Published: September 24, 2025.
Last Update: July 20, 2026.
TradeSmith wants you to understand how our indicators work and the differences between them so that you can plan your exits based on your trade plan. A sound exit strategy in case the trade goes against you is just as important as picking the right investments.
VQ Definition:
The Volatility Quotient (VQ) is the heart of our system. It provides customized trailing stops and helps determine the number of shares to buy for any security based on its risk level.
Historical price data for any given security determines its normal volatility or risk.
The VQ is also dynamic, and we update it weekly.
Volatility Quotient Level Breakdown:
- Up to 15% = Low Risk
- 15% - 30% = Medium Risk
- 30% - 50% = High Risk
- 50% and above = Sky-High Risk
Now, let’s take the VQ a step further and add a momentum component with the Health Indicator.
Health Indicator Definition:
The Health Indicator uses a simple green, yellow, and red light system to help you determine whether a stock is in healthy condition.
When a stock is in the Green State, it is in a healthy state and moving well within its normal VQ range.
The Green State is a buy signal.
If the security’s price drops and hits the Yellow State, this indicates caution.
This means the security has sustained a significant correction but is still moving within its VQ range. It has not been stopped out, but it is getting closer to an “unhealthy” state. Just like with a yellow traffic light, you want to be cautious.
The Yellow State is a hold signal.
The security can move back into the Green State or continue moving lower until it hits the Red State from the Yellow State.
If a security’s price hits the Red State, it has dropped by more than its VQ from the most recently detected high close price and is no longer in a healthy state.
The Red State is a sell signal.
The Health Indicator is a system alert you can assign globally across your investment portfolios, watchlists, active newsletters, and Billionaires Club (if available through your subscription).
Differences between the Health Indicator and VQ% trailing stop.
The Health Indicator tracks the security’s VQ from the most recently detected high close price and doesn’t consider when you enter the trade.
The red “H” bubble indicates the most recently detected high close price.
As higher highs are detected, the Health Indicator stop loss (red line) shifts higher to lock in profits.
The Yellow and Red "I" bubble marks the initiation of the Yellow and Red States. You can hover over the lines to obtain the trigger prices for the Yellow and Red States.
Purple icons indicate the VQ% trailing stop. The purple “I” bubble marks the initiation of the VQ% trailing stop (based on your entry date), and the purple “C” bubble is its current stop price.
The VQ% trailing stop tracks the stock’s Volatility Quotient beginning from the most recently detected high close price (marked by the purple “H” bubble) that occurs on or after your entry date. By contrast, the Health Indicator tracks the most recent close price regardless of when you entered the position.
Both tools reference the security’s VQ from its latest high close, but the VQ% trailing stop is tied to your entry date, whereas the Health Indicator is not. If the VQ rises, the trailing stop will automatically lower to account for the additional volatility, while the Health Indicator remains unchanged.
To protect against excessive downside risk, the VQ% trailing stop is capped at 55% when the security’s VQ exceeds that level. This cap helps limit losses in highly volatile assets. However, if you prefer to assume greater risk and follow the stock’s full VQ, you can set a custom trailing stop instead.
The Health Indicator, on the other hand, is not capped—it always applies the stock’s full VQ.
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