Q&A from SmartStops.net Webinar
Controlling Risk in Volatile Markets
Presented By Chuck LeBeau
September 24, 2009
Q: With your study, I understand the exits, but what
strategy did you use on when to
to get back in?
A: The study reflected an entry
method that is commonly referred to as the "Turtle Trading"
method. It is defined as: you enter as soon as the stock makes a new
SmartStops will soon be
publishing our own re-entry strategies with even better
results than the"
turtle" approach. The SmartStops reentry
method will assure that you will
not miss "the next big
move" which is what holds many from feeling they must just hold on to a stock
through periods of
weakness. The problem in holding on
however is that a stock
may not recover for
weeks, months, years or never (as in the case most recently in some
2008 financial stocks
like Lehmann (LEH). In fact, statistics
show that market leaders will
drop an average of 72%
from their peak.
During the webinar,
Chuck mentioned the Black Swan study that showed "avoiding the worst
100 days out of the 29,190
trading days increased the profits by 43,396.8% to $11,198,734,
and more than doubled
the mean annual compound return to 11.5%.
Below is another study
completed from 1984-1998 emphasizing the same
Q: What about mutual funds? What about commodities?
A: Both are being considered as an
expansion of our services.
Q: Do you do this for bond ETFs also?
A: All ETFs are covered so long as
they have a trading history of 150 days, and are above $1 in price and volume
is >40,000 shares.
Q: Is the same underlying analytic approach used
Q: Do you recommend adjusting your stops on existing
positions based on current smartstops?
A: Yes, we do recommend you adjust them
daily. We hope to work with all brokers
to make this as seamless as process as possible. We currently do offer our BrokerLink service
for TD Ameritrade customers.
you do not want to adjust them daily, we do provide a color-coded
"warning" in our daily end-of-day portfolio reports. Thus if you have not yet set your stop, you
will be warned that the current stock price is very close to the SmartStop and
may want to set it then.
Q: Do you
offer SmartStops exits for the short trades?
A: We currently do not supply
SmartStops for "short" positions though we do support ETFs that may be a
Q: Are SmartStops mainly for using on longer
time frames, based on daily closes and not really designed to be used in
A: Correct. We do not support a shorter
time horizon for intraday / day traders.
Q: What if we want to make money on the way down?
Does SmartStops work in the opposite way?
A: We only provide exits that are
below the prices so they do not serve as exits for short trades. However our
sell signals may be a good entry for a short trade. Or another idea would be to buy an ETF that goes
short as we do provide SmartStops for ETFs.
Q: What kind of statistical tests have
you done to determine if the SPY data is valid or just "luck"?
A: It was a 10-year backtest of an
ETF we thought might be representative of results in general. Since we do not suggest which stocks to buy
it is difficult to generate performance data that is not biased by our choice
of stocks to test. We posted a very comprehensive test that included all 500
stocks in the S&P 500 Index. You can view the results at http://smartstops.net/LearnMorePages/ExitStrategyComparisons.aspx
Q: These studies are retrospective. Did you have
any portfolio where you invested according to these criteria & do you have
any results of that?
A: We have done numerous
studies. One is showing the most 10
widely held stocks, as if you owned them in beginning of 2008 and at end of
2008 using SmartStops exits that were actually published. We have yet to upload that to our website but
the results are shown below.
points out that the results of the SPY test from the original ending date (May,
2008) that were updated from May, 2008
to the end of August, 2009 are entirely "out of sample" results
that might be more meaningful than the backtesting. You should note that we did better in the out
of sample period than we did in the back test. That should be very encouraging.
You can also just look at our charts on our website. We currently have a 2 year history. You can
then analyze any portfolio you may have set up.
is the basis of the indicator? I guess I
wonder if it relies on more than individual stock price/volume data as well as
index price/volume data.
A: SmartStops unique
methodology utilizes both macro trends and individual stock behavior to
determine the optimized calculations. There
are many factors including volume that go into our proprietary calculation.
Q: How does SmartStops compare to 'Chandelier
SmartStops incorporates several indicators in its sophisticated
the inventor of the Chandelier exit remarks,
the Chandelier exits are intended to work best in rising markets where
typical exit strategies lag too far
behind prices. However in a downtrend there will be only that one exit
hopefully near the top. After the top is made there is no logical place to hang
the Chandelier from.
methodology is unique. It alters the underlying analytics based on macro trends
as well as individual stock behavior to produce optimization and is much more
sophisticated than Chuck's Chandelier.
Q: Have you done any studies to determine the % of false exit signals that
we should expect? I.e., % of instances where shortly after the exit, the trend
A:These risk alerts are sometimes false alarms, but
negative consequences of false signals can be overcome by shifting investments
to better performing alternatives, or by re-entering the equity when an uptrend
resumes, e.g., upon a new 20 day high (yes, our re-entry alerts are in beta). The number of false signals experienced will vary based on
several factors. The first SmartStops trigger following an uptrend is very
reliable. Since they are reset every day, triggered SmartStops map out
abnormal weakness along the downtrend so there will always be a last alert
before an upward trend resumes.
Stock prices may also bounce back after moving sharply lower and triggering a
SmartStop, but this might also be an early indication of trouble.
Re-entry alerts will arrive soon! Email email@example.com
if you wish to be a beta tester.
Q: How can I keep risk at a certain percentage
like 1% if sometimes the SmartStop is moved lower than the original stop?
A:Chuck suggests that you might limit downward adjustments because
the exits change daily and risk will be fluctuating constantly.
Although short-term fluctuations are usually very minor and would not result
in a substantial increase in risk, you should occasionally check the risk of
each position and rebalance the portfolio (buy or sell shares) if it looks
like the risk might be getting out of line.
Q: For Canadian stocks not in your database, can I
simulate your short-term values with a formula such as 3.5 ATRs?
A: That would be better than most
exit strategies that are currently available but it would not be as accurate
as SmartStops. ATR is only one variable and indeed the multiples are
continually switching. Also please
note we will be rolling out support for Canadian stocks hopefully before end
Q: Using short-term SmartStops, I have already experienced two whipsaws so
far this year. In one case I exited and rebought at a 20 day breakout just
three days later.
Unfortunately an occasional whipsaw will occur as nothing can
guarantee you a stock will not recover quickly. However we have fewer whipsaws than
alternative stops. If you have to buy
a stock back slightly higher just consider the whipsaw as the cost of
insurance that will protect your portfolio and drastically improve
Q: Can Smartstops handle a rapidly rising
Unlike most trailing stops, SmartStops adjusts upward very rapidly as
new highs are made.
Q: How do SmartStops work with 2X and
3X leveraged ETFs?
A: The leveraged ETFs are
extremely volatile so our exits will be far away so you will need to use a
very small position size as Chuck explained in the webinar.
information, please contact us at firstname.lastname@example.org