The TradeStops’ Re-Entry Rule:

 

 

Your Tool for Finding the Right Time to Re-Enter a Stock Trade

Did it happen to you? It’s happened to a lot of investors: The recent stock market volatility has eradicated billions of dollars, decimating personal portfolios and wiping out the life savings of countless hard-working men and women.

All that money… gone.

For example, are you one of the tens of thousands of investors who got suckered into buying Apple, Inc. (AAPL) in early November? Alas, Apple’s stock has been rotten to the core, going from ripe, to rotten, back to semi-ripe… and then back to rotten: The stock began at $130 in July, went down to $102 in late August, and then back up to $121 in November.

Take a look:

Stock Trading Timing
Every smart investor could see this, right? No way it could go lower! But unfortunately, it could move lower, a LOT lower. Take a look at what happened next:

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If you had bought AAPL when you thought it was “cheap,” you’re sitting on a loss of close to about 30% right now. Ouch! (Unless you already sold it and took your realized loss. I hope you did.)

Some of you will rationalize taking the loss as, “Well, I can deduct the loss from my taxes,” but do you really invest in the stock market to lose money? I didn’t think so. It’s not an effective strategy. Neither is “guessing” a good way to enter a trade.

Let me show you a better way. It’s called “The Re-Entry Rule.”

At TradeStops.com, I’ve done a lot of research to determine the best time to buy stocks after they have moved lower and stopped out. I don’t mind being patient. I’m not trying to buy at the absolute rock-bottom, because it’s impossible to know for sure where the bottom is. I’d rather buy it when it begins to bounce back up again, because it’s critically important for investors to avoid unnecessary risks – and few things are riskier than trying to catch a falling knife.

So what should we look for? Let me show you the three year chart of GLD. That’s the ETF that tracks the price of Gold. (We’ll come back to AAPL in just a moment.)

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There were three times when the price of GLD bounced higher by almost 10%, but it never triggered my Re-Entry Rule. Do you notice something else? The dotted purple line is the Smart Moving Average. You’re familiar with a moving average, you hear the term all the time in the financial media. My Smart Moving Average is different. Each stock has its own Smart Moving Average. You’ll see why this is important in a moment.

So what is the Re-Entry Rule?

The Re-Entry Rule – one of the special tools we developed for our subscribers – can tell the difference between normal volatility in a stock, and when that stock has truly changed its trajectory. It’s a rule I’ve learned to closely follow, because it can be the difference between success and failure.

Look at the three times that are shown on the chart: Every single time the price of GLD moved up by almost 10%, it came back down shortly thereafter. Each of these three times is a perfect example of “normal” volatility in the price of GLD. The stock was temporarily moving higher, but was still within a downtrend. Temporary upward movements in price are to be expected from any stock that is trending lower. You can also see that the Smart Moving Average is not moving higher during these upticks in normal volatility and has not established a positive slope.

The Re-Entry Rule helps me to know that a new trend higher has possibly been established. How do I know the difference between a temporary move higher, and when a stock has established a new higher trend with profit-potential?

The key is the VQ% of the stock and the Smart Moving Average.

The VQ% is the normal volatility of the stock expressed as a percentage of the stock’s price. In the example of GLD, the normal volatility of GLD is 13.35%. Let me show you how I know that.

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This is the TradeStops chart of GLD. You can pull this up on the “Research” Tab on the TradeStops Home Page. It is available to every subscriber.

The VQ% shown above is the percentage amount that the stock normally moves up and down, and is still considered to be within its current trend. So, in the case of GLD, the times the stock moved 10% higher were all within its normal volatility range.

The Re-Entry Rule requires that the stock move higher by MORE than its normal volatility AND that the Smart Moving Average be in an uptrend with a positive slope established. The price of GLD had to bounce-off the low – established in the middle of December – by more than its normal volatility, and the Smart Moving Average had to be in a clear uptrend. In other words, GLD had to move higher from its low by more than its normal 13.35% of volatility, combined with the Smart Moving Average moving higher. (And that happened on 2/22/2016 at a price of $115.49!)

Now, according to this impartial and unbiased statistic, there is a good likelihood that the stock has established a new trend higher.

So am I going to blindly rush out and buy GLD, just because it has triggered a new Re-Entry Rule? No, of course not. And you probably shouldn’t either. There are many factors to consider when buying a stock. But for me, one of the key requirements is that a stock must be moving higher, and a new uptrend must be established, according to the rules of normal volatility.

Because this market has been so difficult lately, spotting stocks that are triggering their Re-Entry Rules is exciting! It doesn’t mean that the stock is automatically going to keep moving higher, but remember, “the trend is your friend,” and it’s critically important to make the statistically-smartest decisions with your portfolio. The Re-Entry Rule is another statistic that you can use to measure performance, assess risk, detect positive trends, and invest with confidence.

Click here to learn how you can apply the Re-Entry Rule alerts to the stocks that you’re tracking from the TradeStops Help Center.

Let’s now go back and look at AAPL. What will it take for the Re-Entry Rule to be triggered? Here’s the recent chart of AAPL:

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The low closing price on AAPL was $92.92 on 1/27/2016. As you can see, the VQ% is 18.89%. So for AAPL to trigger the TradeStops Re-Entry Rule, the stock has to move more than 18.89% higher than the recent low closing price and the Smart Moving Average has to have established a positive slope. This puts the Re-Entry Rule trigger close to $119.70 depending on actual market activity. With the stock trading slightly above $100, that means you would need additional patience before a new uptrend is established.

The Re-Entry Rule trigger notifications can be set-up as alerts for any stock and fund within the TradeStops system. This means that when the stock you are tracking has triggered its Re-Entry Rule, you will receive the alerts as part of the normal notification system. The Re-Entry Rule is a powerful part of TradeStops.

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Richard M. Smith, PhD
CEO, TradeSmith
Founder, TradeStops.com