Over the past year, TradeSmith and the TradeStops team have written about several effective and simple trading strategies that utilize the TradeStops tools. Here’s the 2nd part that describes some specific strategies associated with the Stock State Indicators (SSI) and how to take advantage of them. (See Part 1 here.)
This is the article that shows why buying a stock when it first triggers the SSI Entry signal and enters the SSI Green Zone is the best entry point. In the article, we showed the backtested results using different entry points and the initial SSI Entry signal has the best statistics.
It’s not always possible to enter a stock when it first triggers a new SSI Entry signal. We looked at the Volatility Quotient (VQ) of the stocks and determined that a stock could move up to 2 VQs, in other words, two units of risk, before it became too late to buy into the stock.
Using this example of Berkshire Hathaway (BRK.B), we saw that BRK.B had a VQ of 12%. That means its normal expected movement due to noise in the market is 12%. We saw that even if an investor bought into BRK.B after it had moved 2 VQs or 24% higher, there was still room for a nice profit to be made.
This is the question every investor wants answered. Once we get into a stock, how much can we make on it? Looking at the stats above, we can see that the average gain is more than 5 times the average loss. That translates to average gains of approximately 5 VQs. Here’s an example of Nike (NKE) that achieved a gain of 8 VQs before stopping out.
We also discovered that the average holding period for winning trades was 929 days… almost 3 years. The average holding period for losing trades was 235 days.
Most people have never thought of doubling up on their winning positions. This is a more aggressive investment strategy, but can be very effective when the right stocks make a long run to the upside. We looked at Constellation Brands Inc. as an example.
Here are the results of doubling up on STZ at every 2 VQ interval.
Stocks that have multi-year moves to the upside can generate substantial gains. In this example, only one of the investments was negative, and that was by a very small amount. The total profit at the time the article was written was still almost double what a single investment into the stock would have been.
Remember, TradeStops is not an investment advisory service and our Customer Success team cannot answer any specific questions about these strategies. These are backtested strategies only and the research was done for the purpose of determining the efficacy of the TradeStops tools. No money was invested in any of these strategies.
Cheers,
Tom Meyer
Education Director, TradeStops
