A couple of months ago, I began to test some of the trading ideas presented in Dr. Samir Elias’s “Generate Thousands in Cash on Your Stocks before Buying or Selling Them”. The results (all paper traded, thank God) were abysmal. I planned on posting results on this blog just as soon as I mastered posting images, which keep disappearing of my previous post.
Anyways, I also planned on writing up a piece on momentum trading, and then testing trades in the same manner. While I was thinking about this, it occurred to me that my previous tests occurred during a very poor time to test just about ANY strategy against individual stocks.
See those tests I mentioned regarding Dr. Samir’s supposed tea leaf reading had, for the most part, predicted that chosen stocks would fall. I made paper option trades complying with these predictions (sold calls naked/built vertical spreads/ and sold puts). In the end, almost every stock rose instead, and the only trades Samir “predicted” accurately were those few that the method had just happened to predict would rise as well. Not surprisingly, as I started the trades when the market was falling, and I ended the trade in the middle of this recent run up.
As much as I like to hammer away at technical trading as “tea leaf reading”, I feel I have to be as fair as possible to Dr. Samir, and give his trades a fair shake; preferably at some time when individual stocks and the stock market aren’t so freakishly correlated (see last post).
Of course, no one is likely to write a follow up article stating “individual stock/ index correlation back to normal”, but I have noticed over the past week or two that the stocks in my portfolio have begun to swing a little more independently from the overall market. It’s not very scientific, but hey… if you have a better measurement, please send it my way. As such, this might be the ideal time to test a strategy sent to me by TD Ameritrade in their thinkMoney magazine.
I know what you are saying: “why trust a brokerage magazine… their goal is to get you to trade more, not to make more money”. That may be true, but they’ve included a trade that promises to look for the end of trends, and I’d like a shot at finding something to help me analyze trends, and evaluate another technical analysis “crystal ball” at the same time.
Trend analysis gets its start essentially from the practice of market timing. There are those of us who evaluate a stock and buy it when it seems undervalued, and those who try to buy a stock only when it is “about to go up”. Obviously, if you can time a stock with any reliability you would have a pretty big leg up in the game.
Efficient market proponents assure us that we can’t the market, but if you are still reading my posts, you know I don’t put a lot of stock in what they say. So let’s give the guys at TDAmeritrade a go:
Here’s the basic idea behind their technique. They use an 8 period and 21 period exponential moving average (EMA). This is basically the same as a moving average except that more weight is given to the more recent periods over older periods. In addition to the two EMA lines, this evaluation uses Heikin Ashi bars to display price action. Heikin Ashi bars were completely new to me, and I had to look them up at investopedia. These bars seem to be a form of averaging of very recent price movements incorporated into a candlestick chart.
Ameritrade depicts buying pressure candlestick bars as green and selling pressure candlestick bars as red. So, to find the end of a trend, Ameritrade tells us to look for two opposite colored bars against the current trend (if a trend is down, we are looking for two green… if a trend is up, we are looking for two red). Once we have found two of the opposing bars, we are to look at the 8 and 21 period EMA. If the 8 period EMA is changing directions, than we are to move our stops within 4% of the current price. When 8 period EMA crosses the 21 period EMA, we are to consider the trend over and pull our position, if it hasn’t been stopped out already.
Basically, it looks like this method is saying “If Stock was going up, but now it’s going down… and it’s going down more now than it was going down yesterday, you might want to sell it.” Got it. We’ll give it a shot.
T.R.
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