The beginning of a new year is always a great time for making resolutions. But when it comes to making high probability trades, look to the end of the month as your opportunity to take advantage of a real, quantified, short term edge.
As noted in Short Term Trading Strategies That Work, the best-selling trading book now available in paperback, seven of the final eight days of the month saw five-day gains for the average stock of more than 0.50%. This was based on simulated testing on trades from January 1995 through December 2007.
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Many traders have talked about the idea of stocks moving higher toward the end of the month. But very few if any have ever actually quantified this behavior, revealing what the edges how, specifically when they occur (and disappear) and how large they are
Larry Connors has taken this basic research several steps further, to the point of developing a number of short term trading strategies that traders of both stocks and exchange-traded funds (ETFs) can use. These strategies, called the End of the Month Strategy, can also be used with leveraged ETFs
On December 29th, 30th and 31st, our End of Month Strategy gave three consecutive buy signals. Traders watching for these signals could have used a variety of vehicles to take advantage of these signals – from e-mini index futures to equity index ETFs – including leveraged ETFs – to options.
On Monday, the first trading day of the new year, markets soared higher, providing traders who had taken advantage of the End of Month Strategy trading signals with the necessary strength to sell into.
As you might imagine, not every End of Month is created equal. To arrive at the high probability strategies that make up the End of Month Strategy, Larry applied the same sort of high-win rate, mean reversion trading rules that the market data continues to indicate represent a winning method for trading stocks and exchange-traded funds in the short term. Those rules? Buy the selling. Exit into Strength. And quantify, quantify, quantify.
David Penn is Editor in Chief at TradingMarkets.com.