In a stock market that seems to move relentlessly higher, there always seem to be a number of overbought stocks. These are stocks that are among the most vulnerable to a selloff and make ideal short trade candidates. Shorting is a way to benefit from a price decline that involves selling a stock or ETF and buying it back later to close the trade. This strategy is often viewed as high risk and is ignored by many traders. Because the profit potential is so high, traders should consider including short strategies in their portfolio.
One problem a trader faces with short trades is timing the price reversal. Losses can mount quickly if the price continues moving higher and that is always possible. High probability indicators such as PowerRatings can help traders decrease this risk. Stocks with PowerRatings of 3 or lower are potential short trade candidates.
Heading into Friday’s trading there are 3 stocks with a PowerRatings of 1.
PowerRatings demonstrate the usefulness of quantified trading rules. There are other quantified strategies that can be used to benefit from a price decline. TradingMarkets.com is now offering a new tool for traders – a suite of more than 100 quantified trading strategies that can be used to trade your own account or to operate a professional trading business. These strategies include short ideas as well as long trading strategies.
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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. Stocks with the lowest PowerRatings have the least potential for the next week, on average.
All data is as of the end of day on 9/18/2014.