My research team and I made a discovery that has the potential to help you make more and risk less.
Here are the details …
Last month, we presented two different Low Risk Runner (LRR) strategies. Both are initiated when a stock moves from the Stock State Indicator (SSI) Yellow Zone back into the SSI Green Zone.
What differentiates the two strategies is how we exit the trades.
Even though the winning percentage and average gain on these two strategies are good, we wanted to see what would happen if we combined the two strategies. So, we ran some tests. Let’s take a look at what we did and how you can easily do it yourself.
First, here are the rules for this new Low Risk Runner Strategy:
We look for positions that have recently moved from the SSI Yellow Zone into the SSI Green Zone and use whichever exit comes first.
- If our stock hits its SSI Stop before eight months have passed, we exit the trade.
- If our stock hasn’t hit its SSI Stop, we exit the trade at the end of eight months.
It’s very simple to manage. The maximum time you’ll hold the trade is eight months.
Now, let’s look at how this combined exit strategy performed …
Using the same testing group as our first two strategies, the combined LRR exit strategy had a winning percentage of over 52%. And the average winning trade was more than 2–1 better than the average losing trade.
This combined strategy is for stocks only. We covered the Low Risk Runner strategy for options here.
The biggest benefit of this combined SSI Stop/8-Month Stop strategy is the smaller drawdowns and the shorter average holding periods. It maintains the lower drawdowns of the SSI stop strategy and the shorter holding periods of the 8-month automatic exit.
This is a good time to review the relative benefits and costs of all three strategies:
- Exit by SSI has the biggest average gains, and the average gains really outweigh the average losses. But you have to hold your positions longer and you have to live with more losers than winners.
- Exit in 8 Months has more winners than losers and shorter holding periods but the average winner doesn’t nearly outweigh the average loser as well as the Exit by SSI strategy.
- Combining the two strategies (exiting by whichever exit signal comes first) threads the needle between both strategies. It gives you more winners than Exit in 8 Months, and the average winners outweigh the average losers more, too.
These are the kinds of choices and tradeoffs that every investor/trader needs to make. There is no one-size-fits-all strategy. Some people need to have more winners than losers even if the winners are smaller. Other people are okay with having more losers than winners as long as the winners are much bigger than the losers.
It’s interesting to consider which strategy is most attractive to you.
Finally, remember, the Low Risk Runner and Kinetic VQ strategies are not meant to replace the traditional TradeStops methodologies.
We’re presenting you with these different strategies so that you can see the power of the Volatility Quotient (VQ), the SSI signals, and how these can create different opportunities that might fit into your personal risk tolerance.
We’re always researching different opportunities that take advantage of the TradeStops tools. Our goal, of course, is to help you become a better investor. We love digging into the numbers and sharing our research with you so that you can find what works best for you.
Richard Smith, PhD
CEO & Founder, TradeSmith