Trade Ideas Blog

Steenbarger Inspired Strategy: Trade the Transitions

Sep 9, 2009

Great strategies align themselves with vetted and observable themes in the market.

Strategy comes from taking a stand based on what you perceive are demonstrative behaviors in the recent market and then submitting that position to the market’s cross examination – you’ll come out smelling like a rose or its fertilizer. The nice thing with The OddsMaker backtesting tool, is that you’ll know this without risking a penny of capital.

Don’t know which behaviors to identify? What cause to fight for? Adopt someone else’s opinion – preferably someone you may regard as a mentor or at least a trusted interpreter of the market’s various and many signals.
I haven’t had an original thought since I named our second daughter 2 years ago. So when I want some heavy theme action, I look to another doctor who’s good at midwife-ing ideas through delivery and into the world: Brett Steenbarger.
Yesterday the good doctor produced a beauty.
Theme: “buying strength and selling weakness has led to consistent, short-term underperformance.”
  1. Trigger 1 occurs when stocks close above or below a defined distance from their moving averages. This captures relative strength or weakness.
  2. Trigger 2 occurs when stocks lose upside or downside momentum after the first signal has occurred and after stocks have continued their move to new price highs or lows. This captures a loss of momentum to the upside or downside.
  3. Trigger 3 is an execution signal [sic] that looks for buying that makes a lower high (if one is going short) or selling that makes a higher low (if one is going long).
Trading Plan:
  1. The stop loss occurs when Trigger 3 is violated; i.e., stocks make a higher high after having seemed to have topped out.
  2. The average holding period for the trades is 2-3 days.
Ok. So here is the strategy I developed from the description above. Subscribers will see this in real time, everyone will see the delayed 20 minute data.
Type or copy/paste this shortened string directly into a browser then copy/paste the full length link into Trade-Ideas PRO using the “Collaborate” feature (right-click in any strategy window): (case sensitive)
The strategy uses 3 alert triggers subject to 7 filters:
25% pullback from lows 25% Pullbacks from Lows
Positive VWAP Divergence Positive VWAP Divergence
10 minute bullish engulfing 10 minute Bullish Engulfing

Min Price=5 (Dollars) Min Price = 5 (Dollars)
Min Daily Volume=500,000 (Shares / Day) Min Daily Volume = 500,000 (shares/day)
Min Above Low=0.1 ($) Min Above Low = $0.10
Min Position in Previous Day's Range=50 (%) Min Position in Previous Day’s Range = 50% (Percentile)
Min Position in 5 Day Range=40 (%) Min Position in 5 Day Range = 40% (Percentile)
Max Position in 10 Day Range=25 (%) Max Position in 10 Day Range = 25% (Percentile)
Max Up from 20 Day SMA=-5 (Bars) Max Up from 20 Day SMA = -5 (Volatility Bars)
Click on the icons to see a definition of each of these indicators.
Tomorrow I will post the trading instructions I used to produce these results:
86 / 198 = 43.43% up $0.01 at close after 2 days; Average winner = $0.777, Average loser = $-0.3204, Net winnings = $31.90, Best = $3.17, Worst = $-2.89; Casino Factor = 99.86%
Daily summary:
8/14 : 0.7400/14
8/17 : 1.3300/3
8/18 : 3.6500/33
8/19 : 13.6800/33
8/20 : 7.5700/25
8/21 : 4.3200/13
8/24 : 0.7200/9
8/25 : 0.3100/7
8/26 : 2.7500/14
8/27 : 0.6800/7
8/28 : 2.0300/11
8/31 : 1.1100/7
9/01 : 2.6400/7
9/02 : 0.6900/5
9/03 : 5.0000/10
Understand these backtest results from The OddsMaker in more detail by reading the User’s Manual: