Strategy Limit Pullback #1

Description

Buy pullbacks, with intra-day weakness, in uptrends, and sell rallies, with intra-day strength, in downtrends

This is our best mean-reversion system. It looks for situations where a stock has become very weak in an uptrend by checking a handful of price action metrics to confirm to confirm the weakness across multiple dimensions of metrics. If all of the criteria are met, it then looks to enter long the next day with a buy limit order below the market's closing price, trying to buy amid further intra-day weakness, confirming even further the weakness of the stock. On the short side, the situations are reversed, but the same principles apply: confirm strength with multiple metrics, and sell short with a limit order above the market, selling into intraday strength. The timing of when to exit winners and losers are well-defined as well and we use published risk/reward ratios to size our positions according to our money management rules.

Characteristics

This system provides higher-quality signals, but at much less frequency. We generate about 5-times more PB01 signals than LP01 signals. In addition, only about half of those signals will be filled trades due to the fact that we are trying to enter outside of the market with limit orders. So trading this system can be frustrating because you may have several days where you enter orders where few or none of them get filled. However, because of the higher quality of this system, we trade them more aggressively and are not as selective as we are with the PB01 trades.

It performs well on stocks and ETFs. Due to the market's overall long bias, this strategy works better on the long side, but short positions can help with hedging and diversification but we generally trade larger positions to the long side, depending on seasonality. Similar to the PB01 system, it also uses a time stop to exit languishing trades, but we use a longer 10-day period. This helps to reduce the chance of a large 25% or greater loss and flattens out the equity curve quite a bit.

How to Trade this Strategy

We look for high probability setups from the daily statistics published here. To learn more about how to use the data we publish see How to Use the "Entry Signals" Page to Plan Your Trades.

If our limit order entry trade is filled the next day, we then look to exit the trade in one of two situations:

  1. Exit the trade when the stock makes strong moves in the direction of the trend (target)
  2. Exit the trade when stock loses 25% or more of its value (stop)
  3. Exit the trade when 10 trading days have passed (time stop)

We don't place resting stop orders because our tests and experience show that placing resting stop orders at these levels hurt profitability. You must wait for us to publish a proprietary exit signal.

Statistics have shown that all LP01 trades have a general win percentage of 73+% for long stock trades and 61+% for short stock trades. For ETFs, we win 88+% of the time for long trades and 61+% for short trades. We have an average profit factor of 2.4+ for long stocks and 1.4+ for short stocks. For ETFs, we have a profit factor of 8.8+ for long trades and 1.69 for short trades. These numbers can vary depending on market condition, season, and the nature of the instrument.

Part of our education and mentoring is to teach you how to pick the very best signals to increase your likelihood of profit and control your risk and outperform the strategy's average returns through proper position sizing and risk management.