Everyone knows that the TradeStops Volatility Quotient (VQ) measures and tracks the changes in the volatility of individual stock and funds. But the VQ can also be used in other ways to help you become a better investor.
Every stock has its own unique volatility. That volatility isn’t static. There are times that a stock is more volatile and times that it’s less volatile. We can see how the VQ changes on the TradeStops site by looking at the historical VQ line on the chart.
Here’s the past three years of Netflix (NFLX). NFLX has had a VQ as high as 40.0% and as low as 28.2% over the past three years.
The VQ is the also the basis for our Stock State Indicator (SSI) green, yellow, and red light system of determining whether a stock is bullish or bearish.
Most of you know that we use the VQ to help determine the proper investment sizes for stock purchases. This is built into the Position Size Calculator tool. For instance, if we want to buy NFLX and are willing to risk $1,000 in the position, the Position Size Calculator determines that we can buy 10 shares of NFLX at its current VQ.
The Position Size Calculator can be used at every level of TradeStops membership.
Given that every stock has its own VQ, we can use the VQ to help us answer some difficult investing questions.
For example, every investor wants to know how much can they make on a stock. We took a look at this back in November 2016 …
On average, a winning stock using the TradeStops system can increase about 5 VQ units
Here’s an example of Berkshire Hathaway (BRK.B) from 2012–2016. At the time, BRK.B had a VQ of about 12% and it moved higher by about 60% over the three years it was in the SSI Green and Yellow Zones.
Our research published in May 2018 also shows that the winning trades we measured outperformed the losing trades we measured by a 5–1 margin.
Another question everyone wants to know is how quickly can a stock move higher by X%?
Since each stock has its own volatility, we changed the question to this: How quickly can a stock move higher by 1 VQ unit?
Keep in mind that the VQ measures volatility over a one- to three-year timeframe.
The answer was surprising …
More than 60% of the time, it only took 6–10 months for a stock to move higher by 1 VQ. This shows that stocks in a strong uptrend, as measured by the SSI signals, can move higher fairly quickly.
Education and Research Specialist, TradeStops