PowerRatings Trading Strategy 101: Better Entries, Better Trades
Stocks are trading around breakeven levels in the first few hours of trading, following Thursday’s surprising, late-session, short-covering rally.
Last week I talked about trading strategies using Short Term PowerRatings. This week I want to continue that discussion by talking more specifically about entering positions.
We are proponents of using limit orders when making high probability, short term trades in stocks and ETFs. We also like to have opportunities come to us, rather than chase them. So when we are looking to buy a stock that has pulled back, our trading strategy is to use a limit order below the stock’s last close. This gives the stock opportunity to pull back even further on an intraday basis, giving us an even lower priced entry into the position.
The effectiveness of this short term trading strategy was revealed to us through more than a decade of quantified backtesting involving millions of simulated short term trades. We call the strategy one of relying on “intraday weakness” or what I’ve called in articles “the pullback after the pullback”. It has been a valuable part of our overall approach to buying weakness and selling strength.
Here’s a common question: if I want to use this trading strategy with Short Term PowerRatings, how do I know how far below the previous close to put my limit order?
There are a couple of different options for short term traders following this trading strategy. If you place your limit order very close to the previous close, for example at 1-3% below that level, then you are likely to get more fills than if you placed your limit order farther away. This will mean more trades and, relatively speaking a larger number of losing trades, as well.
If you place your limit order at a greater distance from the previous close, such as 4-6%, then you will get significantly fewer trades than if your limit order were closer. But those trades will likely be more profitable insofar as you will only be trading the deepest pullbacks and the most oversold stocks and ETFs.
Whichever approach you take should be based on your personality and trading preferences. If you want to be more active as a trader, use a tighter limit order. If you only want the biggest pullbacks and don’t mind missing a few of the more modest gaining trades, then go ahead and use a limit order that is 4% or more below the stock or ETFs last closing price.
One observation. With the sort of high probability, high win-rate trading opportunities that our Short Term PowerRatings provide, the downside of using a tighter limit order that ostensibly increases trade frequency and potential losses is much less pronounced than it might be with other strategies with win rates closer to 50%.
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.