Frequently Asked Questions

Dr K Market Direction Model
Should I consider tighter stops on my stocks when a sell signal is issued by the model?

The model is designed to keep one, in general, on the right side of the markets, and outperform the general market by way of investment in ETFs. Investment in individual stocks can be used in conjunction with the model.

One could consider tight stops on their stocks when a sell signal is issued, but this depends on each investor's time horizon, ie, swing vs. intermediate vs. longer term investor, as well as risk tolerance (position size, diversification, etc). For example, if you hold a position in a stock that is huge by your own standards, you could create a tighter stop where, if triggered, you would reduce the position by 1/3 to 1/2. Also, selling is contextual to the general markets. For those who sell more on 'gut' feel, some may reduce their positions before their sell alerts are hit. For those who are more systematic, they should stick to their sell rules, which may employ the use of the 10dma and 50dma as selling guides.

As a general rule, let your stocks tell you when to buy and when to sell. Keep in mind there may be unusual situations where leading stocks are setting up nicely and become buyable, as they did in March and early April of 1996, even though the model was still on a neutral signal.

Published: Sep 14 2010