We’ve covered a lot of ground in the last two months – position sizing for equal risk, Smart Trailing Stops 2.0, Volatility Quotients, Low-Risk Buy Zones, Smart Moving Averages and Re-Entry Rules.
Now it’s time to put all the pieces of the puzzle together into what I call the new TradeStops Profit-Maximizing System.
This information is a bit more advanced than most, but this is how I use these tools myself and I wanted to share it with you.
I’ve kept it as simple as possible and included clear charts. If you find the material a little challenging, just remember that you can easily accomplish all of this using the TradeStops tools (or at least you will be able to by May 2015).
Let’s take a look at the past 7 years of Johnson & Johnson and assume that we were interested in getting long JNJ after the 2007 – 2008 market correction.
The Volatility Quotient on JNJ in early 2009 was about 15%. So to use our Re-Entry Rule we would have been waiting for a bounce of greater than 15% off of a bottom and for our Smart Moving Average to start to turn up.
That happened on August 21, 2009.
Using a Smart Trailing Stop would have kept us in this leg of the JNJ trade for five and a half years – all the way until the stop was finally triggered on October 13, 2014 at $96.21.
If we just focus on the percentage gain of our entire investment then we made a gain of about 84%.
However, remember that we only risked $1,000. If we look at the ratio of our Reward to our Risk we made $5,613 on our $1,000 of risk. That’s an excellent reward-to-risk ratio of 5.6 to 1.
Now admittedly, it was a pretty darn tough exit on JNJ in October of 2014. The stock made a very unusual sharp V-shaped bottom. In fact, JNJ only spent a single day below the Smart Trailing Stop and then immediately reversed course and rocketed back up. That’s about as frustrating as it gets. (Short aside – isn’t it amazing that even when we win, it can still feel like we lost?)
But remember, we’ve got some new arrows in our quiver now with our Re-Entry Rule and our Low-Risk Buy Zone indicators.
Let’s zoom in on the last 8 months of JNJ to see how we might have leveraged these tools.
At the time that JNJ was stopped out in early October 2014, the Volatility Quotient on JNJ was right at 10%. Our Smart Moving Average was still trending up, so as soon as JNJ rose 10% off of its October bottom, it triggered a Re-Entry Rule in early November 2014.
Now maybe we were feeling a little gun shy about jumping right back into JNJ after such a violent “wash and rinse” move that stopped us out of our original Smart Trailing Stop.
If we weren’t prepared to take the full 10% risk on JNJ at the time of the re-entry trigger, we could have decided to wait for JNJ to pull back into its Low-Risk Buy Zone. Remember, the Low-Risk Buy Zone is triggered when price pulls back about 60% of the way to the current Smart Trailing Stop.
That happened on January 20, 2015 when JNJ closed at $100.59.
On January 20, 2015, the Smart Trailing Stop on JNJ sat at $96.94. With an entry price of $100.59 and a stop price of $96.94 that means that we were only risking $3.65 per share. That means that our risk is just 3.6%.
If we’re willing to risk $1,000 on a new position in JNJ and we only have to risk 3.6% per share, how much we can we invest in JNJ? You can use the TradeStops Position Size Calculator to figure this out but the answer is an astonishing $27,559!
Why on earth can we invest $27,559 in JNJ at this point? Because if our hefty position in JNJ corrects just 3.6%, we will have once again triggered the Smart Trailing Stop and will be out of the trade with our small loss of just $1,000.
A 3.6% loss on a $27,559 position is just $1,000. Pretty amazing, isn’t it?
I know that all of this is just a little bit complicated, but the fact of the matter is you can accomplish all of this simply and easily using the tools that we’ve built in TradeStops.com.
Last week we released the new Smart Trailing Stops 2.0 algorithm and Volatility Quotient in TradeStops. In the next few weeks we’ll be adding the Low-Risk Buy Zone, Smart Moving Averages and Re-Entry Rule indicators to TradeStops Pro.
Now is the time to be on board. TradeStops gives you the tools you need to know your risk and to make that risk work for you instead of against you.
To the growth of your wealth,