Buying Breakdowns & 3 PowerRatings Stocks
Imagine this scenario. The stock you have been watching is starting to creep higher. As soon as it breaks out, you buy your chosen number of shares.
Within a short time, the price starts dropping, which forces you to take another small loss. What went wrong in this common short term stock trader scenario?
The first thing short term traders need to understand is that the market is designed to take your money. The set ups that look obvious are often traps luring in the unsuspecting and new traders to buy or sell at the worst possible time.
In other words, the market is setting you up to buy when the professional money is selling, and to sell when they are buying. Realizing this fact is the first step in developing a successful short term stock trading plan.
Since, many traders have been taught to buy strength and sell weakness, we decided to take a close look at this constant phenomenon. Buying when a stock is going up, or breaks out of common technical resistance seems to make common sense; however there is no short term edge to this strategy.
Our extensive research since 1995 with over literally millions of stock trades clearly shows that the edge in short term stock trading exists after a series of down days or lower lows. Buying after a stock has made 5 or more down days or lower lows is difficult. In fact, it’s somewhat scary to buy companies that have dropped for this length of time or longer.
However, in all things investing, going with the statistical edge is always the wisest move. On this basic, statistically proven premise, we have developed a 3 step stock picking system that is easy to use and has been proven time and time again via research and real life trading.
The first and most critical step is to only look at stocks trading above their 200-day Simple Moving Average. This assures that a strong, long term up trend is in place, increasing the odds that you are not buying into a falling knife or catching a stock in a death spiral.
The second step is to drill deeper into the list locating stocks that have fallen 5 or more days in a row or experienced 5 plus consecutive lower lows. Yes, you heard me right, fallen 5 or more days in a row. I know this fly in the face of conventional wisdom of buying stocks as they climb higher.
However, as previously stated, our studies have clearly proven that stocks are more likely to increase in value after a period of down days than after a period of up days.
The third and final step is a combination of whittling the list down even further by looking for names whose 2-period RSI (RSI(2)) is less than 2 (for additional information on this proven indicator click here) and the Short Term PowerRating is 8 or higher.
The stocks that fulfill each of the above steps have proven in extensive, statistically valid studies to possess solid odds of increasing in value over the 1 day, 2 day and 1 week time frame.
Here are 3 top ranked PowerRatings Stocks for your consideration:
^ENT^
^HUN^
^OEH^
Learn more strategies for trading stocks in the short term with a free trial to our PowerRatings! The highest rated stocks have outperformed the average stock by a margin of more than 14.7 to 1 after five days! Click here to launch your free PowerRatings trial today!
David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.