Last week we covered some of what it takes to be a successful investor and how far TradeStops has come in providing investors with the tools to succeed. We covered how:

  • Successful investing is often a counter-intuitive and even illogical experience and investors need robust but simple tools to help short-circuit ordinary thinking in order to become extraordinary investors;
  • Simple 25% trailing stops are a great place to start because they help us make the market’s madness work for us instead of against us; and
  • Volatility tuned trailing stops and volatility tuned position sizes offer the next generation solution to the basic challenges faced by individual investors.

These are outstanding, foundational resources for any investor and they are all available as part of our basic TradeStops service. Together they empower investors to favor their winners over their losers and make more money by leveraging up position sizes on conservative investments and right-sizing investments on more volatile riskier stocks.

In the past year we’ve been building on these solid foundations to bring you groundbreaking tools and services to take your investing to the next level as part of our TradeStops Pro service. We’ve covered each of these new tools in detail in earlier writings that you can find on our blog. Today we’ll continue our bird’s eye view of all the tools and benefits TradeStops offers today.

Smarter Trailing Stops

Traditional trailing stops take the investor’s entry point as the starting point for tracking the trailing stop. Let’s say, for example, that you wanted to buy GLD today (GLD is the ETF that tracks the price of gold). As of this writing, the latest close on GLD was $113.23. If you were going to track a 25% trailing stop on GLD then you would initially set your stop 25% below this price at around $84.92.

If, on the other hand, you want to use our traditional volatility tuned trailing stops, then you would look up the current VQ% on GLD and find that it’s 13%. You would then set your initial stop 13% below $113.23 entry at $98.51.

So using a traditional approach to trailing stops you would have your stop at $84.92 if you use a 25% trailing or at $98.51 if you use a VQ Trailing Stop. So far so good. We’ve reduced our risk in GLD considerably by using the VQ Trailing Stop approach.

But the core idea of the VQ% is that it tells us how much room the stock needs in order to not get stopped out by the normal expected volatility of the stock. Wouldn’t it be nice to know how much of that volatility range has already been used up by the time that we get into the stock?

You bet it would, and that’s exactly what our Smart Trailing Stops (STS) provide. Let’s take a look at GLD – the ETF that tracks the price of gold.

GLD1
GLD made a closing high of $122.23 back in January of 2015. The Smart Trailing Stop algorithm automatically detected this high as being the most important recent high and it uses this important high close to trail the stop. Trailing the stop 13% below this high close places our Smart Trailing Stop at $106.34.

So let’s review our three different stop loss strategies that we’ve considered so far:

Again, these are all assuming that we’re going to buy GLD at its most recent closing price of $113.23. Here’s how those all look on a chart:

GLD2
That’s a nice picture of how our trailing stop algorithms have evolved over the past ten years. All three of the above approaches provide the essential value that any good trailing stop strategy provides – helping the individual investor to favor his winners over his losers rather than the other way around.

The full Smart Trailing Stop strategy, however, does so with the least risk. Taking less risk and doing so in a smart way, means you can make more money.

TradeStops – No Longer Just for Knowing When to Sell

So far we’ve covered how TradeStops can help us to manage risk and know when to get out of investments that we’ve already decided to buy. We’ve covered the various trailing stop strategies that TradeStops offers as well as how to position size for volatility using VQ%.

Over the past few months, however, TradeStops has begun to provide new services that help our subscribers decide if it’s a good time to enter an investment. TradeStops has also recently added new tools to help subscribers evaluate different investment opportunities relative to their personal goals and risk tolerance levels.

The Re-Entry Rule was the first of these new entry-side focused TradeStops services. “When do I get back in if I’ve been stopped out?” This is a question that I heard often from TradeStops subscribers.

It’s an important question for a couple of reasons. Of course, it’s great to have a good rule for when to get back into an opportunity that you got stopped out of but I’ve also found that it helps my subscribers follow a disciplined trailing stop strategy if they know that there’s a way to get back in to positions that have hit their trailing stop strategies. That’s a big deal.

The concept of the Re-Entry Rule is simple. It’s safe to get back in to an investment when the trend is on your side and when the investment has had a strong bounce in your direction greater than VQ%. We’ve covered the Re-Entry rule and its associated trend indicator, the Smart Moving Average, in depth in earlier articles. If you’re looking for the nitty gritty detail, you can find it here.

While the new Re-Entry Rule certainly can create some exciting entry opportunities (like it did for the S&P 500 in 2009), it also has immense value to subscribers by helping them to know when to stay away. As an incredible example of this indispensable value, I offer you this chart of GDXJ – the ETF which tracks a basket of junior gold mining companies.

GDXJ
After the Smart Trailing Stop on GDXJ was triggered in late 2011, our Re-Entry Rule indicator has yet to tell us that it’s safe to wade back into the waters of GDXJ. Think about that. GDXJ is exactly the kind of investment that could have crushed the average investor – even the above average investor.

Think of how many of us believe in the case for precious metals. Think of the opportunity that GDXJ offers. It’s a very compelling opportunity. But being right and making money are often two totally different things. Timing is everything. The Re-Entry Rule is a powerful ally for the investor looking to be right and make money.

Dr. Smith’s Indicator

I’m personally so excited about the power of this Re-Entry Rule and our latest Smart Trailing Stop algorithm that I’ve combined them into a single new red light / green light indicator that I call Dr. Smith’s Indicator.

I’m going to be incorporating this into TradeStops Pro very soon, hopefully before the month of June is out. The components of the new indicator are already available in TradeStops Pro but I am doing some work to bring them together in a way that they will be visually obvious to Pro subscribers.

This new indicator is simple. If the investment in question has triggered a Re-Entry Rule that has NOT been stopped out by a Smart Trailing Stop – then it’s green light… thumbs up. It means that the investment has passed the most basic requirements for safety and good behavior. A robust trend is in place and well established and the stock has not corrected beyond its normal expected volatility.

A great example of this current “green light” mode is the S&P 500 itself. It triggered a Re-Entry Rule in late 2009 and has yet to be stopped out by its Smart Trailing Stop.

SPX_reentry_what happened
As far as I’m concerned, it’s still green light / thumbs up mode for the S&P 500 but my stops are tight. The current VQ% on the S&P 500 is 9.3% and the Smart Trailing Stop is at $1,931.61. That’s what I’m paying attention to… and I’m ignoring all the rest of the media driven noise.

Once the S&P 500 does trigger its Smart Trailing Stop, I’’ll be waiting for a new Re-Entry Rule in order to know that it’s safe to get back in.

Well, that’s all that I’ve got time for this week. Next week I’ll wrap up this TradeStops 2015 overview with a review of the Low Risk Entry Zone, Newsletter Center, Portfolio level VQ and automatically created alerts.

I hope that you’re inspired by all of the deep value that TradeStops provides to subscribers today.

To the growth of your wealth and your peace of mind,

richard's signature

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