A new day trading strategy idea
In previous articles I have blogged about the high risks involved with day trading. I have also spoken of my preference for trading strategies that combine both technical analysis AND fundamental analysis. Much like Bruce Kovner in the original Market Wizards, I find that fundamentals can add real strength to technical trading systems by first eliminating overpriced companies. In this article I will talk about a simple trading idea based on both value and trend.
Day trading obstacles
The biggest problem that day traders have to overcome is the cost of trading.
Commissions and wide spreads mean that day traders need to stick to shares with high volumes and tight spreads. This narrows the playing field and means traders should stick to the most well known companies such as Apple, Exxon or Google.
The second biggest problem day traders face is psychology. Day trading is inherently stressful and can chew up and spit out even the best traders if they don’t have a strong plan. It’s for this reason that most traders benefit from implementing some sort of system.
Most important components
There are many important components to a successful trading strategy but I suggest that none are as important as this:
The direction of the long term trend.
Fundamental and value traders can complain all they like but the fact is, markets move in irrational ways, particularly in the short term. Trading the trend is therefore the most reliable method for day traders. In fact, if you can correctly ascertain the long term trend you should be able to make money at least 70% of the time.
Take the S&P 500 for example. How much money would you have made by going long the index every day during the last bull market? A lot, I’m guessing.
Nevertheless, it is true that a buy and hold strategy can outperform strategies that move in and out of the market, especially when costs are taken into account.
I therefore suggest that fundamentals should be used in conjunction with looking at the long term trend.
Specifically, the idea of this strategy is to identify high volume stocks that are good value and moving in a clear direction, up or down.
New day trading strategy rules
The first step is to focus only on the stocks that trade the tightest spreads (0.1% or less). We can then do a stock screen on these companies to find those that are cheap on a valuation basis.
For this I will use the stock screener at finviz.com and I will only consider stocks with a PEG ratio of less than 1. This will bring up a list of stocks that we can at least say are not expensive.
Now, get rid of any stocks that have an RSI above 70. We don’t want to be buying anything that is overbought already.
Just these three steps are likely to reduce the list down to only a handful of companies. Look at each one and decide which one is showing the most consistent long term trend.
If all these steps are in place and the 20 day EMA is above the 50 day EMA, then you buy on the open and sell on the close. If the stock happens to go down two days in a row, you wait until it has at least two more up days.
And that’s it. A simple day trading strategy that relies on value and the long term trend (in my view the most important consideration for a trading strategy).
Now I don’t know if this strategy would work or not as I haven’t tried it. But the chart of Apple indicates that the idea might be worth exploring. Setting the strategy up in code and putting into a back tester to test on past data will be the next logical step.
Thank You For Reading
Joe Marwood is an independent trader and the founder of Decoding Markets. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies. If you are interested in more quantitative trading strategies, investing ideas and tutorials make sure to check out our program Marwood Research.
This post expresses the opinions of the writer and is for information or entertainment purposes only. It is not a recommendation or personalised investment advice. Joe Marwood is not a registered financial advisor or certified analyst. The reader agrees to assume all risk resulting from the application of any of the information provided. Past performance, historical or simulated results are not a reliable indicator of future returns and may not account for real world settings. Financial trading is full of risk and margin trading can lead to financial losses totalling more than what is in your investment account. We take care to present accurate analysis but mistakes in backtesting and presenting of analysis regularly occur. Please read the Full disclaimer.
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