Take It to the Limit: How to Buy High PowerRatings Stocks
Our stock rating service, PowerRatings, helps traders find the best stocks to trade every day.
Unlike many stock trading strategies, our PowerRatings approach to trading is based on mean reversion. This style of trading has been practiced for decades by professional stock traders who have long recognized that there is a powerful edge for traders in buying stocks on weakness and selling them as they recover and resume their advances.
Not only is mean reversion a time-tested way for traders to make money in stocks in the short term, but also our specific approach to mean reversion is supported by thousands and thousands of simulated short term trade going back to 1995. This rigorous testing has revealed impressive performance statistics for the highest rated stocks in our rating system and is what helps give short term traders the confidence to buy stocks when they often look at their worst.
One key tool for PowerRatings traders is the limit order. When we are entering PowerRatings trades, we are looking for a stock that has a high PowerRating of at least 8 – though preferably 9 or 10. These will be stocks that sellers have already begun to take profits from. But what we have found provides traders with the greatest short term edges is for traders to look to buy the market after it moves even lower on an intraday basis.
I’ve referred to this as the pullback after the pullback. And it is a fundamental strategy for mean reversion traders looking to take long positions at the lowest levels possible.
For more tips on trading with high PowerRatings stocks, read Larry Connors excellent PowerRatings trading primer, How to Find the Best Stocks to Trade Every Day.
So how do limit orders work for PowerRatings traders? When a PowerRatings trader sees an attractive stock, the limit order entry strategy is to place a limit order anywhere from 2% to 7% below the stock’s last close. If selling continues, then the trader will get filled as the stock “comes to them”. And our research has indicated that this approach to short term mean reversion can make a significant difference in performance results.
Sure, sometimes there will be no follow-through weakness and a stock that is rated 9 one day (meaning that it is likely to outperform the average stock by a margin of more than 9 to 1 after five days) will soar higher the next day without ever pulling back enough to trigger the limit order. But over the long term, trade after trade, the approach using limit orders is a proven one to ensure that traders are trading with the best and biggest edges behind them.
Our highest Short Term PowerRatings stocks have outperformed the average stock by a margin of more than 14 to 1 after five days. Click here to start your free, 7-day trial to our Short Term PowerRatings!
David Penn is Editor in Chief at TradingMarkets.com.