I might have to change the name of TradeStops after I’m done with this one.
You know by now that I believe successful investing is more about how you manage your investments than it is about which investments you make.
TradeStops has been focused on helping investors know when to sell to maximize profits and minimize risk as well as how much money to put into different investments, a.k.a. position sizing, in order to tune risk to one’s personal risk comfort zone.
Last week I showed you some simple ways that TradeStops could be used to be more proactive about how and when we buy our investments as well.
What I’ve got to share with you this week, however, changes everything.
The first new buy‐side indicator that I would like to share with you is what I call the Low‐Risk Buy Zone.
Here’s how it looks on the example of TSLA that we’ve looked at recently:
(Note: the small uptick in the Smart Trailing Stop price line in the chart above is from the stop level automatically tightening up as the volatility in TSLA shrinks.)
The most important point to note here is that, with this new algorithm, the Smart Trailing Stop price remains the same, even if you buy TSLA today. That’s because the new algorithm automatically detects the high price from which to trail the stop instead of just using your entry price as the initial high price.
The current Smart Trailing Stop price on TSLA is $171. As of this writing, TSLA is currently sitting at $185.00.
If you bought TSLA today, and you use my newest algorithm, then your current risk on TSLA is only $185 ‐ $171 = $14.
On the other hand, if you had bought TSLA back in September of 2014 at the high of $285 then your risk was the full 40.0% Volatility Quotient. But if you buy TSLA today, you only have about 5% of that risk left.
Are you starting to get the idea of the Low Risk Buy Zone?
Using these new tools we can start to look for when a stock has pulled back far enough that it is close to its Smart Trailing Stop point but hasn’t crossed over it yet.
The question is, how much of a pullback should that be?
Letting a stock pull back as much TSLA has pulled back in the chart above is not likely to work out well very often. TSLA is a volatile stock and, at this point, it’s only about 5% above its Smart Trailing Stop price. TSLA could easily move 5% in one day. In fact it has done so over a dozen times in the past year alone.
It would be great if we could always wait until a stock we want to buy has pulled back to the very bottom of its VQ range but, unfortunately, that’s usually waiting a bit too long.
My research team and I performed extensive back‐testing on this question and we reached the conclusion that, on average, the best time to look for a Low‑Risk‑Buy‑Zone entry point is when a stock has pulled back a bit over half of its VQ range – 60% to be exact.
Taking a look at our TSLA example, that would mean that we could start looking to buy TSLA on a pullback of 24% or more (for the numerically interested that’s the 40% VQ times 60%).
Here’s how it looks on a chart:
As another illustration of this concept, the following chart shows the S&P 500 Index and highlights the half dozen or so times that the index has pulled back into its Low‐Risk Buy Zone since the 2009 bottom.
I personally love the idea of the Low‐Risk Buy Zone because I love taking less risk. I’ve been using this strategy myself for about a year now and it’s been working very well for me.
I’m excited to soon be sharing it with my TradeStops subscribers.
I’ve introduced a lot of new concepts over the past month… and I still have one final new concept to cover. I was going to try to do that this week but I think that I’ll leave it to next week instead.
At this point I feel like I owe a bit of an explanation about when subscribers will be able to get access to all of these new tools that I’ve been seemingly teasing you about.
Here’s the approximate timeline of events for the next six weeks.
- Early April: Release of new Smart Trailing Stops 2.0 and introduction of the Volatility Quotient
- Mid-April: Introduction of Low-Risk Buy Zone alerts
- Early May: Release of new Re‐entry Rule – a brand new algorithm that tells you when to get back into a stock if the stock is currently stopped out
Wow. That’s a lot of new tools.
So… do you think that the name TradeStops is still an appropriate name for our expanded set of services? Maybe TradeStarts? TradeStopsAndStarts? How about TradeSmith?
Feel free to drop me a line and share your thoughts by just replying to this email.
To the growth of your wealth and your mastery of the markets,