Battle Plan Trade of the Week: Scaling-in to China

This report is a tip of the cap to both Larry Connors Daily Battle Plan (click here to launch your free 7-day trial) as well as to our ETF PowerRatings. For traders in the ^FXI^, it didn’t matter which product you were taking your lead from: both the Battle Plan and ETF PowerRatings came up big.

Of all the pullbacks in recent days, few were as powerful as the one in Chinese exchange-traded funds (ETFs). Whether you were focused on the FXI or one of the smaller, more specialized ETFs, like the ^TAO^, many ETFs related to China were in pullback mode over the past few days. Consider this chart of FXI.

FXI became oversold on January 12. This, as high probability ETF traders know, was an alert for a potential short term, high probability trade IF the fund closed lower.

That lower close came – in spades. FXI gapped down to close some 50 cents lower the next day and pulled back by an additional 30 cents the day after that.

Each of these lower closes allowed Daily Battle Plan traders to add to their position: one unit on the first follow-through, oversold close on December 13, a second unit on December 14, and a third and final unit on December 15.

I should mention here that on those three days, ETF PowerRatings traders were seeing an ETF that had earned an ETF PowerRating of 9 on December 13, an ETF PowerRating of 10 on December 14, and an ETF PowerRating of 10 on December 15. This was compelling evidence that a high probability opportunity in FXI was developing.

Once fully loaded (a full position), all traders needed to do was wait for strength into which to sell the position. That strength arrived on Tuesday, January 19, as the ETF shot higher to close at 42.77 (above all three of the entry prices on the 13th, 14th, and 15th). This was the exit signal – allowing high probability traders to exit the FXI trade with an averaged gain of approximately 1.78%. For traders who used options or who scaled-in to the FXI position in greater size (an advanced strategy discussed in Larry Connors’ book, High Probability ETF Trading), the gains were likely even more impressive.

This is what high probability trading – in the Daily Battle Plan and with ETF PowerRatings (click here to start your free 7-day trial) – is all about. While not every trade will work out exactly as FXI did, the pullback in FXI was a good example of both buying markets after they have become oversold and, just as important, adding to oversold positions to maximize your edges before locking in gains while selling into strength.

David Penn is Editor in Chief at TradingMarkets.com.