Battle Plan Trade of the Week: Taking Gains in Short Term Trades
With the markets moving lower in earnest again on Wednesday, this might be a good time to remind traders of how Larry Connors’ Daily Battle Plan played the market as weakness began to creep into stocks and ETFs in the first half of August.
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Those who are familiar with our approach to trading in the Daily Battle Plan know that we have focused almost exclusively on short term, high probability ETF trading for more than nine months. This approach has led to a very successful run of 34-8 since October 2008.
We noticed the first signs of weakness in country ETFs just a week after August began. But it wasn’t until the iShares MSCI Germany Index ETF
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PowerRating) slipped into oversold territory above the 200-day moving average on August 10 that we had a high probability opportunity to act on our observation that ETFs – especially country ETFs – may pull back in the short term.
As EWG continued to move lower over the succeeding session, we opened up a long position in the ETF as of the close on August 11th.
In the past, we have used a variety of dynamic exits to exit trades – from the 5-day moving average to the 2-period RSI to price action itself. Of late in the Battle Plan, we have returned to the 2-period RSI as our exit signal. Why? Our research tells us not only that dynamic exits are superior to static ones (i.e., specific price targets, for example), but also that the 2-period RSI tend to allow short term traders to remain in a trade a little longer than the 5-day moving average. This may mean a few extra points in gain for traders and, as such, we thought it was a change worth making.
EWG alerted us to an exit opportunity only two days after we took a long position. In at 19.96, we took profits in the long EWG trade as of the close on August 13 at 20.47 for a gain of more than 2.5%.
This is just one example of the sort of high probability trading that we do in Larry Connors’ Daily Battle Plan. If the sell-off in stocks and ETFs has you concerned, then our approach to high probability, mean reversion trading may be just the thing you need to start looking at overbought and oversold markets the way the pros do.
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David Penn is Editor in Chief at TradingMarkets.com.