Four ETFs are heading into Monday’s trading with PowerRatings of 9 or 10.These ETFs track mining stocks, the biotech sector and the stock market of South Korea.
The fourth column in the table above shows the number of high probability buy setups that each ETF meets using strategies detailed in the book High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.
In addition to being potential buys based on PowerRatings, these ETFs meet all of the buy setup conditions for additional strategies that enter long trades on additional weakness. One of the strategies is the RSI25 strategy. In back-testing on 20 of the most liquid ETFs for as long as the ETF had been traded, a period of up to 15 years, 77% of 786 buy signals were winners, delivering an average gain of 1.06% with an average holding period of just over six days. These trades were closed when the 4-period RSI closed above 55. Other exit strategies can be used to improve the trading performance. iShares MSCI South Korea (NYSE: EWY) meets the setup conditions of this strategy.
PowerRatings are based on the relationship between price and the 5-day moving average (MA) of price. The further prices move away from the 5-day MA, the stronger the tendency to snap back becomes. PowerRatings uses the 5-day MA and several other components to identify high probability trade entry points. This strategy was thoroughly back tested and the history of over 4 million trades was analyzed.
We know from back testing that PowerRatings can be used as the basis of a trading strategy. Detailed back testing has confirmed that the higher the rating, the greater the one week historical gain has been for stocks and ETFs with that rating. For best results, enter trades on stocks with a PowerRatings of 8 or higher with a limit order 3-7% below the previous day’s closing price. Higher % limit entries have historically shown a greater percentage of winning trades but higher % limit orders also reduce the chance of trade execution.
As an example of a trading strategy that can be used, in the past, buying stocks with a rating of 10, on a 3% pullback the next day and selling after the stock closes above its 5-day simple moving average has been profitable 75% of the time with an average gain of 5.9%. Other entries and exits also show high winning percentages and large average gains.
All data is as of the end of day on 9/5/2014.