Dear Reader,
TradeStops is, of course, well known for helping investors know when to sell. Not many investors, however, understand the power of TradeStops signals to help you in other ways in your investing.
Today I’d like to share with you a few ways in which you can currently use TradeStops for other decisions.
One of my personal favorite ways to use TradeStops to help me make entry point decisions is to alert me when an asset that I’m interested in has bounced significantly off of a recent low price.
I’ve learned the hard way that catching falling knives is a tough business. So when I get tempted, I ask TradeStops to let me know when the knife has stopped falling and has started a significant rise.
I do this by setting simple percentage trailing stop alert on a stock position that is set up as if I had sold the stock short.
Short sellers profit when the price of a stock falls. Setting a trailing stop on a short position will alert you when the price rises since if you’re short a stock, you’re losing money if the price rises.
Let me show you what I mean.
Let’s say that you became “intrigued” by the 50% fall in the price of oil over a mere six months from June 2014 to December 2014.
We’ll use the iPath S&P GSCI oil ETF that tracks the price of West Texas Intermediate crude oil futures. The symbol for this ETF is, not surprisingly, OIL.
In June of 2014, OIL made a high around $26. By December 2014, it was trading for about $13.
In order to be more confident that a strong bottom had been put in after this shocking price rout, we might want to know when OIL had risen a solid 25% off of a bottom.
To be alerted to this situation by TradeStops we could set up a short position on OIL and set a 25% trailing stop on it. Here’s how that’s done.
- Create a manual Watch Only portfolio from the Portfolios page in TradeStops. Watch Only portfolios are manual portfolios for positions that you’re following, but aren’t yet invested in.
- Add a new position on OIL to this portfolio and set it up as a Short position with a 25% trailing stop.
That’s all there is to it. Again, short sellers of stocks profit when the price of a stock falls. So the maximum point of a profit in a short position is the lowest price of the stock since the entry date. A short position is losing money when the price of the stock rises.
Setting a 25% trailing stop will trigger an alert on a short position when the asset has bounced 25% off of its lowest price.. Here’s how that looks in a chart:
The blue line is the trailing stop line for our short position on OIL. Since our position on OIL is a short position, the trailing stop line is above the price. When OIL rises 25% off of a low, the trailing stop will be triggered and TradeStops will send an alert.
At today’s levels, that 25% trailing stop will be triggered if OIL closes above $11.80.
As I’ve mentioned many times before, I believe that a lot of success in investing comes from tricking ourselves into not doing certain things – like trying to catch falling knives, for example.
“The price of oil is down 50%! It’s a bargain! ISIS is terrorizing the Middle East… Iraq and Syria are falling apart… Iran’s going to get a bomb. Oil can’t go much lower than this. I’m buying!”
Been there… done that… don’t want to do it again.
It’s amazing how taking this simple action of setting up this watch–only alert in TradeStops satisfies the urge to “just do something” in the face of such urgent market temptations.
If you’re a TradeStops Pro subscriber, there are additional types of alerts that you can use to alert yourself to your preferred signals. Here are a few of them:
- Breakout Alerts alert you when a stock makes a new high over a given time period. Here, for example, we’ll be alerted if the stock closes at its highest point of the past 12 months:
- Close Above / Below alerts let you set a fixed price target at which to be alerted. Here we’ll be alerted if this stock closes above $72.00
- Moving Average alerts let you know when a stock closes above or below a moving average. Here we’ll be alerted if the price closes 1% above the 100–day moving average.
- Moving Average Crosses let you know when one moving average crosses another. Here we’ll be alerted if the 50 day moving average closes 1% above the 100–day moving average.
All of these alert types allow us to be more purposeful in our investing strategies. We can use them to let the markets come to us… to watch for the right pitch… to be proactive rather than reactive.
Next week I’ll share with you a couple of brand new indicators that I’ve developed, and that I’m very excited to be soon bringing to my TradeStops subscribers.
To the growth of your wealth,
P.S. The response to my “Volatility Quotient” idea was overwhelmingly positive. Over 500 people replied to my inquiry and well over 95% of the replies were positive. I’ll be launching the new Volatility Quotient and Smart Trailing Stop tools in the first half of April.
