I love it when we can reduce risk without reducing our chances of success. Don’t you?
Last week I shared with you the next evolutionary step in Smart Trailing Stops – how we can further reduce risk and maximize profits by automatically finding the best high close from which to trail our Smart Trailing Stop.
If you missed that article, you can find it here, but here’s the chart that sums up what we discussed last week:
Our new advanced Smart Trailing Stop algorithm automatically determines the best recent high from which to trail our stop.
As the Smart Trailing Stop algorithm evolves and matures, the way that I think about it and describe it is also changing.
And this brings me to something that I’d like your help with.
In the past I’ve used the term “Smart Trailing Stop” to describe the percentage value of the stop – for example, 41% on TSLA.
This description, however, doesn’t capture the full benefit of this percentage indicator. This percentage value is more than just a stop loss level. It tells you how much noise or wiggle room there is in the stock. This is valuable information whether you use a stop loss or not.
In addition to being used to identify an optimal trailing stop level, it can also be used to adjust position sizes for volatility so that we’re taking equal risk on our different investments instead of putting an equal amount of money into each investment.
I’ve come up with a new name that I think better captures the full scope of the benefits of this important indicator. I call it the Volatility Quotient or VQ.
We’re all familiar with Intelligence Quotients or IQ. Nowadays we even talk about Emotional Quotients or EQs.
In the same way that these two well–known quotients are intended to tell us something important about a person, I think that this Volatility Quotient tells us something very important about our investments.
Using this Volatility Quotient value helps us to get into our personal risk comfort zone in a number of ways – including what level of trailing stop to use.
If we’re going to start saying that, for example, “The Volatility Quotient on TSLA is 41%” then where does that leave us with the term Smart Trailing Stop?
Well, as I see it, the term Smart Trailing Stop best describes the actual stop price itself – in this case, $171 on TSLA.
Using these refined terms we would say, “The Volatility Quotient on TSLA is 41% and the Smart Trailing Stop is at $171.”
It makes sense to me but what’s most important is that it makes sense to you too.
I’ve always tried to keep it simple in TradeStops. That’s super important to me.
I think that this idea of “Volatility Quotient” adds value to TradeStops. It’s a figure that tells you something meaningful about the stock all by itself.
But I want to hear from you on this issue as well. I don’t want to unnecessarily complicate things.
So please do me a favor…hit reply to this email and just tell me “Yes” if you like my new Volatility Quotient idea or “No” if you think that I’m muddying the waters unnecessarily.
Feel free to tell me more than just “Yes” or “No” but please do at least give me a “Yes” or a “No”.
It’s important for the future of TradeStops.
To the growth, and protection, of your wealth,