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THIS IS NOT TRADING ADVICE. USE AT YOUR OWN RISK. TRADING INVOLVES
SUBSTANTIAL RISK OF LOSS.
This is an idea I have been toying with but I doubt I will ever use. Stocks
are not my thing. It is part mechanical, part discretionary, so it makes
backtesting difficult. It is just an idea -- do with it what you want. I
make no warranties about the past or future profitability of this method.
It is only an idea that seems to have promise.
***I am not all that familiar with stocks so I ask the stock savvy amongst
us to comment on the feasibility or worthlessness of this strategy.
STRATEGY FOR DAYTRADING STOCKS
OBJECTIVE: to capture a "large trend" day (i.e. a day with an open and close
at either extreme of the bar.)
Here's how it works:
1. Use a trend filter to determine the overall direction of the market. You
can choose a moving average, oddball, whatever. I seem to remember an
article in TASC where a combination of a 21 period slow stochastic and a
"longer than default" MACD being on the same side of the signal line, which
seemes like a reasonable filter. If the trend is up, look to take long
trades only, vice versa for shorts.
2. Every day, check cnbc's website (
http://moneycentral.msn.com/investor/calendar/ratings/current.asp ) or yahoo
or whatever for analyst upgrades/downgrades (UGs/DNs). On uptrending days
(according to point 1) look at upgrades, VV for downtrending days.
I am not that familiar with stocks, so while I understand some of the
terminology related to UGs/DNs I do not understand all of it. For instance
an upgrade from "hold" to "buy" seems pretty straightforward, but I am
unfamiliar with the meaning of, say a downgrade from "equal weight" to
"underweight". Perhaps someone could point us to a website that discusses
such things? I am unaware if some UGs/DNs are more significant than others,
and this would be an important point.
3. Choose stocks with the most liquidity. Often volume will increase the day
of UGs/DNs, so that is something to consider as well. Look for stocks priced
high enough that they can make a significant move in 1 day (perhaps greater
than $25). Avoid stocks with large opening gaps due to the UGs/DNs
announcement. Often these issues will consolidate the whole day or go the
opposite way due to an overreaction.
4. You want to use 5 minute charts. Compare your "hit list" stocks with a 5
minute chart of the S&P 500. In the first hours of trading, you are looking
for the stock to display strength relative to the index. By relative
strength I do not mean that the stock is up 10% while the index is up 1%.
That often is the result of a large gap (which to would want to avoid); plus
it is easier for individual issues to move large %'s in one day than it is
for the index, so it is not a fair comparison. By relative strength I mean
you are looking for areas where the index makes several consecutive lows
while the issue in question makes corresponding higher lows (a divergence).
For a good example, look at SGP today compared to the S&P between the hours
of 9.30 and 12. You can also use a low point from yesterday as the point of
comparison looking for the divergence (check yesterday's price action for
ATU to see an example of this).
5. Buy or short the stock . Often this will mean that you are only getting
in on the afternoon trend, since it may take that long for evidence of
relative strength to develop.
6. Exit MOC or using a trailing stop.
Have fun.
David
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