PowerRatings and Short Term Exit Strategies for Traders
Stocks are off to a soft start on Tuesday, as the selling that dominated the pre-market futures spilled into the regular session with a vengeance.
Last week, I spent some time talking about a trading strategy for taking short term positions in high Short Term PowerRatings stocks. Our approach, as buyers of weakness and sellers of strength, is to use limit orders below the most recent close of the stock we are interested in – a stock that should have a Short Term PowerRating of 8 or, even better, 9 or 10.
We do this because our research shows us that there is an edge not just in buying stocks after they have pulled back, but also in waiting for those stocks to pull back a bit further on an intraday basis. By using limit orders below the last close, we stand a greater chance of getting what one famous trader in one of our Big Saturday Interviews called “the last dumb sellers” to sell their shares to us, often only a day or two before those shares rebound and move higher.
I also talked about where to place your limit order and how to decide how far from the previous close you should look to enter the market. If you want heavier trading volume, then use a limit order that is still relatively close to the previous close, such as 2-3% below. If you want only the deepest pullbacks with the greatest profit-potential – but don’t mind taking fewer trades – then using a limit order that is farther away from the close, such as 5-6% below, should be your strategy.
Now that we know how to get into high Short Term PowerRatings stocks that have pulled back and are poised to move higher, how do we get out?
There are three different exit strategies that we think Short Term PowerRatings traders can take advantage of profitably. The first, and most common exit for long trades, is a close above the 5-day moving average. Again, because we are buying weakness, we are looking for a sign of strength in order to exit and a cross above the 5-day moving average is one of those signs. The 5-day moving average exit also has the benefit of being very simple, straightforward and easy for most traders to track and use.
A second exit strategy is to use the 2-period RSI. The stocks we buy will always be oversold to some degree. One way to know when to exit these trades and take profits is to wait for the stock to move from oversold territory to overbought territory – using the 2-period RSI as a guide. We consider a 2-period RSI of 70 or more to represent an overbought market.
The last exit strategy I want to mention is another surprisingly simple one: Short Term PowerRatings. Traders whose strategy involves buying high Short Term PowerRatings stocks can use those same Short Term PowerRatings to guide their exits, as well. Here, traders should exit their high Short Term PowerRatings stocks when those stocks earn PowerRatings downgrades to 7 or lower. Our research indicates that it is stocks with Short Term PowerRatings of 8 or higher that have the true edges in the short term, so exiting stocks as their Short Term PowerRatings decline is one way to keep the short term edges on your side.
This week we will focus on specific trading strategies using Short Term PowerRatings: entry strategies, exit strategies, options, ETFs and more. If you’ve just started working with and trading Short Term PowerRatings stocks, then this is a week at TradingMarkets that you won’t want to miss! Tomorrow, we will take a closer look at these exit strategies and how they provided timely profit-taking opportunities for short term traders.
Does your stock trading need a tune-up? Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of nearly 17 to 1 after five days.
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Whether you have a trading strategy of your own that could use a boost or are looking for a way to tell the stocks that will move higher in the short term from the stocks that are more likely to disappoint, our Short Term PowerRatings are based on more than a decade of quantified, backtested simulated stock trades involving millions of stocks between 1995 and 2007. Click the link above or call us at 888-484-8220, extension 1, and start your free trial today.
David Penn is Editor in Chief at TradingMarkets.com.