I was looking through some old tradings scans the other day, and came across a really basic scan that still works well today. Here’s the nuts and bolts.

1. Look for stocks with todays volume that is twice the 21 days ESA of volume.
2. Close today has to be greater than the mid point between the high and low today.
3. The 14-day RSI Wilder today has to be less than 30.
4. Go long at next days open.

I tested this on Sp500 stocks with a simple holding period of 2 days, no other capital protection or exit strategy. Very interesting results. The test below was from 10/07/2007 – 03/05/2009. I wanted to cover a protracted pullback in the market (SP500 index was -39.17% for the period). The table below shows encouraging results.

The winners outnumbered the losers by 138 to 79 with an average profit/loss for all trades of 2.49%. Key points to note. With a holding period of 2 days, some positions take a big loss, some have hard drawdown (even in 2 days). You’d need a strong stomach to ride these positions. Scanning the positions in this strategy, there was one period where 25 new positions would have been established in one trading day. While not insurmountable, existing cash in an account would have been spread thinly if your capital was less than $50,000.

I ran this startegy for the last 24 months with similar results below. Again same key points on drawdown and new positions applied to this test.

In the next article, I’ll run this through the Portfolio Simulator with ‘real’ money for a complete real life test.

Trading is a statistical business, traders focus on risk management using systems that have been shown to provide an edge. Trading stock tips, news stories, stocks you are familiar with, and similar approaches can lead to mixed results. No one guesses right all the time. Trading is not about guessing or hoping. Traders need tools that are well understood, like an old friend. You usually know how a friend will react in a given situation, sometimes you are surprised but more often than not you have a good idea of their reaction to things. Trading needs to be the same way. No system reacts as expected all the time, if they did everyone would be driving a BMW to their Yacht. A traders job is to find a system that has an edge, learn how it behaves in different market conditions, and then be positioned to profit if the system does the normal thing.
Trading involves more than just picking a stock and entering a position. You don’t have a profit until you are back in cash. Exit strategies and money management techniques are important aspects of trading. Traders need to vary their position sizes and the number of trading positions used based on the current market conditions. In order to do this traders need to know how their trading systems perform in different market conditions. We cannot control what the market is doing, but we can react to it. During conditions that result in lower success rates for a trading system we need to either switch to a different trading system, or reduce positions sizes, as a way of reducing risks.
I went to a high school football game to watch my oldest daughter play in the band. After awhile I walked over to the refreshment stand to get something to drink. As I was walking toward the stand the crowd noise greatly increased, and people were cheering loudly. I knew from the increased noise level that something important had happened so I turned around and saw the end of a long yardage play. Stock volume is a similar indicator, when stocks are moving on volume there is a lot of interest in the play and traders should turn and pay attention.
If Sears has been selling a hammer for thirty dollars and they suddenly raise the price to forty dollars they would expect to sell fewer of them. Sears would see the volume drop off, and conclude that the price may not be sustainable. The same idea applies to stocks, when the price moves up on declining volume the price change may not be sustainable.
Steve Palmquist a full time trader who invests his own money in the market every day. He has shared trading techniques and systems at seminars across the country; presented at the Traders Expo, and published articles in Stocks & Commodities, Traders-Journal, The Opening Bell, and Working Money. Steve is the author of, “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not. Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs. To receive a sample of the ‘Timely Trades Letter’ send an email tosample@daisydogger.com. Steve’s website: www.daisydogger.comprovides additional trading information and market adaptive trading techniques. Steve teaches a weekly web seminar on specific trading techniques and market analysis through Power Trader Tools.

Bearing some resemblance to mutual funds, the ETF is actually in a class of its own. Rather than purchasing an individual stock, an ETF is a manner of automatic diversification, without the capital demands of individual stock purchase, yet all the while allowing the benefits of direct stock appreciation.

Mutual funds will have a daily valuation that will apply to all transactions on that day, as the unit price is altered to reflect the funds asset value; the advantage to the short term trader is minimized. ETF’s on the other hand are quite able to be traded intra-day, as the price will dynamically respond to the ordinary markets forces of demand and supply, and are able to trade at a discount or a premium to the underlying instrument they are hinged upon. This of course will take into account numerous fundamental variables, not the least of which is the cash and carry premium that is inherent in synthetics to reflect the absence of physically carrying the underlying instrument or commodity. Importantly, short selling is possible with ETF’s, and so trading on margin also adds to the inherent leverage that this type of synthetic instrument allows.

ETFs are available on numerous underlying instruments including indices, industry sectors, regional sectors, commodities, and in fact a plethora of niche markets that marvelously, even extend to fixed interest income streams. In a bid to maximize every possible return, this type of flexibility allows investors to tailor their portfolios to unprecedented accuracy. With ETF’s, any composition is quickly able to be implemented and adjusted when the need arises.

Often a mutual fund will charge fees up to 3% p.a. while an ETF will rarely exceed 1%. Still given a liquid ETF market exists, the bid ask spread will contribute to an investors expense and will detract from any return accruing. This is the one aspect of ETF trading that may dissuade smaller investors from redirecting investments from similar leveraged instruments such as mutual funds. Larger institutional traders on the other hand can cover their exposures easily in large volumes, which are far easier to execute than in individual markets.

There also exists a certain tax advantage concomitant to ETF’s. Capital gain will be realized and tax will accrue upon the conversion of equity through an exit trade. Additionally, some ETF’s upon equity will allow an exchange for physical stock, and similarly enabling the deferral of tax. Mutual funds however, must purchase and redeem shares of stocks as they are created within the fund, and then distribute the capital gain each quarter. This declaration is subject to an immediate tax liability, a nuance that an ETF does not lend itself to.