Occasionally I like to peruse my old haunting grounds to see how I would be doing if I still traded using stock screening techniques. As many of you know, the Zweig stock screen was my "bread and butter" for several years and it performed marvelously for several years averaging a 50% return for me each year. I was using a "tweaked" version of the screen that simply ranked the Zweig screen candidates by their 26 week relative strength (as compared to the S&P 500) using AAII's Stock Investor Pro.
I then chose the top 5 stocks listed in the screen (the screen averaged about 10) and bought them Monday morning. I held through the week without using any stop losses. I would re-evaluate the screen on Sunday and if any stocks dropped off the list, I would sell them Monday morning and replace them with new stocks that qualified for the top 5.
I sometimes held stocks for just a week, but in most cases, the stocks stayed on the screen for weeks and months at a time. It was a very simple way to trade using mechanical methods which allowed me to work full time during the day and still enjoy returns that handily beat the indexes. But things fell apart for the screen in 2008, and AAII's version of the screen lost 34% over the year. Before 2008, the screen's worst performance since 1998 had been a 17% gain in the awful market of 2002.
By mid-2008, I knew that I would have to change my trading strategy if I was going to be able to eventually trade for a living. A losing year just wouldn't cut it for paying the bills since I didn't have an abnormally large chunk of equity. So I made the switch to day trading which I felt gave me much more control over my trading and my equity curve.
I'm still learning, and the transition hasn't been easy by any means. The fast pace and emotional stress of trading intra-day takes its toll. It is much more complicated and requires a huge amount of effort, learning and dedication. I sometimes question the switch I made (as many of my readers have done). So once in a while, I'll "take a peak" at some of my former methods just to see how they're holding up.
I'll have to admit that I was completely surprised to see that the Zweig method has performed poorly this year--down 17.4% YTD. This is the type of environment where the stock screen usually thrives--an unrelenting bullish bias after the market bottoms out. In 2003 the unmodified screen returned 89% with monthly re-balancing.
That fact gives me pause that the rally we are seeing today doesn't necessarily indicate that happy days are here again. Something is not quite right fundamentally if the Zweig screen is down for the year after a 40% rally has taken place.
Today's action provided several opportunities for profit, but more importantly a clean Elliot Wave pattern formed throughout the day. I like Elliot Wave patterns because they provide several important areas where traders can find an edge.
Understanding Elliot Wave patterns intra-day has helped me become a much more patient trader because they provide good entries, specific stop-loss areas, and logical targets. Take a look at the chart at the left (you can blow it up by clicking on it). The chart was captured about 30 minutes before the market closed.
You can see how the entire day unfolded into a "story" with predictive value--taking what most people see as random price movements and creating a sort of "crystal ball" that gives clues as to what will happen next.
I used to jump in on any pullback to a moving average. Now I try to wait for an ABC pullback to complete before I take a trade. Today, we got a pullback after a 3rd Elliot Wave (big number "3"). I wanted to take a trade as soon as price moved back to the 20 EMA. You'll notice that price bounced of the 20 and began heading upward. But I held off because I was expecting a larger wave 4 to form and I new that wave for usually created an ABC pattern.
The ABC corrective pattern did indeed form. If I had taken the trade too early, I probably would have stopped out--even with a stop comfortably below the 20EMA. Instead, the ABC pattern completed with a "hammer" candle forming off a bounce on the 50EMA. This provided a terrific trade with edge. A stop placed below the 50EMA with a target of the top of wave 3 is what Elliot Wave would suggest as a "wave 5" trade with a 2 to 1 risk/reward ratio.
You'll notice when that trade achieved its target that price continued to move up quickly as the sellers who were shorting ended up buying back their shares. I held my trade as their stops were triggered creating additional gains for the trade.
Posts
All Comments
