Wednesday, February 21, 2007

Strategy Session: Persistent Strong Closes

Let's leave it up to good karma that after reading today's post from Dr. Brett Steenbarger, "Persistent Strong Closes: The Personality of This Stock Market", I field an interesting support IM (Note: list of support IMs here) from "a Brooklyn Trader" that produces a good strategy based on Brett's observations - a Strategy Session we call, Trampoline Dip and Bounce.

First let's sum up the lesson from Brett's post today:
we've typically had some degree of weakness during the market day, but--as on Tuesday--buyers have tended to step in and use such weakness as an opportunity to accumulate stocks.
this is somewhat rare, as Brett points out, but signals a temporary behavioral strength in the market that one would be wise not to discount. For several weeks we've been describing this market as one whose patterns tend to revert to the mean more often than not. Results from The Odds Maker and observations from Dr. Steenbarger suggest that we may have entered a small momentum/buy on the dips behavior in the market:
One of the reasons for this is that the occasions of persistent strong closes have tended to cluster.
The subscriber from the support IM today wanted to do this:
A Brooklyn trader (03:50 pm): what i am trying to find are those situations in which a stock is up say 5% for the day and then it has a sudden sharp move down, (i.e., a shakeout). Is there a good config to signal the sharp move down in a situation like that?
We determined he was looking for a nice pullback and so I created this Strategy Session for him which I'm happy to share with you.

The Strategy: Trampoline Dip and Bounce

How It's Modeled:

Here are the filters for this strategy:

Max Spread=10 (Pennies) Max spread: 10 pennies
Min Daily Volume=500,000 (Shares / Day) Min Average Daily Volume: 300,000 shares/day
Min Current Volume=1 (Ratio) Min Current or Relative Volume: 0.5 (no less than half their average during the session)
Min Up Days=2 (Days) Min Up Days: 2 days previous to today
Min Up Candles=2 (30 minute candles) Min Up Candles - 30 minutes: 2 candles in a row
Min Up from the Close=5 (%) Min Up from Close: 5%

Here is the alert that triggers only after satisfying all of the above filters:

15 minute low 15 Minute Low

We are essentially buying after a definite uptrend on dips hitting a 15-minute low marked by potentially low current volume.

To see how good this strategy performed over the last 3 weeks, The Odds Maker was configured with the following trade management rules:
  • The alerts that initiate The Odds Maker to trade are entry signals to go Long
  • All trades are held until the market close
  • Trading ends (i.e., no new trades) 3 hours before the close
And produced these results:
39 / 79 = 49.37% up $0.01 at the close; Average winner = $0.611, Average loser = $-0.3305, Net winnings = $11.5474, Best = $3.30, Worst = $-1.81; Casino Factor = 93.91%
Learn what each of these items in the summary mean in The Odds Maker Manual - including the one trade/stock/day rule The Odds Maker uses.

Learn how to interpret win rates vs. Average Winner/Average Loser from a great 2 x 2 decision tool.

  • Link to other Strategy Sessions
  • 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. Know, however, that and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, alerts and all other features are for research purposes only and should not be construed as investment advice


tradespeed said...

Wow! This is the strategy I am looking for! Especially after experiencing a lot of false breakouts in the high momentum stock! Keep it up Dr. Brett!!

Noel Albano

Anonymous said...

Hmmmmm, there seems to be an error in the assumptions for this strategy. The statement "All alerts are entry signals to go Long" cannot be used in conjunction with the Odds Maker results. As I understand it, Odds Maker uses the only the FIRST alert for a stock as the entry.

If this is still correct, you have to just take the first alert...which seems to be difficult as this strategy produces hundreds of stocks.

D TradeIdeas said...

Dear Noel, Thank you for the wonderful feedback! Dr. Brett is the source of a good number of strategy sessions that appear on this site. His contributions to the practice of trading is prolific to say the least.

D TradeIdeas said...

Dear Anon,

You are correct. Only the first alert for a stock is entered (subject to when The Odds Maker is configured to trade). You could modify the strategy set-up to employ a MAX count filter set at 1 or 2 to see the same trades that The Odds Maker enters.

Thank you for the clarification. I'll modify the post to reflect this caveat.

juan said...
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