We’ve all seen the headlines that dominate the financial news media about the increase in market volatility over the past two months. How does this “information” affect you and your investments?
As you already know, the TradeStops Volatility Quotient (VQ) is dynamic. It changes every week. The changes aren’t normally very big, but even small changes can affect your stops.
We told you last September about an alert that many of you aren’t receiving. This is the weekly email that alerts you to changes in the VQs after their weekly recalculations. The email looks like this:
The list is long, but you can see a pattern here. Most of the stocks that I’m following, and most of the stocks that you probably own as well, have increasing VQs. That makes sense in this market environment.
But what you might not know is how the increasing VQ affects the stops that you have in place in your portfolios.
The two most popular stops in TradeStops are the Stock State Indicator (SSI) Stops and the VQ Stops. These stops act differently when the VQs increase.
SSI Stops are calculated from a stock’s most recent high. They do not change as the VQ moves higher.
VQ Stops are also calculated from a stock’s most recent high; however, they do change as the VQ moves higher. The VQ stop widens as the VQ moves higher.
Teva Pharmaceuticals (TEVA) is a stock that has seen its VQ move higher over the past several months. Here’s an example of both stops using TEVA.
We’ll look at the SSI Stop first. TEVA triggered an SSI Entry signal on February 12th. The SSI Yellow Zone and Red Zone calculations are based off the most recent high of the stock which occurred a month earlier at $22.07.
The green line at the bottom is the historical VQ. In this chart, it has moved higher from 25.38% to 28.55%.
The SSI Stop price was calculated based on the most recent high, minus the VQ. It started at $16.47 and remains at $16.47 even though the VQ has increased in the last two months.
Let’s take another look at TEVA but from the perspective of a VQ trailing stop. We still have the same most recent high price of $22.07. At that point, the VQ trailing stop was $16.47.
The historical VQ jumped in the second week of February from 25.75% to 27.91%. This caused the VQ stop to move lower from $16.31 to $15.91. The VQ stop dropped again when the VQ moved above 28%. The VQ is currently 28.55%, and the VQ Stop is $15.77.
The VQ stop moves lower as the VQ moves higher to compensate for the increase in volatility. If you’re using VQ stops and don’t want your trailing stops lowered, it would make sense to add either a fixed price alert or use a percentage trailing stop based on the VQ at the time you buy the stock.
In the case of TEVA, we could have set up a 25.75% trailing stop that would not be changed when the VQ changes. The trailing stop of $16.39 has remained steady for the past 3 months.
For the past few years, we’ve mostly been dealing with decreasing volatility and decreasing VQs. The landscape is changing, and it’s important that you’re aware of how this increased volatility affects you and your investments.
We’re going to discuss this in more depth on Wednesday, April 18th, from 1:00-2:00 p.m. Eastern. Click here to register.
To your investing success,
Tom Meyer
Education and Research Specialist, TradeStops
