Written by: Robert and Russell Markham

I want to revisit Dr. DiLiddo’s 4 Steps To Protecting Profits as a follow up to the post I did on AMP on 11 May (check out the VectorVest Views if you missed this). The 4 Steps to Protecting Profits is a very powerful technique for working out when to sell a given stock. If you are not applying stop-losses, you are running the risk of catastrophic losses. It doesn’t have to be this way. Using sensible stop-losses will ensure you protect your capital. Many of our subscribers have optimised their stop-losses through BackTesting. If your trading plan applies a given stop-loss that you have BackTested to perfection or you are applying a stop-loss that you’re happy with, then mission accomplished.

However, many investors do not have a trading plan and are not yet applying stop-losses. Perhaps you are new to investing and you like to look at each stock you own, keeping an eye on the graph to decide on when to sell. If this is you, then Dr. DiLiddo’s 4 Steps To Protecting Profits is an excellent way to manage your individual positions rather than apply a standard stop-loss across all stocks.

Dr. DiLiddo’s 4 steps are as follows:

Step 1: Look for your stock price falling away and for volatility
Step 2: Price falls below the 40-Day Moving Average (MA)
Step 3: Relative Timing (RT) drops below 1.00
Step 4: REC = Sell

This is quick and easy to check out in VectorVest. Let’s take the example of AMP.AX and apply the 4 steps in the last 6 weeks. Click on the Graphs tab and graph AMP.AX. Per the Graph Control Panel (on the right of the graph), select the Graph Layout and set the layout to: VectorVest Layout. You should have the Graph of AMP and the 40-Day Simple MA (per the purple line) and RT (per the red area line). Then simply find the button REC and click on it (per the bottom left of the graph) such that you have the Buy, Hold or Sell rating on the graph marked (per the top of the graph). Select the time frame to be 6 months (you can just click on the 6m button per the bottom right of the graph).

Let’s see the 4 steps applied to AMP.AX:

Step 1: Price started falling away along with volatility around 19 to 21 March 2018 onwards. There were plenty of other volatile periods prior to this but this is per the last few weeks.

Step 2: Price broke through the 40-Day MA on 15 March and has remained below the 40-Day MA from 20 March this year.

Step 3: RT broke below 1.00 on 28 March 2018 and is yet to break above 1.00.

Step 4: REC = SELL on 6 April 2018.

Many of our subscribers will consider 3 out of the 4 steps as sufficient enough to take action. The fourth step typically will be the last step and one does not have to stick around until REC = SELL flashes up. We can see that Step 1, 2 and 3 were all met by 28 March when the Price was at $5.03 per share. All 4 Steps took place on 6 April when the Price was at $4.86 per share. As of 23 May, the Price is currently at $3.93 per share, down more than 21% from 28 March and down more than 19% since 6 April.

I have noted some examples in the past, applying the 4 Steps to Domino’s Pizza and Bellamy’s. If you want to see exactly how it is done, check out the blog posts (with the corresponding videos). The 4 Steps certainly have assisted significantly with AMP, Domino’s and Bellamy’s!

Click Here to see the 4 Steps applied to Domino’s.

Click Here to see the 4 Steps applied to Bellamy’s.

You may wish to run the 4 Steps on some of your current holdings or run the 4 steps on some stocks you have held in the past and see just how useful this technique is!