For new traders finding a strategy with a proven edge is not easy. Even experienced traders find themselves in situations where they need to tweak and adjust old strategies. In fact, some strategies become obsolete all together.
Remember rule number one – if a strategy is not working – dump it. The rule number two – keep testing until you find something that does work.
Here are three strategies that have still proven to be effective.
Volume Weighted Moving Average (VWMA) vs Simple Moving Average (SMA)
Using technical analysis can provide a trader with information on how a stock is trending, and potentially where it might be headed next. Best of all, many brokerages include charting software in its trading platforms.
You can use technical analysis to trade both short and long term. The following strategy involves two indicators, the volume weighted moving average (VWMA) and the simple moving average (SMA)
Now, the simple moving average is a plotted rolling average, using a stock’s closing prices over a certain period of time. The SMA gives equal weight to all the prices in the data set, which naturally imply it’s a lagging indicator.
On the other hand, the volume weighted moving average (VWMA) adds weight to a standard moving average based on the amount of volume in a given period of time. The notion, price should be given more weight when trading activity is high.
Now, when the two lines overlap and the volume weighted moving average starts to distance itself up. That is a is a sign of an uptrend supported by increasing bullish volume.
Check out the image below, the purple line (VWMA) crosses the blue line (SMA) and distances itself at around 12:45 pm. A buy at that level could have captured about a ten cent scalp, in a highly liquid stock that isn’t overly volatile.
Now, here is another example, using Apple stock. You can see some consolidation from 10.30 to 11.30 am, then the trend to starts picking up, providing a decent entry point. This would have been a solid trade, and could have exited once the lines touched or reversed.
This strategy fights the trend. For example, if a stock is severely depressed the contrarian trader will take the other side, and vice versa if the stock raging higher.
The idea behind this strategy is that volatility mean reverts. That said, this can be a very painful trade to put on for some. It might involve being wrong for an extended period of time and looking at some huge unrealized losses, before things turnaround. For some traders, they compare the strategy to trying to catch a falling knife.
However, if you’re able to find a move that appears to be overdone, this strategy can payout big– and fast.
Here is an example:
United States Steel Corporation (X) reported earnings after market on April 26th. The following day, the stock was trading 20% lower, after the market assessed its earnings report.
Now, the trend trader might see that as bearish and take a short position. However, the contrarian trader is going to look for a point to enter a long position.
Now, they may look for an entry that day, however, after giving it one or two tries, it’s clear that the stock might not bounce much.
However, it’s important to remember a couple of things in this market: United States Steel Corporation is a stock, and in this market, stocks go up.
The next day, the stock becomes short sale restricted. Add to the fact that the symbol X is a stock, this looks like a better day for the contrarian to take its long position.
April 27, 2017
Notice that X opens up weaker on the 27th. However, you can finally see the VWMA cross the SMA, at around 10:30 and then 11 AM.
Now, after 12 pm, the stock starts to really get on a run. So what would have been the entry? Well that really varies, some traders will use levels like support or resistance. Others might look at volume and the size the candle sticks for an indication.
The bottom line, you’re saying that this move doesn’t make sense, the stock is either up too much or down too much over a short period of time, and it should mean revert. That is, taking the other side offers the greatest reward.
Now, make no mistake about it, these strategies work. However, only if you believe in them. You see, you can only trade based on whatever your beliefs are. For example, some traders prefer going with the trend and “riding the wave,” they would never feel comfortable taking the contrarian side. The best strategy not only has edge, but it’s something that makes you comfortable. And that is something that you’ll need address. Select a strategy that fits your personality and risk profile, there are many out there to test and try out. Don’t get discouraged if you haven’t found any you like yet.
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