Friday, November 25, 2005

Strategy Session: Dummies

Background:
A few weeks ago a subscriber introduced me to "the Dummy" strategy and asked how it might be modeled in Trade-Ideas. The strategy is credited to a well known and respected trader and teacher called, Chairman MaoXian, who provides over a 100 examples of how the strategy was used to pull opportunity out of the market. We found that some of the best results from modeling the strategy were generated using the maxim, "less is more" when choosing from the many possible alert and filter combinations. One version appeared on EliteTrader for others to see and report their experiences. A slight variation is below.

One of the practionners of this strategy says it best, "Remember, 'dummies' is not the golden key to unclasp the treasures of the market. Its just one simple strategy. That's all."

The Strategy:
Characteristics of Dummies:
  • Often appear in the morning session
  • Mostly an intraday strategy
  • Contain unusual movement in price
  • Occur on higher than normal volume
  • Trade with the trend, not against it
  • Look for an inside bar or countertrend to form as the entry
  • Best traded on 30 minute charts or 15 minute charts for those more 'frisky'

Those seeking more certainty with the trend add another characteristic that says the stock should close up the previous day (1 day at least).

In this post we share the uptrending or long version: Dummies - Up Trend

How It's Modeled:
The basic filters were:
1. Min share price = $9, Avg daily volume = 700k
2. Min current volume = 1.85 or stocks must be trading 85% higher than normal
3. Previous days up = 1

Some additional filters to increase probabilities of a trend were:
4. Min up from previous close = $0.05
5. Min position in today's range = 65%

The alerts chosen all attempt to spot small pullbacks or countertrends in the overall movement upwards as ideal entry points before the stock resumes its course.

Who Could Benefit:
It is a simple strategy so it can apply to many types of traders. Those trading intraday will find this strategy appealing as well as those who swing trade and are looking for good places to enter positions.

Remember that these set-ups are sketches meant to give you an idea how to model your own trading plan. Use this 'as is' or modify it to your own liking as many others do.

Footnotes:

Chairman Maoxian archive of Dummy set-up examples: http://www.maoxian.com/archivecat.html

The Dummy Journal started by 'Babak' on EliteTrader: http://www.elitetrader.com/vb/showthread.php?s=&threadid=54717&perpage=6&pagenumber=1

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