At Invest with Rules, we wholeheartedly believe in using Stop Losses for every trade!

While some traders/investors don't use stops because they feel stops can cause "whipsaw", or being sold out of a trade prematurely, we have extensively backtested various strategies with and without the use of stops, and have consistently found stops, well-placed, provide key portfolio protection.

We think of stop losses as the "cost for doing business" to provide protection in stock market speculation - very similar to how you insure your home, auto or business!

We seldom use "Hard" Stop Losses - by "Hard", we mean Stop Losses that are placed on a brokerage platform to be exercised anytime during the trading day.

We don't use Hard SLs because of the large amount of volatility the market experiences during any given day. Instead, we wait until the last hour of each trading day to take action on our signals and stop losses.

BUT, we can do this since this is all we do full-time - whereas, if you have another job taking you away from your trading, using Hard SLs might be a great way to handle your training and manage your risk.

There are many, many ways to establish stop losses - here is just a sampling:

• % of Price - for example, using a basic stop 8% below your purchase price.
• Volatility, such as ATR (average true range), which allows you to set your stop based on a ticker's volatility. The more volatile the ticker, the wider the stop.
• Indicators, such as Moving Averages, Stochastics, MACD, Keltner Channels, etc.

Our Invest with Rules process includes the following methods:

• Short-Term Signal - which analyzes the last 4-5 weeks of trading for a ticker (based on our algorithm).
• Mid-Term Signal -which analyzes the last 6 months of trading for a ticker (based on our algorithm).
• Long-Term Signal -which analyzes the last year of trading for a ticker (based on our algorithm).
• ATR (see above)
• Price support levels, such as when a ticker might be breaking out of a range, with the bottom of the range being the stop loss.

We encourage each member to determine what type of Stop Loss is best for her/him based on risk-tolerance and investing/trading timeframe.

At Invest with Rules, we are risk managers first and foremost, because if you lose your capital, it's "game over"!

So, in order to manage risk, we need to have a way of measuring it.

The process we have decided to use is to Identify the amount of $ we are willing to lose when we take each trade - and then we convert it into a % of the ticker purchase price.

Here's an example:

• You have a $100,000 account.
• You have decided you are willing to lose no more than $1,000 per trade in order to protect your capital.
• You decide to buy the QQQ ETF and set your initial stop loss at 5% of the purchase price.
• If you are buying QQQ at $500 with a stop of $475 (price - 5% of $500).
• With a $25/share risk, you can buy 40 shares (your maximum risk of $1,000/$25 = 40).
• So, your risk on this trade, or "Risk Unit", is 5% or $1,000.

At this point in time, we have chosen not to publish the algorithms behind the Trend Roadmap Signals - but this will likely change in the future.

In the meantime, here is a breakdown of the Signals:

• GAS Signal - when both Short-Term and Long-Term Trends are up.
• COAST Signal - when the Short-Term Trend is down and the Long-Term Trend is up
• UTURN Signal - when the Short-Term Trend is up, but the Long-Term Trend is down
• BRAKE Signa - when both the Short-Term and Long-Term Trends are downl
• OVERHEAT Signal - When the RSI or Relative Strength Index (see "Definitions FAQs") is over 68, indicating a potential over-bought ticker.

The trends are determine by the:

• Short-Term Trend Signal - which analyzes the last 4-5 weeks of trading for a ticker (based on our algorithm).
• Long-Term Trend Signal -which analyzes the last year of trading for a ticker (based on our algorithm).

We also occasionally use the "Mid-Term" Trend Signal:

• Mid-Term Trend Signal -which analyzes the last 6 months of trading for a ticker (based on our algorithm).

We'll say it up front: 

We don't see Trend Following as the "nemesis" of Buy & Hold.

In fact, for younger folks, who are still in the "accumulation phase" of their investing lives, Buy & Hold using Dollar Coast Averaging (learn more here) is not a bad way to go!

Why? Because a person with a longer time horizon can "afford" to weather the ups and downs of bad markets - and Dollar Cost Averaging allows them to systematically accumulate assets when times are both good & bad.

BUT, for anyone who is not in their accumulation phase (retired or heading there), Buy & Hold can be disastrous.

Example: 

Let's take an unlucky couple, Monica & Chandler, who retired at age 59 in the early 2000's and kept their nest egg in the S&P 500 or a 60/40 Stock/Bond mix.

Well, from about 2000-2010, the S&P 500 ended up going nowhere, and even lost a bit depending on the starting point you pick.

So, Monica & Chandler got seriously hurt over the next decade where their nest egg actual lost money, since the S&P 500 didn't return it's "normal" 8-10% annual return.

And, to compound the issue for Monica & Chandler, if they were taking out the standard 4% to live on, they got truly crushed: a double whammy.

Plus, even more disastrous: they had to weather a 50%+ drawdown to boot in 2008! How many investors can weather that depth of loss?

So, the point is Buy & Hold can be disastrous for those of us trying to protect and grow our wealth - and just investing in a "broad based" index won't necessarily provide the protection of diversification.

But the good news for Monica & Chandler is they decided to use Trend Following and not only protected their wealth, but participated in some amazing trends during their first decade of retirement, including the massive run-up in Gold, which returned 300%+ from 2000-2010.

Here are some videos we have done to help deeper dive on this topic:

 We talk about last "Lost Decade" here.

More about the "Lost Decade" here.

A 20-Year Backtest of our Trend Roadmap trend following strategy is here.       

Trend Following in it's most basic form is simply using a trigger of some sort to indicate the start and end of a trend in price for just about any asset, from stock and ETFs to Real Estate and Crypto.

What is this trigger? Well, there are so many possibilities, such as:

• Price breakouts and breakdowns
• Moving averages
• Stochastics
• MACD (moving average convergence/divergence)
• And so many more......

The real key is for a Trend Follower to determin how she/he will idenitfy a trend in the timframe picked to invest/trade. 

For example, a long-term investor can keep it as simple as using the 200-day simple moving average: when price is above the 200-day SMA, I buy, and when it falls below, I sell. Will there be whipsaw or perdiods of loss, of course! No indicator is perfect. But it truly can be this simple - see our video on the 200-day SMA here.

Trend Following is often said in the same breath as "timing the market", which many say is impossible - but we know, through extensive experience and backtesting, timing the market is not only possible, but, in many cases, is also a more effective way of investing/trading.

Why? Because employing some type of trend following system, helps an investor/trader find & ride sigfnicant uptrends, as well as find and avoid account-wrecking downtrends.

Don't beleive us? Try it for yourself on any charting program - go back and see how a simple 200-day SMA buy/sell routine on the Nasdaq 100 ETF (QQQ) would have done over the last 5, 10 or 20 years. You'll find you're able to avoid massive downtrends and capitalize on the majority of major uptrends.

Here are some videos we have done to help deeper dive on this topic:

How our Trend Roadmap would have handled the 1929 Market Crash is here.

A 20-year backtest of our Trend Roadmap is here.