ETF Trading with Larry Connors Daily Battle Plan: Quantified Tools for Entries and Exits
Here’s the second in a four-part series on Larry Connors Daily Battle Plan – straight from Larry himself. If you missed Part 1 of our series, click here to read: “Larry Connors Daily Battle Plan 101: How to Find the Best ETFs to Trade Every Day.”
And if you’re interested in learning more about Larry Connors Daily Battle Plan, click here.
*
The 200-day moving average helps define whether or not a market is in a bear market or a bull market.. People often want to complicate the definition of what a 200-day moving average is. And even myself, I’ll take a step back and say, “Can it really be that simple? That a 200-day moving average defines a bull market and a bear market?”
We saw this in test results going back to 2002 and 2003. When we looked back, you could see that the 200-day moving average was a wonderful place to draw the line in the sand whether to be long or to be short. And it’s now multiple years later in 2011 and it still holds true: the 200-day moving average is the single best indicator to define whether or not a market is in a bull market or a bear market.
And this becomes important at certain times, especially early in the stock market cycle when there is no rational economic reason to say that the market’s price action is nothing but a bear market rally. The same thing is true when the market is declining and there’s a whole bunch of good news out there.
But if you take a look at the bottom in the spring of 2009, it really looked like it was the end of the world. And throughout 2009, there were a number of fund managers, traders, investment advisors that stayed short throughout 2009 and some of them remained short through 2010 and even into 2011. They missed the entire bull move.
The 200-day moving average acts as that line. Above the 200-day moving average, that’s when we want to buy. Below the 200-day moving average with ETFs, that’s when we would want to be short.
For Entries, For Exits: Rely on the 2-period RSI and the RSI Solver
I use a 2-period RSI (Relative Strength Index) above 70 as the exit point on the long positions. For the short positions, I use a 2-period RSI below 30. The reason we do that? The statistics guide us. You can use the 5-period moving average for exits. You can use other RSI periods. But the Daily Battle Plan uses a 2-period RSI reading above 70.
What we are able to do is perform those calculations. We have an RSI Solver on the TradingMarkets.com website. What you can do is go in and find out what the price needs to be to reach a certain RSI level. So if you are looking to scale into a position for example with an RSI below 30 or exit a position above 70, you’ll know you can simply get those readings by using the RSI Solver.
For those of you who have an Android you can download it directly from the website. If you do not know how to find it on the TradingMarkets.com website, just call our office and we will show you how to get it.
As far as using trailing stops and price stops, we’ve tested this over and over again and the only stop that we’ve seen that basically does not hurt the performance (most stops tend to hurt the performance of short term, mean reversion trading strategies), the one that tends to hold up the best is when something crosses 1.5% on the other side of the 200-day moving average.
So if you take a look at the backtesting and you take a look at using a stop of 1.5% on the other side of the 200-day moving average, it tends to perform almost as well as using no stop at all.
But when you take a look as a whole, and this is encompassing many strategies, the majority of the times you will see that not having a stop in place will tend to have the best backtest results.
We published this many years ago in my book, Short Term Trading Strategies That Work: A Quantified Guide to Trading Stocks and ETFs (now available for free at the TradingMarkets.com website) and, again, this is now 2011 and the test results continue to hold up.
We are now seeing more and more studies. People are publishing articles showing that stops are hurting performance of the strategies they’ve created. So it’s somewhat interesting to see others starting to catch up to the research we’ve published. And that’s good information people should know.
To start your free, 7-day trial to Larry Connors Daily Battle Plan, click here today. Part 3 of Larry’s series on ETF trading, is available here.
Larry Connors is Editor in Chief of TradingMarkets.com