Here are my 3 favorite PowerRatings strategies

Editor's note: In this in-depth article, 10-year professional day trader, John Emery shares his favorite PowerRatings trading strategies.

Ashton Dorkins
Editor-in-Chief

I have been a trader of stocks and stock indexes for almost 10 years. I started trading as a proprietary trader with a well-known proprietary firm. The adage of the lead trainer at the time was “every ship at the bottom of the sea had a chart.” I was not very successful as a trader at the firm.

I and several other traders left and became involved with another proprietary firm that believed in charts and indicators. This was better, but real success still eluded me. A major breakthrough in my trading resulted from my exposure to the early writings of Don Miller. Trend Analysis Using Multiple Time Frames is the backbone of my trading.

Here's a further background before I go on. During a particularly quiet market period, I had the good fortune to work with TradingMarkets.com as a sales consultant. So my name may sound familiar to some of you.

Today I am making my living as a professional day trader. As a professional day trader I use several of the tools, methods and strategies from TradingMarkets. I use the products because they have provided me with a distinct edge in my trading.

The first TradingMarkets product I ever used that provided a statistical edge in my trading was the RSI-25 Explosion system. I remember being very skeptical of the whole concept of “statistical” trading, but I have become a believer.

Let me take a break here. If your eyes just glazed over or your attention span drifted at the mention of the concept of “statistical” edge, you are experiencing a normal reaction. Ninety-five percent of the traders I have talked with about this concept “do not get it." Frankly, neither did I at first. But I watched, learned, and most importantly, profited.

For you to understand the potential of PowerRatings, you must understand the concept of “statistical” edge. Let me try to help you understand the concept.

First, Las Vegas is built on a statistical edge. All those beautiful casinos were built with the knowledge that if people gambled at the casino, almost all would lose their money over a period of time. Occasionally someone will randomly become a big winner. Of course if the big winner hangs around at the casino long enough, the big winner will give it all back. This occurs because the house has the edge in all the games. For every $100 wagered by a gambler, the house will retain a known percentage over a period of time. The gambler will at times be ahead, but over the long run, the gambler will lose.

There are two important distinctions to recognize when comparing trading to gambling in a casino. The first distinction is that the markets are open. You are not trading against the house. You are trading against other traders. The second distinction is that you can develop your own statistical edge.

If you can develop a statistical edge, you will have a much better chance at trading success.

I have spent a considerable amount of time, energy and money to develop my statistical trading edge. It is derived from watching charts, understanding what the other market participants are trying to do, and using tools and methods that are quantifiable in terms of the edge they provide.

Larry Connors and the TradingMarkets research team have done this with PowerRatings. His objective was to find the proper mix of patterns and trading tools that produced a probable and predictable move. The team did extensive research and back testing of over 10 years of historical data. The result was a rating system than can be statistically quantified. A stock with a PowerRating of 9 or 10 has been shown to rise in price over the next 5 days at a statistically higher rate than a stock rated at a lower number. A stock with a PowerRating of 1 or 2 has been shown to fall in price over the next 5 days at a statistically higher rate than a stock with a higher number.

Does this mean that this stock is guaranteed to go up? Absolutely not! Does this mean that a stock rated lower might not rise? Again Absolutely not! What this does mean is that a stock with a high PowerRating has what I call a “predisposition” to rise. A stock with a low number has a “predisposition” to fall.

Let me stress again, there is no guarantee in the direction of a stock price as the result of a particular PowerRatings Number. It is a probability. This probability can be translated into a higher success rate. So far, I have had a very high success rate when trading stocks with this “predisposition”.

How do I use this knowledge? I like to trade high volume, big cap stocks. At the end of the trading day, I scan the 8, 9, & 10 ratings for stock symbols I recognize. With over 6000 stocks being scanned, I see many symbols that I am not familiar with. I tend to ignore the symbols I do not recognize because they do not match my trading style. When I see a stock I recognize with an 8, 9 or 10, I do further research to see what type of pattern the stock is in. I check to see if there are earnings announcements on the horizon. I check the sector to see if other stocks are in similar patterns. Usually the stock goes on my trading watch list for the next day. I also scan the 1, 2, and 3’s and review them the same way.

There are 3 recent trades from PowerRatings that I would like to share. These trades came in Toll Brothers (TOL | Quote | Chart | News | PowerRating), SanDisk (SNDK | Quote | Chart | News | PowerRating), and Southwestern Energy (SWN | Quote | Chart | News | PowerRating).

TOL came up on February 21, 2006 with a rating of 2. Upon doing further research I found that TOL had an earnings announcement the next morning. I make a habit of not having a position going into an earnings announcement. I have saved myself lots of money with this rule. I put the stock on my watch list and posted the fellow housing stocks on my watch list. While I did not trade TOL early in the day, I traded several other housing stocks from the short side that morning as the reversal patterns set up. TOL rallied during the opening 2 hours and then rallied during the doldrums. I had noticed a major resistance area around the 34 price area. The resistance went back into November. I became very interested in a possible short of TOL as it started exhibiting an inability to break through the 34 area. I took a short term short trade prior to the close and covered for a profit. It was definitely on my watch list for the next morning.

The next morning, based the intraday pattern and the continuing PowerRating, I decided to go short on the open. Fortunately TOL is exempt from the uptick rule and I was filled on the opening print. The stock dropped like a rock right into a support area where I covered. I traded TOL several more times that day, all for small profits.

SNDK was another PowerRatings pick on February 21, 2006, with a PowerRating of 9. The stock had been a downtrend for 13 days. 13 is a Fibonacci number and SNDK seems to follow Fibonacci cycles in its moves I felt that the probabilities for a rally were very good. If it started to rally, the short covering action alone would push the price up.

I purchased the stock on the first hard pullback. The pullback occurred very quickly on light volume and the rally was very fast on increasing volume. The stock never really pulled back for the remainder of the day. I exited intraday as a divergence in the RSI indicator began to develop. I never took a short in the stock in the subsequent days and was looking for another entry to the long side. It never came, as the stock gapped up on an upgrade the following Monday.

The final stock I want to discuss is SWN. On February 28, 2006 the stock appeared on the nightly scan as an 8. I looked at the daily chart and noticed several things. It had touched the 200 day moving average during the day. It had tested a prior low and held. Finally, it had a divergence on a stochastic indicator. It was definitely on the watch list.

The stocked had a small gap open on March 1, 2006. I was fortunate enough to get filled on the quick pullback and watched the stock rally all day. I exited near the close and never had any pain in the trade at all.

Not every trade goes as perfectly as the ones I have discussed today. But the trades that I have taken from the PowerRatings scans have provided enough “predisposition” edge to make sure that I check them every evening. I have many different ways to find trading candidates for each day, but the overall success of these scans has made them the number 1 choice for my watch list each morning.

John Emery

A quick note from Ashton Dorkins: I hope you enjoyed John's article. Please feel free to send to me any questions or comments you may have about John's work and trading. My email address is: ashtond@tradingmarkets.com.