Published: September 15, 2025

Last Updated: July 20, 2026

What is the Health Indicator?

The Health Indicator is one of TradeSmith's most powerful tools for everyday investors. Think of it like a traffic light for your stocks — it uses color-coded signals to help you quickly understand whether a stock is in good shape, showing warning signs, or in trouble.

Two Versions of the Health Indicator

TradeSmith offers two versions of the Health Indicator, each designed for a different investing timeframe. Understanding which one to use depends on how long you plan to hold a position.

Long-Term (LT) Health Indicator

The Long-term Health Indicator is built for investors with a 12-month or longer horizon. This makes it more stable and better suited for identifying sustained trends. 

How the Long-term Health Indicator Works 

When a stock or index is in the Green Zone, it is considered healthy and moving within its normal range based on its expected level of risk. 

That expected range is measured by the Volatility Quotient (VQ). 

Think of the VQ as a guide to how much a security typically moves up or down. Using historical price data, TradeSmith calculates the normal price movement for stocks, ETFs, mutual funds, indexes, and even cryptocurrencies. 

• If a security declines by about half of its VQ, it moves into the Yellow Zone. 
  → This signals caution. The pullback may be temporary, or it could continue.  
• If a security declines by more than its full VQ, it enters the Red Zone. 
  → This indicates the security is behaving abnormally and may be unhealthy. 

Short-Term (ST) Health Indicator

The Short-Term Health Indicator is designed for investors interested in trends that typically last less than three months, though some can last a bit longer. It uses six months of price data, making it more sensitive to recent market movements.

How the Short-term Health Indicator Works 

The Short-term Health Indicator is designed to follow the current price trend. Because of this, it typically does not change before the trend changes—it reacts as the trend develops. 

Its signals are based on a combination of proprietary indicators that measure trend strength across different timeframes. What matters most is how these indicators relate to each other, not their individual levels.

For these reasons, it’s not possible to predict exactly how much the price must move before a signal changes. 

Here's what backtesting has shown about how long each state tends to last:

• ST Green lasts about two months on average and signals a bullish (upward) trend.
• ST Red also averages two months and signals a bearish (downward) trend.
• ST Yellow lasts about two weeks on average and marks a transitional stage between bullish and bearish.

How It Compares to Long-term Health 

By comparison, the Long-term Health Indicator is simpler. It relies on a single measure—the Volatility Quotient (VQ)—and changes slowly. Because it’s based on longer-term data, it can take months to adjust to sudden market shifts. 

This slower pace allows us to estimate how much a security must decline before triggering a sell signal. 

Why Short-term Health Is Different 

The Short-term Health Indicator is designed to be more responsive and adapt quickly to recent market activity. 

For example, if a stock drops 12% in a single day, the VQ used in Long-term Health will not immediately adjust—even though risk has increased. Short-term Health is built to respond more quickly in situations like this. 

If you’re using the Long-term or Short-term Health Indicator as an exit strategy, here’s an easy way to remember it: 

• 🟢Green means buy 
• 🟡Yellow means hold 
• 🔴Red means sell 

For long-term investors, the Long-term Health Indicator should be your primary focus. It helps you cut through short-term noise and identify stronger, more stable opportunities. While the Short-term Health can provide additional context, it’s not essential when your goal is long-term investing. 

The key is aligning your tools with your objective. If you’re investing with a long-term horizon, the Long-term Health should drive your analysis. 

How the Health Indicator Drives Entry and Exit Signals

The Health Indicator isn't just for monitoring — it's also the foundation for TradeSmith's standard entry and exit signals.

• Entry: Triggered when a stock moves into the Green Zone. This suggests the stock has recovered and may be ready to climb.
• Exit (Stop Loss): Triggered when a stock moves into the Red State. This is TradeSmith's way of telling you the stock is no longer healthy, and it may be time to protect your investment.

If you're following the Long-Term or Short-Term Health Indicator as your exit strategy, TradeSmith will send you an email and push notification through the mobile app when it's time to take action. Just make sure the Health Indicatory system alerts are enabled under the Alerts menu in your program settings.

Screenshot taken from a Platinum account on Apr. 24, 2026.

Final Thoughts

The Health Indicator is one of the simplest and most effective ways to cut through market noise and make more disciplined, emotion-free decisions. Whether you're a long-term investor focused on building wealth over years, or a more active trader looking for shorter-term opportunities, aligning your approach with the right Health Indicator — and understanding what each color means — can make a meaningful difference in how you invest.

By combining the LT and ST Indicators, investors can better understand both the bigger trend and the short-term shifts that influence price movement. This layered perspective helps guide smarter trading and risk management decisions.

For educational purposes only. TradeSmith tools are not financial advice. Always consider your own financial situation and risk tolerance before making investment decisions.

Need Help? 

Our Customer Success team is ready to assist: 

• Phone: 1-866-385-2076 (toll-free) 
• Email: [email protected] 

*Note—The tabs and features you see on your TradeSmith Finance site will vary based on your subscription(s) and subscription level(s).