Strategy Pullback #1
Buy pullbacks in uptrends, sell rallies in downtrends
This is our core pullback system. It looks for situations where a stock has become very weak in an uptrend, then looks to go long at the next day's opening price. Or, in a downtrend, it will look to sell rallies during short-term strength. The entry price is the next day's opening price. 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.
This system provides many tradable signals so the key to success is to take the best ones. We look to enhance our success with fundamental analysis, examination of seasonal patterns and current market conditions. If you take too many of these signals you may not have enough capital to trade each and every signal.
It performs best on stocks that are part of an index. Also, ETFs perform well due to their mean-reverting tendencies. 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.
We also have a more strict version of PB01 called PB02
which trades less frequently but gives higher quality signals.
How to Trade this Strategy
We look for high probability setups from the daily or weekly 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 trade is filled the next day, we then look to exit the trade in one of two situations:
- Exit the trade when the bar closes beyond the 9-day moving average.
- Exit the trade when the bar closes beyond the 200-day moving average.
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 the bar to close beyond the moving averages.
In general, the 9-day moving average is our profit target. However, if a stock lingers or goes against us first, and then later crosses the 9-day moving average, it could end up as a losing trade.
The 200-day moving average is generally considered our stop loss level. It also helps determine whether to take long or short trades only. It helps determine the direction of the trend that we should be trading in.
Statistics have shown that all PB01 trades have a general win percentage of 62-68% and have an average profit factor of 1.6 on the long side and 1.2 on the short side. These numbers can vary depending on market condition, season, and the nature of the stock.
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.