Sunday, November 21, 2010

Using Market Studies to Make Trades

I conduct historical studies when the market presents something interesting and worth looking into further. The last week has produced a few compelling studies that have already played themselves out. The main idea behind all of them is to buy short term weakness and sell strength.  Using market history, various indicators and an engine to backtest our ideas, we can build a road map that will lead us into high probability trades.  

Had we acted upon the signals to a tee, here would be our trading results:


REAL TIME







Market Study
Date
Price
Ex. date
Ex. Price
 % P/L
Profit 
Trade % DD
11/12/2010
120.20
11/18/2010
119.96
-0.20%
          (200)
-1.70%
11/16/2010
118.16
11/18/2010
119.96
1.52%
         1,523
0.00%
11/16/2010
118.16
11/18/2010
119.96
1.52%
         1,523
0.00%
11/16/2010
51.45
11/18/2010
52.43
1.90%
         1,905
0.00%


Compared to what we expected based on history:


EXPECTED RESULTS





Market Study
Date
% of Winners
Avg % P/L
Avg Profit 
Max. Trade % DD
11/12/2010
87.34
1.27%
        1,270
-5.48%
11/16/2010
100.00
2.39%
        2,390
-2.54%
11/16/2010
76.09
1.37%
        1,370
-15.49%
11/16/2010
80.95
1.50%
        1,500
-19.51%


Things are pretty much in-line with history, with some minor deviations in a few metrics.  On 11/16/10, there were studies that were basically screaming 'buy', even while fear was rising and the empty suits on CNBC were getting the bears fired up. Heck, one study was 100% correct, and it still is (12 for 12). These studies give me the confidence to make short term trades on many different stocks/ETF's, not just the SPY or QQQQ. You could trade options, futures, leveraged ETF's,  individual stocks, whatever. Combine a study with your style own of trading to help you make decisions.  That's what I do and it has been effective for me.

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