Short Term Trading Techniques Should Be Easy To Understand
Good day traders, a few days ago, I went over basic short term trading techniques that demonstrated how the length of a moving average or the length of a breakout moving average, changes the odds drastically. For those who of you who did not read the first part of this series, you can read the full report and watch the video here.
In a nutshell I demonstrated the 20 day moving average, the 40 day moving average, the 60 day moving average, the 80 day moving average and the 100 day moving average. As I increased the length of the moving average, the odds of trades becoming winners increased as well.
The best result was achieved using a 90 day simple moving average. The worst results were achieved using the 20 day moving average. Anything after 90 days caused the method to decrease the percentage of profitability.
While testing the different length of moving average, we discovered that 20 day breakouts tend to be accurate only 29.7% percent of the time. This is not very promising. However, if we reverse this technique we will end up with an entry method that is 70.3% accurate. Imagine trading short term trading techniques with over 70% accuracy. Today, I will show you how we can take an entry method that produces awful percentage of profitability and reverse it to produce profitability above 70 percent.
Our test results discovered that 20 day breakouts produce 70 percent false breakouts, what I did was create a strategy that fades 20 day breakouts. I then added a few filters to increase profitability even further.
Long Entry Rules: The stock or any other market you trade must make a 20 day price low, in addition the market must close at the upper quarter of the daily range. This is the filter I was talking about; It will show me the stocks or other markets that are losing steam after making the 20 day high. Here are a few pictures so you can see how it looks visually. In addition, and this is a big one, you want to make sure the 20 day low is AGAINST the main trend. Meaning you want to trade this method only in the direction of the main trend. Here is a visual so you can get a good feel for this method.
The next step is to place an order $0.25 cents above the high that was reached that day. I won't cover protective stop loss orders or targets in this tutorial, that's for tomorrow tutorial.
By going only in the direction of the main trend and only picking markets that are closing in the upper quarter of the range, we increase our odds even further. This strategy has one of the highest rates of percentage profitable I have seen in 20 years. Tomorrow I will go over stop loss placement and profit targets for this method. There are short term trading techniques that cost thousands of dollars that cannot out perform this simple method. Remember, complicated and expensive does not equal profitability.
Short Entry Rules: The stock or any other market you trade must make a 20 day price low; in addition the market must close at the upper quarter of the daily range. This is the filter I was talking about; it will show me the stocks or other markets that are losing steam after making the 20 day high. Here are a few pictures so you can see how it looks visually. In addition, and this is a big one, you want to make sure the 20 day low is AGAINST the main trend. Meaning you want to trade this method only in the direction of the main trend. Here is a visual so you can get a good feel for this method.
In this example you can see exactly where to sell stop goes. Remember, the market must close against the direction of the breakout and close at the bottom 25 percent of the daily range that day. This is a very important step that many traders ignore, I recommend following these rules precisely.
The stock stop gets triggered and the market falls back in the direction of the main trend. This is very important and can make all the difference when trading this strategy.
These examples should give you a good idea of the 20 day fade strategy. Tomorrow I will go exactly how to calculate your stop loss level and how to calculate your profit target. I will demonstrate the ATR indicator that will achieve this very easily.
The 20 Day Fade Strategy is one of my favorite short term trading techniques. I hope you join us for tomorrow's tutorial. For more on this topic please go to: Many People Ask Me Is Swing Trading For A Living Possible and Swing Trading For Beginners
all the best,
by Roger Scott