Battle Plan Trade of the Week: Shorting a Too High SPY

A few days ago, as the Battle Plan Model Portfolio looked likely to yield its second losing trade of the year (out of a total of 17 trades) I received an interesting e-mail from a trial subscriber.

The subscriber was curious about our exit strategy. As many of you know, we use a close beyond the 5-day moving average as an exit signal for both stock and ETF trades. The 5-day moving average is a dynamic exit that adjusts to market conditions, changing more dramatically when volatility is high and changing more slowly when prices are moving slowly. We prefer dynamic exits like the 5-day moving average compared to static ones and have seen the positive results in both our testing and real-world trading.

The subscriber wondered in his e-mail whether we would be sticking with the 5-day moving average exit in the current trade because – if he was calculating it correctly – an exit on the 5-day moving average meant that the trade was a losing one.

SPY Chart

What was interesting was the fact that the subscriber seemed to want to leave us an “out” – an excuse to change the exit strategy – just because the trade looked likely to be closed unprofitably.

To quote a former Vice Presidential candidate: thanks, but no thanks.

Not every trade in any trading strategy will be a winner. In fact, a great many traders are happy when their trading strategy produces 50% winners. After all, this is where the idea of letting your winners run and cutting your losses short comes from. If every trade is a 50/50 shot and you let the winners get to +3 and cut off the losers at -1, then over time a trader should grind out a profit.

With high probability trading strategies like those used in Larry Connors Daily Battle Plan, however, we are dealing with strategies that have far higher win rates, win rates in excess of 80% for most liquid ETFs as revealed through our backtests. Everything about the way we approach trading: from being discriminating and picking our trades carefully and cautiously, to our strategy of adding to positions as the edges grow in our favor, is based on the fact that these trading strategies are high probability methods.

But high probability is not 100% probability. And even being right 80% of the time (or more, we have had 88% of our Battle Plan trades have been profitable this year), means that a few trades will not work out the way we hope.

The solution to this, as far as we are concerned, is not to change our strategy, but to make sure we remain committed to it. Remember, one of the good things about experiencing one of those trades that falls in the 20% category of potential losers is that the likelihood of getting back to the 80% category of potential winners just became that much greater.

Every day in our Battle Plan we’ll provide you with incisive, before-the-bell commentary and analysis on the day’s markets to help put your trading in context. We’ll give you suggested entries and exits for short term trading opportunities in stocks, ETFs and options that may be only hours away. And we’ll give you what many other people can’t: model-driven percentages so that you know the historical win rate going back to 1995 for every single trade idea-long and short.

Give the Daily Battle Plan a read before the next market open. Click here to start your subscription or call us today at 888-484-8220.

David Penn is Editor in Chief at TradingMarkets.com.