|Did you realize that some successful trading methods cost nothing to construct and operate? No out-of-pocket cash to buy, lease, or rent the thing, and, best of all, it's simple enough for a preteen to comprehend. Let's look at one particular incarnation of a homemade trading system, along with some tips on how to filter the stocks you may want to trade with it. See Figure 1.|
|FIGURE 1: AZK. Simpler is better in trading. This basic entry/exit setup can be made to work much better by focusing on relative strength rankings, market trend, liquidity, and earnings growth potentials in the stocks you trade with it.|
|Graphic provided by: MetaStock.|
|This is it? This is a winning trading template? Why is it so simple -- no wave counts, no neural networks, no pretty green and red arrows, flashing lights or instant message trade alert from Emini Central Command? You don't need all of that stuff. Let's start with the basics:|
The red lines are known as Gann swing lines and are three-period simple moving averages of the daily highs and lows -- note how they form an undulating channel that traverses the cyclical lansdcape of Aurizon's (AZK) daily price action. The big idea here is this: when the price closes above the upper Gann swing line and the stock is also above its upsloping 50-period exponential moving average (EMA), place a buy-stop order two ticks ($0.02 for stocks or exchange traded funds [ETFs]) above the breakout bar. The initial stop will be two ticks below the lower of the previous bar's low or the lower Gann swing line, whichever offers less risk. If the stock moves higher, you simply use the lower red swing line as your trailing stop, using a daily close below it to close out the trade at a profit or loss. Short setups are the exact inverse.
Note the two blue ovals on the chart, denoting the last completed trade by this system; the price did drop briefly below the lower swing line but did not actually close below it, thus keeping the long trade going. Not every trade works out this well, but it does provide a convincing example of the potential power of this method.
Since this system appears to work pretty well on liquid stocks, here are some tips that may help you produce more profits over time:
1. Use only stocks with excellent (poor) earnings growth potential. I use Zacks Research to identify these stocks, only focusing on the higher-ranked stocks for buys and lower-ranked stocks for short sales.
2. Trade the stocks with the strongest (weakest) 13-week relative strength rankings versus their parent index and/or stock industry groups. If you ever get one piece of stock market advice that is worth its weight in gold, then this surely has to be the one.
3. Only buy stocks trading above $7.50 that have at least 500,000 average share volume over the previous 50 trading sessions. For the short side, try to stick with stocks trading over $20 per share whose volume averages closer to a million shares per day over the previous 50 sessions. You don't want to be short a $5 stock that is thinly traded, only to get creamed in a massive short squeeze as some big player decides to take a huge position in the stock one fine afternoon just before the close.
4. Make sure the broad indexes and/or parent industry groups of the stocks that pass muster are in confirmed up (down) trends before you pull the trigger. This is very important and will also help to provide you with an additional edge.
|If you put all of these components together, you should have a swing/breakout stock trading system that will produce above-average profits over the long haul. It can even be programmed into MetaStock or TradeStation if you like, adding stop-loss, profit target, and entry/exit refinements. Best of all, you can back- and forward-test it to see if maybe a two- or four-bar Gann swing line performs better than a three-bar version, the optimal place to set your initial stop.|
This is a very good system when used with discretion. Play around with it on your favorite stocks and see how you do by following all of the suggestions regarding relative strength, market trend, liquidity, and earnings growth potential. You may be amazed at how much your stock trading improves.
|Title:||Writer, market consultant|
|Company:||Linear Trading Systems LLC|
|Jacksonville, FL 32217|
|Phone # for sales:||904-239-9564|
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