Strategy Pullback #2

Description

Buy pullbacks in strong uptrends, sell rallies in strong downtrends

This is an enhanced version of the PB01 pullback system.This strategy is very similar to PB01 but it has some more filters that greatly enhance signal quality and helps us trade fewer, higher-quality signals.

Like PB01, 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.

Characteristics

This provides fewer tradable signals so the key is to be patient for them (some days generate no signals) but be ready to commit when the signals come. It performs best on stocks that are part of an index. Also, ETFs perform very 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.

How to Trade this Strategy

We trade this the same way we trade the PB01 strategy. The PB02 performs better though, with win rates of 70-72% and profit factors of 2.0 or better, depending on market condition, season, and the nature of the stock.