Thursday, February 04, 2010

Alternative trading methods using real equities?

I tend to only be interested in penny plays these days, but if you wish to trade "real" stocks where you compete against well-financed insiders, you should at least follow some sound plan.

One thing I have noticed that inexperienced traders (and some old hands as well!) try to do is to pick outright tops and bottoms of stocks and markets where personal ego and public recognition become money losing factors.

A better approach for a solid day trade or swing play, is to target oversold conditions short term in the context of an uptrend or downtrend. Instead of trying to select the point of reversal of a trend top or bottom, you can pick stocks that are experiencing several day pullbacks or rallies in defiance of the dominant trend.

This method prevents you from bottom or top fishing, but allows you to exploit short term reversals.

One great tool, at a low price, is stockfetcher, located at With a cheap subscription, you can make filters to screen for customizable criteria that permit you to search for all manner of possible strategies in trading. You cannot get current day results without a paid account, but it is worth its weight in gold bricks for all kinds of trading strategies!

Using this site, I found a simple example of the strategy I am describing in this post.

Using the primitive screen:

close has been decreasing for the last 4 days and average volume(30) is above 250000 and close is above 5.00
where stock is trading above MA (50)
where stock is trading above MA (200)

I found the symbols, UBSI CHSI SLXP as references for further research.

Notice that the screen demands the stocks be currently above the 50 and 200 day SMAs, while the closing price in four straight sessions has been deceasing. A clear pullback within the context of a primary uptrend is thus possibly fished out. You look at the charts in greater detail, in several time frames over at least 2 years, then you may find a candidate. You can target aggressively stocks at day 4 of downside bouncing off north of the 20 or 50 day SMA.

You are not bottom or top fishing, because you are merely buying real dips and selling into rallies, so to speak. You enter on a nice spring day by watching for a long entry next session early, once it becomes clear that you are heading into a session that is likely to end positive, etc.

If a stock keeps experiencing more and more down days it becomes more likely you are not experiencing a pullback, but a trend reversal, so the timing should not be based on anticipation, but signs that the red days are ending beginning with day 5! That is easy enough to tell by avoiding buys until 30 minutes into session 5.

Of course, these suggestions can be reversed for overbought short targets, using the screen:

 close has been increasing for the last 4 days and average volume(30) is above 250000 and close is above 5.00
where stock is trading below MA (50)
where stock is trading below MA (200)

Now you have broader downtrend targets that are experiencing 4 day rallies that you hope to short by entering on day 5 on a nice fall day, using the 30 minute rule in the same spirit as in the above method.
As before, do your multiple time frame analysis work to narrow the field of candidates.

One caveat: The broader indexes play a HUGE role in the immediate direction of an equity if it is "real" stock, i.e. one trading above 5 bucks and on a major exchange, of a true company not being promoted or pumped.
So, you MUST take this into account on the spring/fall day for entries and the direction you anticipate.

Now you know why I trade pennies! Good luck and happy research...

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