Sunday, October 5, 2014

The Power of Stops.....10.5.14

Here's a quick look at alternative 90 day outcomes for the new Beta model using various levels of stops.
Left to right...Auto-Stop & Cash stops ON; Auto-Stop only and No stops, just the rankings.
The impact of using active stops becomes quite apparent in this light.
What to do if you're around in during market hours to monitor price breakdown to stop levels?
Most trading platform have an ALERT or conditional order feature that lets you set a stop price for auto-execution if hit.
Are there opportunity costs involved?
There have been in the past and it depends on your risk profile.  I'm in the capital preservation/drawdown mitigation camp and for me stops provide a margin of safety that I feel comfortable with.
Will stops sometimes get blown through?
On dramatic news days it can happen and has.  Using the rankings as a guide helps provide a perspective on underlying market momentum and, as we saw last week, we were able to use the cash stop to exit VXX for a 1% loss ahead of the day it declined over 6%.
How are stops calculated?
The Auto-Stop is based on a 2 day versus 5 day Coppock curve.
The cash stops are based on a 70% 5 day ATR (average trading range) calculation times a volatility factor based on the VIX premium (not the XIV premium).