Trading Software and Books Reviews

Mid-Level Pullbacks

Combine Price and Time

Ideally we want to combine price and time with our pullbacks. What does this mean? It means we want to see the pullback occur over a period of time (not one day), and we want to see the pullback be at least 3-5% from its highs.

The further the pullback, the greater the returns have been in testing going back to 1995.

Finding Mid-Level Pullbacks

1. Look for stocks which dropped at least 5% from their highs over the past 3-5 days. These stocks will potentially be setting themselves up for a rally. In fact, approximately 66% of these stocks have closed higher when you use a 10-day moving average exit, when they were above their 200-day MA.

2. Now, let’s look to increase the edges even further. How do we do this? By waiting for these stocks to pull back even further intra-day. For example last week we looked at stocks which were above their 200-day MA, when they had certain liquidity requirements and were at 10-days lows. As we saw the results were as follows:

Entry	Exit	Avg % Gain/Loss	% Correct	# of Trades
10-Day Low	Close > 10-Day MA	1.29%	69%	262,400

Limit Order Entries

Now let’s look what happens if we wait for these stocks to pull back even further intra-day and we buy them on a limit 5% below yesterdays close. As you can see, the results improve, and we’re now trading higher quality pullbacks.

Here are the results of a 10-day low, buying on a limit order 5% lower the next day. Exit on a close above the 10-day MA.

Entry	Exit	Avg % Gain/Loss	% Correct	# of Trades
5% Limit Order	Close > 10-Day MA	2.57%	69%	28,917

Higher Quality Trades

By waiting for the pullback to become deeper, you see that there are fewer trades. But the quality of these trades improves by a healthy amount. The % correct stays the same, but the average gain per trade nearly doubles.

Here is an example of a mid-level pullback which was able to capture a healthy gain over a few trading days:

Trading Markets

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