How to Trade High Short Term PowerRatings Stocks
The market is off to a positive start on Friday, following-through to the upside after Thursday’s strong finish. Poor numbers on the jobs front have encouraged traders to believe that the President’s stimulus package is more likely rather than less likely to be passed in the Senate.
Today, I want to cover one of the most basic aspects of Short Term PowerRatings and short term stock trading. Because we look to buy stocks and ETFs after they have pulled back rather than after they have broken out to new highs, our approach to entering trades is different from that of many short term trading strategies
When we are buying stocks or ETFs, we want to do so at the lowest levels possible. To help in doing this, we have tested a number of different strategies and concluded that the best way to trade high Short Term PowerRatings stocks in the short term is by using limit orders below the stock’s most recent close.
With this strategy, we are waiting for the stock or ETF to come to us. We want low prices on our purchases. And like a smart shopper heading out to the store, we have a price – or a price range – in mind. If the product or service we want falls into our price range, then we are more than happy to buy. If, however, the product or service does not move into our previously decided price range then, to quote the former Vice Presidential candidate from Wasilla, Alaska, “thanks but no thanks.”
This approach does more than just get us into trades at the lowest possible levels. It also serves to keep us disciplined rather than emotional when it comes to taking trades.
This is no small point – especially for mean reversion, buy-after-pullback traders. Most of the stocks and ETFs we are looking to buy do not look very good to the untrained eye. They are selling-off, often sharply, have been down for consecutive days, and are making lower highs and lower lows. Compared to a set of charts showing stocks breaking out to new highs like fireworks on the Fourth of July, the stocks we find attractive for short term trades sometimes look downright ugly.
This is why having a strict entry rule, such as using limit order 2% to 6% below the high Short Term PowerRating stock’s last close is so helpful. By the time an already oversold stock makes an additional 2-6% correction intraday, that stock is all more likely to have run out of willing sellers. And that is the moment we are waiting for. While there may be a few stragglers left behind, these are typically what trader Tom DeMark called in an interview “the last dumb sellers” who actions inevitably bring on short term lows.
So when looking to trade stocks with the highest possible Short Term PowerRatings and the lowest possible 2-period RSI values, be sure that you don’t chase those trades. Put in your limit order below the previous close and let those oversold opportunities come to you.
Next week, I’ll talk about how we enter short trades in high Short Term PowerRatings stocks and ETFs, as well as our preferred exit strategy for all trades.
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David Penn is Editor in Chief at TradingMarkets.com.