Understanding VQ is the Heart of the TradeStops System.
The TradeStops Volatility Quotient (VQ) and Stock State Indicators (SSI) can be difficult for some to understand. Here’s an easier way to look at them.
The purpose of the VQ is to understand what the normal volatility of a stock is so that you don’t get stopped out too early. It tells you how much uncertainty, or “noise”, there is in your stocks due to the underlying volatility. Also, the VQ is dynamic. It changes each week, though these changes are usually small.
The VQ of conservative stocks is lower and the VQ of risky stocks is higher. For instance, Coca Cola (KO) is a very conservative stock. Its VQ is only 10.23%.
On the other hand, a small gold mining stock such as New Gold (NGD) is a very risky stock and its VQ of 51.80% shows it.
Both KO and NGD have their Stock State Indicator showing that they are in the SSI Green Zone.
Here’s a stock that is also very volatile and has a similar VQ to NGD. Yamana Gold (AUY) is also very risky with a VQ of 52.00%, but its SSI shows that it’s in the SSI Red Zone.
Two stocks with the same VQ, but one is in the SSI Green Zone and one is in the SSI Red Zone.
Why Is There a Difference?
The Stock State Indicators can be thought of as a way to take the temperature of your stocks. Stocks that are in the SSI Green Zone are healthy and in good shape. They are acting as they should and moving higher in their uptrend.
The chart of 3M (MMM) is a good example. During the last week of February 2016, the stock was strong enough to trigger a new SSI Entry signal. That’s the exact time that the stock enters the SSI Green Zone.
The stock has been healthy the entire time and made a new high in the last two months.
Now, compare this to the stock of General Electric (GE). Most people consider GE to be a great company, but right now, it’s a terrible stock to own. And the TradeStops Indicators were right on top of it.
GE triggered a new SSI Entry signal in October 2015. Its high was made in July 2016, but the stock started falling and almost hit the SSI Stop during the first week of November 2016. It finally hit its SSI Stop more than 6 months ago in May 2017.
The media started piling on the stock in September and October, but that was months after the TradeStops signals told you that GE was in the SSI Red Zone and should be avoided. The stock remains in a very unhealthy state today.
In a number of TradeSmith’s presentations this summer and fall, he has shown the following chart that shows the current VQ of several stocks. Remember, this represents the normal volatility of these stocks.
Now, take a look at this same chart when we add the SSI signals. It becomes much easier to understand not only the volatility, but also the health of these stocks.
The Takeaway
Knowing the underlying volatility allows you to understand the risk that’s inherent in each stock. Knowing the health of your stocks helps you determine if they’re potentially good investments at the present time. And TradeStops helps you with both.
Good investing,
Tom Meyer
Education Specialist, TradeStops
