How To Trade PowerRatings In 7 Steps
How To Trade PowerRatings In 7 Steps (or less!)
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PowerRatings is a proprietary trading tool created by Cesar
Alvarez under the Connors Group LLC. Cesar examined 5.5 million trades during
the period 1995 through 2005 using momentum, volatility, trend and volume
to create a ranking system for stocks. PowerRatings rates stocks from 10 to 1,
with 10 being the highest, or best, rating and 1 being the worst. PowerRatings
is a swing-trading tool, meaning that the ratings are based on medium-term
trades that last between 3 and 5 days. The results discussed reflect a 5-day
time period after the initial rating.
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1. Use PowerRatings as a confirmation tool, not as a
stand-alone indicator. Â A trading system should be developed using strategies
and indicators you feel comfortable with. Then PowerRatings are most effective
when used to confirm the ideas that your trading system generates. For example,
your trading system and scans generated XYZ as a buy candidate. When that
happens, you should check the XYZ PowerRating for confirmation of the signal.Â
In most cases this second opinion can extremely valuable in helping you decide
to take or pass on the trade.
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2. Focus on buying stocks rated 7-10. If you trade the long
side of the market, stocks rated 7-10 give the best opportunities for making
money in your long positions. Stocks rated 10 have outperformed the S&P by 16.9
to 1 five days after the signal is given. Stocks rated 9 have outperformed the
S&P by 13.5 to 1 over the next five days. Stocks rated 8 have outperformed the
S&P by 8.3 to 1 five days after the signal. Stocks rated 7 have outperformed the
S&P by 4 to 1. After running through your own strategies, get the PowerRatings
for your focus stocks. If one of your buys is only rated a 4, you may want to
put that stock on the backburner, whereas a buy rated 10 is a green light
signal.
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3. Avoid stocks rated 1 and 2. Stocks rated 1 have
underperformed the S&P by 4 to 1. Clearly, stocks rated 1 have an negative edge,
so traders focused on buying stocks should avoid these ratings. On the other
hand, aggressive traders who like to short sell stocks should focus on these
stocks. Just like on the long side, PowerRatings should be used as a
confirmation tool of a pre-existing strategy. Do not just go to the Stocks To
Avoid list and short sell all the stocks rated 1. Have a strategy in place and
use PowerRatings to confirm your signal.
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4. Buy on pullbacks. PowerRatings is a swing trading tool.Â
One of the most widely-used swing trading strategies is buying on the pullback.
A pullback occurs when a strongly trending stocks reverses for a few days. This
provides traders with an opportunity to buy before the uptrend resumes.Â
For example, stock ABC has been on a strong uptrend for the past few weeks, and
then begins a pullback. The best price to buy occurs at the very bottom of the
pullback. Unfortunately it is difficult to pinpoint the exact price of the
bottom of the pullback. Watch for ABC’s PowerRating to confirm your pullback
signal, and this will give you an edge in determining the true bottom of the
pullback. Instead of missing the reversal, or getting in before the pullback is
over, PowerRatings will help you in gauging when to enter the pullback.
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5. Focus on stocks with extreme PowerRatings that gap at
the open. A PowerRating of 10 indicates that this stock has a higher probability
of rising over the next five days. So if you see a stock PowerRated 10 gap down,
watch for that stock to fill its gap because that stock has a historical edge
that it will make some gains. On the other side, watch for stocks that are
PowerRated 1 to gap up, because the odds are in your favor that the stock will
move back down and lose points over the next few days. To simplify,
PowerRatings provide an excellent tool for the trader to gauge the short-term
strength of a stock, indicating a greater probability that the stock will move
in that direction. High ratings indicate the probability that the stock will
move up, and low ratings indicate the probability that it will move down. A gap
against the historical edge will have a hard time holding, so hedge your bets
that the stock will fill the gap and move in the direction of the PowerRating.
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6. Play with PowerRatings and follow through on your
ideas. What good is it if you try PowerRatings for 3 days and then move on to
something else? It would be very hard to create a valid track record. Invent
your own ideas and strategies to use with PowerRatings; the quantified
simplicity of PowerRatings gives every trader in the world an edge that can be
tooled to fit every trading strategy.
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