Feb 3, 2009

Try the Market’s Lunch Special: SHORT – Lunch Time Fade Strategy

Below is the original Trader’s Tips article submitted for the just released February issue of Technical Analysis of Stocks & Commodities 


February Issue

There is always plenty of capital for those who can create practical plans for using it.” Napoleon Hill (Author, Think and Grow Rich, 1883 – 1970)

For this month’s Traders’ Tips, we’ve provided a strategy whose benefit derives more from when it’s used versus what’s traded.  We discovered this strategy, like finding a hidden gem, in a place most people don’t consider.  Have you ever thought that some of the better odds in trading could be happening right over the market lunch hour (EST)?  Using Trade-Ideas OddsMaker we found some amazing results right at the time when most people are not paying attention.

The strategy is based of course on the Trade-Ideas inventory of alerts and filters and backtested with trading rules modeled in The OddsMaker.

Here is the strategy based on finding over-extended moves in price:

We look for stocks making new highs whose stock price ranges from 5 to 25 dollars.  We watch for a specific spread situation where the stocks have at least a 10 cent spread.  Additionally the stock’s new high must occur with at least a 65 cent rise over the last 5 minutes to create our interpretation of the over-extended move.  The new high trigger is our indication to throw out offers to get short.  The results speak for themselves for the 3 weeks ending 12/09/2008: a 76% success rate where average winners are almost 3X as large as average losers.

Provided by:

Trade Ideas (copyright © Trade Ideas LLC 2008). All rights reserved. For educational purposes only.  Remember these are sketches meant to give an idea how to model a trading plan. Trade-Ideas.com and all individuals affiliated with this site assume no responsibilities for trading and investment results.

Description:  SHORT – Lunch Time Fade

From the browser address bar copy this string directly into Trade-Ideas PRO using the “Collaborate” feature (right-click in any strategy window)

Figure 1.0 below shows the configuration of this strategy:

Where 1 alert and 8 filters are used with the following specific settings:

           New High Alert (of the day)

           Min Price Filter = 5 ($)

           Max Price Filter = 25 ($)

           Min Spread Filter = 10 (pennies)

           Max Spread Filter = 100 (pennies)

           Min Distance from Inside Market Filter = 0.01 (%)

           Min Daily Volume Filter = 50,000 (shares/day)

           Max Daily Volume Filter = 2,000,000 (shares/day)

           Min Up 5 Minute Candle Filter = 0.65 ($)

The definitions of these indicators appear here: https://trade-ideas.54solutions.com/Help.html.

That’s the strategy, but what about the trading rules?  How should the opportunities the strategy finds be traded?  Here is what The OddsMaker tested for the past 3 weeks ending 12/09/2008 given the following trade rules:

           On each alert, sell short (price moves down to be a successful trade)

           Buy back the stock if price moves up $1.50

           Otherwise hold the stocks for no more than 15 minutes after entry

           Start trading 1 hour and 30 minutes after the market open

           Stop new trades 3 hours before the end of the market close

As we mentioned earlier, The OddsMaker summary provides the evidence of how well this strategy and our trading rules did in Figure 2.0.





The results (last backtested for the 3-week period ending 12/09/2008) are as follows:





Understand these backtest results from The OddsMaker by reading the User’s Manual:  https://trade-ideas.54solutions.com/OddsMaker/Help.html

— by Dan Mirkin, Senior Managing Partner, Trade Ideas LLC

www.trade-ideas.com, dan@trade-ideas.com