The TradeStops Stock State Indicators (SSI) were developed using the Volatility Quotient (VQ) as the basis for determining the health of any stock or fund. We talked about the VQ a couple of weeks ago, and you can find that article here.
The Stock State Indicator system uses a simple green, yellow, and red-light signal to help you know if a stock is in a healthy condition or not. But don’t let the simplicity of the system fool you; there’s a lot of math that goes into determining these signals.
Let’s look at what the signals mean first. Keep in mind that we cannot give you specific investment advice; therefore, we can’t make any recommendations based on the SSI signals. Following these signals can help you stay in a trade for much longer than you normally would hold a stock, though.
When a stock is in the SSI Green Zone, that means it is trending higher within its normal range of volatility (that’s what the VQ is for). For a stock to enter the SSI Green Zone, two things must occur. The stock must bounce at least one VQ from the lowest bottom (since moving into the SSI Red Zone) and the SSI Trend Line must be moving higher. The SSI Trend Line is a smart trend line that adjusts based on the underlying volatility of the stock itself. The calculation of the SSI Trend Line is proprietary as is the slope of the trend line to determine a move into the SSI Green Zone.
The SSI Yellow Zone signal acts as a caution that the stock has moved halfway from its most recent top to its stop loss. That means it has moved approximately half a VQ from its top. A stock in the SSI Yellow Zone is still technically bullish and moving higher; however, it bears watching.
The SSI Red Zone signal happens when a stock has moved more than one VQ from its most recent top. This means that the normal volatility of the stock has been exceeded, and the stop loss setting for the stock has been triggered. A stock is considered in the SSI Red Zone until it moves back into the SSI Green Zone at some time in the future.
Here’s an example using Apple Inc. (AAPL).
At the top of the page, we show you the name of the stock, its latest close, and the vital statistics we use in TradeStops. The “Health” of the stock is its SSI. You can see that AAPL has been in the SSI Green Zone for more than 5 months. The SSI Trend is moving higher, and the Risk, or its VQ, currently stands at 18.54%.
Below is the six-month chart for AAPL, complete with our indicators.
On July 18th, AAPL triggered an SSI Entry Signal. That means it moved from the SSI Red Zone into the SSI Green Zone. The jagged blue line represents the daily closing price of AAPL. The yellow line is the SSI Yellow Zone, and the red line is the SSI Red Zone (the SSI Stop Loss). A close below this line is a signal to consider exiting the position.
Here’s an example using Schlumberger (SLB).
SLB has been in the SSI Red Zone for more than a year. The SSI Trend is moving sideways, and the VQ is at 21.15%.
Now, let’s look at the exact moment SLB entered the SSI Red Zone.
SLB triggered an SSI Stop signal on 2/21/2018, almost two years ago. Even though it moved higher after stopping out, that move proved to be a false signal, and the stock has remained in the SSI Red Zone while falling from the $60 level to its current price of just under $40.
The signals are not meant to be 100% perfect. There will be times that a stock hits its SSI Stop Loss and then continues to move higher. There will be times that the opposite happens with a stock moving up into the SSI Green Zone and only to fall back down.
The signals are meant to give you the best opportunity to make money in the stock market by following up trending stocks for as long as they remain in an uptrend.
Look at this chart for United Healthcare (UNH). UNH entered the SSI Green Zone on 6/3/2009 at $24.88 and moved higher for more than 9 years, before finally hitting its SSI Stop Loss at $238.41.
Here are the latest statistics we have that show how powerful the SSI signals are for individual investors. Going back more than 20 years and analyzing almost 10,000 trades using the SSI signals, we can see how powerful they are.
The table shows that 56% of the trades were winning trades. The winning trades averaged a gain of more than 82% with a holding period of more than 2 years. The losing trades averaged a loss of a little more than 16% over less than one year.
That means, across all the trades, the average gain per trade was almost 39%.
You will have losing trades, and you will have winning trades. The SSI system gives you the best chance to hold onto your winning trades provided they remain healthy while exiting your losing trades with a small loss.
Marina and I will be talking more about the SSI system during our webinar on Wednesday, January 22, at 1 pm ET. Click here to register.
Thomas Meyer, TradeSmith
Research and Educational Specialist