Matt Radtke is Senior Researcher for Connors Research. Mr. Radtke graduated magna cum laude from Michigan State University with a degree in computer science. He has 25 years of software development experience in companies large and small, including Hewlett-Packard and Bell Northern Research.
Mr. Radtke has been actively trading stocks, ETFs, and options since 2008. Over the past several years he has become increasingly involved with the Connors Group family of companies, first as a student, then as a member of Chairman’s Club, and finally as a consultant, researcher, and author.
Now that we’ve defined the entry and exit rules for the ConnorsRSI Pullback Strategy, we’ll walk through a trade from beginning to end.
On the chart above, the top pane shows the price bars in black, the vertical gray line marks the currently selected day which is also the setup day, the green up arrow indicates the entry day, and the red down arrow indicates the exit day. The middle pane displays the volume as vertical black histogram bars, and shows the 21-day moving average of volume as a green line. The bottom pane shows ConnorsRSI as a red line, and ADX as a blue line. Now we’ll confirm that each of our entry and exit conditions was correctly met.
Click here to learn how to trade Leveraged ETFs with ConnorsRSI in our new release – Trading Leveraged ETFs with ConnorsRSI.
Rule 1 requires the price of the stock to be above $5 per share. For the days shown on the chart, we can see that the price has ranged from over $16/share to around $8/share, thus meeting our condition.
Rule 2 requires that the 21-day moving average of the volume be greater than 250,000 shares/day. The average volume of 286,704 shown on the chart exceeds this requirement.
Rule 3 states that ADX(10) must be above 30. On the setup day the ADX(10) value is 51.60.
Rule 4 tells us to look for a low price that’s at least 2% below yesterday’s close. WHX closed at $15.20 on 7/17/2012 (the day prior to the setup day shown by the gray vertical line). 2% of $15.20 is $0.30, so we would require the low price on 7/18/2012 (the setup day) to be below $14.90 ($15.20 – $0.30). Since the actual low is below $10, we have clearly met this requirement.
Rule 5 requires that the closing price be in the bottom 25% of the day’s range. Our calculation of Closing Range goes as follows:
Closing Range = (Close – Low) / (High – Low)
Closing Range = ($9.97 – $9.77) / ($15.17 – $9.77)
Closing Range = $0.20 / $5.40
Closing Range = 0.037, which is less than 0.25 (25%)
In this case, we could have simply looked at the chart and easily seen that the closing price was extremely close to the day’s low, and therefore almost certainly in the bottom 25% of the day’s range. In other cases, the chart may not make this so obvious, and you’ll have to do the math.
Rule 6 requires the ConnorsRSI(3,2,100) value to be below 5, which it is; the value shown on the chart is 2.55.
Rule 7 tells us that now that our setup conditions have been met, we should set a 10% limit order to enter on the next trading day. That means that our limit price will be set at:
$9.97 x (100% – 10%) = $9.97 x 0.90 = $8.97
The actual price on 7/19/2012 falls all the way to $8.20, but we will enter the trade at the limit price which we determined in advance: $8.97.
Rule 8 specifies that we will exit the trade when ConnorsRSI(3,2,100) closes above 70. For this trade, that occurs two trading days later, on Monday, 7/23/2012. We exit at or near the closing price of $10.37, giving us a profit of over 15% (excluding commissions).
This is typical of the way Pullback trades work. A significant drop in price (pullback) is followed by at least a partial rebound. If we can correctly identify the pullback and enter the trade somewhere near the low price, we have a good chance of profiting when then the price reverts to the mean.
Remember that you can search for stocks with low ConnorsRSI values by going to the “Proprietary” tab on the Trading Markets Screener Page here. You can also set Price and Volume requirements on the “Profile/Price/Volume” tab before clicking the “Filter Results” button. Alternatively, you can set all the filters at once on the “All” tab. The result will be a short list of stocks that you can enter into your trading platform to see if they meet the remaining criteria for the ConnorsRSI Pullback Strategy.
We hope you’ve enjoyed this Pullback trading series, and invite you to visit our YouTube page to view some of our training videos on identifying high-probability setups using the TradingMarkets Screener. The TM Screener allows you to search for over 3000 companies by using key technical indicators. There’s an abundance of ways to use this information for your trading every single day.
Click here to read How to Trade Pullbacks – Part 1
Click here to read How to Trade Pullbacks – Part 2