Better Late Than Never: End of Month Strategies for Traders
Looking for a trading strategy that might help you turn a month of lackluster performances into a strong finish with positive momentum for the month to come?
Here’s a trading strategy that is as easy as looking at the calendar on your wall.
Larry Connors and Cesar Alvarez, authors of the new book, Short Term Strategies That Work, conducted an interesting study not too long ago. There have long been rumors discussed among traders that the end of the month tended to be a particularly good time to buy stocks? Why? According to theory, this was because money managers tended to buy stocks at the end of the month — often those stocks that had outperformed over the course of the previous few weeks.
There have been a number of explanations for this — from end of month “window dressing” to managers just hopping aboard whatever market seems to be moving the fastest. But what was of primary concern to Larry and Cesar was less “why” this might be happening and more “can this behavior be quantified?”
If you know anything about Larry and Cesar — and the work they have done in developing short term trading systems for stock, ETF, options and e-mini traders, then you can probably guess the answer to that question.
After testing more than 8 million simulated trades between January 1995 and December 2007, Larry and Cesar saw a pattern. They tested the performance of every stock in their database, asking the question, “If we bought the stock on Day X, how would the stock have fared over the next five trading days?”
Larry and Cesar conducted this test for every day of the month — from the first to the 31st. What they found was fascinating.
The average gain for all days — for stocks above their 200-day moving averages (which are the only stocks and ETFs you should be buying, of course!) — was 0.25% after five days. When Larry and Cesar took a closer look at those days that had significantly outperformed that number, virtually all of those days occurred well after the 20th of the month. Not only that, the closer they got to the end of the month after the 20th, the better the performance became! One day in particular had an average gain of 1.23% (meaning if you bought a stock on that day and held it for five days, the average tested gain was 1.23%).
The implications of this research are broad — and explored more fully in their book. For example, if these are the best days to be buying stocks, which are the worst? And is there a way Larry and Cesar’s other observations and insights — such as buying pullbacks and after declines — can be integrated with what we now know about market behavior at the end of the month?
These are just some of the questions that Larry and Cesar answer in their book, Short Term Trading Strategies That Work. If you could use a few more tricks up your sleeve to help you deal with markets when they become volatile and harder to predict, then click here to see what traders are saying about Short Term Trading Strategies That Work. It could be the one book that makes the most difference in your trading in 2009.
David Penn is Editor in Chief at TradingMarkets.com.