Frequently Asked Questions
Q: For Dr. K’s Market Direction service, when you recommend a specific ETF to buy, does that buy recommendation come with a stop loss as well (like 8% from the moment the ETF is bought), or would we wait until getting instructions to go ahead and sell? If so, do the leveraged ETF’s usually use looser stop losses? (I am guessing since they are more volatile that their drawdowns would be much stronger).
A: The Market Direction Model (MDM) comes with a built-in fail safe, so if the signal is false, it protects itself by neutralizing the signal. The stop loss fail safe level depends on the volatility of the market. In practice, the stop loss is usually contained to within 2-3% the NASDAQ Composite, thus QQQQ can be used as a proxy. Of course, if one is trading a 3x ETF such as TYH/TYP, then multiply this 3% by 3 = 9% stop loss. If the market becomes excessively volatile such as after the flash-crash in May 2010, it could go neutral while the market's volatility works itself out.
Ultimaltely, some members use a change in direction of the MDM to sell their ETFs. Other members use their own stop loss figures especially if trading 3-times ETFs.