stock by normal expected volatility.
Giant blue chip stocks like WalMart or Johnson & Johnson don’t need nearly as much wiggle room as more volatile stocks like Netflix and Tesla.
By tuning our stop losses with volatility, we’re able to take less risk and lock in more profits on WMT and JNJ, and we’re able to give more room to stocks like NFLX and TSLA so we don’t get prematurely stopped out by the extra volatility in these noisier stocks.
If your stops are too tight on noisy stocks, getting stopped out is almost inevitable. If your stops are too wide on conservative stocks, then you are taking unnecessary risks.
That’s the basic idea.
By combining these volatility–based stop loss points with position sizing, we’re able to adjust our position sizes so that we take an equal amount of risk in each of our investments instead of putting an equal amount of capital in each of our investments. (I recently wrote about this strategy here in Make Big gains by Taking Less Risk.)
I’m proud of these new tools and I’m very happy that I can deliver them to my subscribers. They are easy to understand and easy to use and I believe that they can and will dramatically improve the performance of investors who use them.
But I’ve continued my research behind the scenes and I’m now going to share with you my latest breakthrough (which I plan to start delivering to my subscribers in the next few weeks).
Consider the following chart of Tesla from the beginning of 2014:
Let’s say that we were looking to buy Tesla in early November of 2014. At that time, Tesla was trading around $240. It was already down about $45 or 16% from its September high.
In early November 2014, my algorithms told us that the normal expected volatility on Tesla was 41.3%.
If we knew that Tesla could move as much as 41.3% peak to trough in its normal course of business, wouldn’t it make sense to place our stop loss 41.3% below the September high, even if we’re buying into the stock a couple months later in November?
The traditional way of using trailing stops is to start tracking them from the point in time that you enter a position. So if we were going to set a stop loss 41.3% below the November entry price of $240 we would set the initial stop at $140.88.
On the other hand, if we set our stop 41.3% below the September high of $285 then our initial stop loss point will be at $167.30.
Let me show you how this looks on the chart:
Wouldn’t it be great if we could confidently identify the recent high in any stock and trail our smart stop from there instead of just trailing it from our random entry point?
Yes it would… and this is exactly what my next generation Smart Trailing Stop algorithm does.
I’m excited to start sharing these new advances with subscribers by April of this year.
Next week I’m going to share with you some new language that I’m using to better describe my latest work.
To the growth, and protection, of your wealth,