PowerRatings are both an indicator and a trading strategy. As an indicator, PowerRatings can be used in conjunction with other tools to analyze a stock or ETF. As a trading strategy, highly rated stocks and ETFs can be considered potential buys while stocks and ETFs with the lowest rankings can be considered short trading candidates.
Each day, traders can access lists of potential trading candidates on the PowerRatings web site. Lists of stocks, ETFs and leveraged ETFs with ratings of 9 and 10 can be found with one click from the home page. Heading into Monday’s trading, for example, three stocks have ratings of 9. No stocks have a rating of 10.
The next step in the trading process would be to enter a limit order to buy 3-7% below Friday’s close. The limit order will allow you to enter the trade on additional weakness. Traders can also enter limit orders for highly rated ETFs and leveraged ETFs.
If a trade is entered, it can be closed when the price of the stock or ETF closes above its 5-day moving average (MA). These simple steps provide a complete a trading strategy that has done well when back tested.
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 9, 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 4.3%. Other entries and exits also show high winning percentages and large average gains.
All data is as of the end of day on 8/29/2014.