PowerRatings: How to Find the Best Stocks to Trade Every Day

• August 11, 2009
• Larry Connors

PowerRatings were released by TradingMarkets in early 2005 and they remain the single most popular tool we have on TradingMarkets.com. As you saw in a previous article, the average stock with a high PowerRating has far outperformed the majority of stocks over a short-term period from 1995-2008. In fact, the top PowerRatings stocks showed positive returns again in 2008.

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When TradingMarkets.com first published PowerRatings in 2005, the simulated historical results were based upon a holding period of five days. If a stock had a PowerRating of 10, its simulated returns were based upon buying a stock on the opening and exiting the stock five trading days later. But, as we will teach you here, one can dramatically improve the simulated edges in PowerRatings by adding two simple trading rules to them.

Here are the two rules to Increase your trading performance

1. Only buy a higher PowerRating stock (8 or higher) on a limit order below yesterday’s close.
2. Instead of using a static exit and waiting for five days, use a dynamic price exit by exiting the trade when the stock closes above its 5-day simple moving average (SMA).

By adding these two rules, the simulated returns rise substantially and expand the edges even more.

Here are the PowerRatings simulated returns from January 1995 to December 2008 using a standard five day exit.

Now let’s add the two rules mentioned above. Only buy the higher PowerRatings stocks (8 or higher) on a limit order below yesterday’s close, and only exit on the open the day following a close above the 5-day SMA.

Here are the results when we add these two rules.

The first table shows the test results by entering a high PowerRating stock on a limit order 3% below the day’s close and exiting on the open the day following a close above the 5-day SMA. As you can see, not only does the average gain improve in all cases, but the % correct improves substantially too.

3% Limit, 5-day SMA Exit

Here are the results using a 5% limit and using the 5-day SMA exit.

5% Limit, 5-day SMA Exit

Again we improve in all cases, and we now see the % correct rise to 72% going all the way back to 1995 on 96,393 trades.

Here are the results using a 7% limit with the 5-day SMA exit.

7% Limit, 5-day SMA Exit

Even though the number of trades drops, the % correct rises to 74%, and the average gain per trade jumps to 6.44 % per trade. The edges on the 9’s and 10’s are even more extreme, with better than three out of every four signals being profitable and returns rising to 9.05 % per trade for those stocks which had a top PowerRating of 10.

Overall, by using a limit entry and a 5-day simple moving average exit, the gains rise substantially.

And, PowerRatings subscribers are provided with a daily list of stocks with specific entry and exit levels based upon these two rules.

One caveat to the above is that most days, PowerRatings are viewed by thousands of traders. Too many people entering or exiting at a fixed price, or on the open, will potentially have an impact on price behavior (and likely make at least a few specialists and market makers wealthier). Therefore, if you apply PowerRatings to your investing and trading, please be cognizant of these facts when entering and exiting positions.

Click here now for your free trial. If you have any questions on the research or the strategies, please feel free to call us directly at (888) 484-8220 ext. 1.