At the end of February, we announced that we had added a new “2 VQ” alert into the suite of TradeStops alerts. Since then, we’ve received a number of questions about the alert and its limitations. We’ll answer those questions shortly.
For those of you who are new subscribers, the concept of “2 VQ” comes from a question that TradeSmith posed a couple of years ago. We hear all the time about people who double down on their losing trades. He wanted to know why people don’t double down on their winning trades.
This led to his article in late 2016 titled Doubling Up… On Your Winners. In the article, TradeSmith wanted to find a good timing mechanism for adding to an investors’ winning positions. After much research, he found that adding to a position each time a stock moved higher by two units of a stock’s normal Volatility Quotient (or VQ) — for instance if a stock with a normal VQ of 13% moved up by 26% — that could be a good way to capture gains from stocks that stayed in a strong uptrend for a long time.
TradeSmith looked at Constellation Brands (STZ) as an example. From the chart in the article, you can see that adding to STZ every time it increased in price by 2 VQ (two units of normal volatility) allowed an investor to profit greatly from the long-term uptrend that STZ experienced beginning in 2013.
Here’s a chart of these trades and their profit condition at the time of the article.
There are also follow-up articles we’ve written that can give you more information about the 2 VQ methodology. We recommend that you read these also to better familiarize yourself with the methodology.
Here are some questions we’ve received about the 2 VQ methodology:
Q. How do I implement the 2 VQ methodology using the Risk Rebalancer?
A. The 2 VQ methodology is a stand-alone methodology and does not work with the core TradeStops tools including using risk parity and the Risk Rebalancer.
Q. What’s the best way to follow the 2 VQ methodology in TradeStops?
A. Because each stock’s VQ is updated weekly, we need a way to track progress toward this approach. The best way to follow the 2 VQ methodology is to set up your positions in Watch portfolios. This way you can focus just on these stocks and not have to guess which are 2 VQ stocks and which aren’t. It’s almost like taking a snapshot in time that you can refer back to later. As a side note, I like using the Watch portfolios for just about every special situation in TradeStops.
Q. It seems that there could be more risk using this methodology. Can you elaborate on that?
A. You’re right about that. Because we’re adding a new position after a 2 VQ move higher, if that position then moves lower and hits its Stock State Indicator (SSI) Stop signal, the position will basically break even. If we hadn’t added a new 2 VQ position and just had our initial investment in the stock, the stop out after a 2 VQ move higher would result in a profit of approximately 1 VQ.
Q. Will the new 2 VQ alert stay active, even after alerting me that the 2 VQ alert was triggered?
A: That is a good question. No, the 2 VQ alert will not stay active. If your position triggers its 2 VQ alert, you’ll need to enter a new 2 VQ alert to be notified of the stock’s next move higher.
Q. Does the 2 VQ alert work for short positions?
A: No, the 2 VQ alert only works for long positions.
We will go over the 2 VQ alert in our next educational webinar scheduled for this Wednesday, March 20, at 1 p.m. Eastern. Click here to register. Even if you’re unable to attend our live event, once you register, you’ll be in line to receive a recording of the event to watch at your convenience.
Research and Education Specialist