How To Find Higher Probability Trades
How To Find Higher Probability Stocks — Transcript
In the previous video, we looked at how the data on our website — stocktradingdataresearch.com — had shown us the strongest stocks, in the strongest sector, which had then gone on to show very significant gains
Starting with the relative strength trend lines chart on the website, we saw that the drug sector had made a significant move from the 22nd of February.
This is the sector that had unquestionably led the market up from the low, which was the 23rd of March, I believe. The low of the recent market drop
It’s the drug sector which led the market out of that. So the leading stocks as they’re termed were likely to be found in the drug sector.
Stock Sector and Industry Relative Strenght Ranking
On this page on the website, we have a database of some 4,000 stocks, with their relative strength ranking score, and the sector to which they belong. And also the relative strength ranking for that sector. And in fact we drill down further to provide the industry and the industry relative strength ranking too.
Stocks Highest Ranked
For the purposes of this, let’s look at the stock and the sector. We can sort the stocks by relative strength ranking by clicking here. By ranking descending, we bring to the top the strongest stocks currently. The higher the relative strength ranking score, the stronger the stock.
Sectors Highest Ranked
If we move across and do the same thing with the relative strength ranking of the sector, we sort descending, in fact we find that the drugs sector is still the highest ranked.
Highest Ranked Stocks March 2020
In the previous video we worked with this list on screen here, which is the same stocks that were on the website on the 20th of March. So just before the market low at the 23rd of March.
This shows us the strongest stocks, in the strongest sector, and we took a handful of these stocks. I grabbed 30-something, I think maybe 37 stocks, just a screen full of stocks from here, and I put them into a watchlist here in Amibroker. And in the previous video, we flipped through these stocks and looked at their charts.
Strongest Stocks Large Gains March 2020
And we also looked at a table showing the gains that the whole list of these stocks had made, and we saw some very significant gains indeed.
What I wanted to do in this video is get a step closer to how we might actually trade the information that we’re looking at here.
So if we’re going to trade any one of these stocks, the data that we get from the website is that this is one of the strongest performing stocks in the market currently. But obviously we need more than that in order to trade it. We need to look at a chart of the stock, we need to look at the chart pattern, we need to look at the trend and momentum of that stock. In fact, we know that the momentum is high (because) the website data has already told us that. But we want to get a good look at the chart.
So here is the chart, and we put a 50 period moving average of the high, and a 50 period moving average of the low, on the chart, to give us a channel. And the first thing that we would want to see, in order to trade a stock, is that it is actually trading above this channel.
If we look through a few of these, we’ll see that they’re not all in a pattern that is suitable for trading at all. And this becomes fairly obvious immediately.
Here, for example (BIIB), the chart is in chaos. So although the stock is strong in terms of its relative strength, it’s just not in a position where we would want to trade it. Whereas some of these stocks have not been so badly affected by the general market at all.
RGEN is one I looked at earlier illustrates this quite well. Here is the period of the market fall. RGEN has had much less of a fall, relative to the market, and it’s put in its low on the 27th of February. And here we see the fight that has gone on in RGEN, while the market was making its big down move.
RGEN has gone sideways with big volatile bars, with the buyers fighting the sellers. It gains some direction as the buyers start to overcome the sellers, as RGEN trades above the channel.
And we see that it makes a very nice move up once the direction becomes clear.
So, at this point, let’s think about other things that we might need in order to actually trade one of these stocks.
We have a good indication, to recap, that the stock itself is stronger than maybe 99% of other stocks in the market, in the case of this list we’re looking at. We can see on the daily chart here that the stock has achieved some direction by trading above the 50 period moving average channel that we put on the chart, and it has indeed established an uptrend which is perfectly tradable.
The Proper Way To Use Stock Chart Indicators
But there is something else that we need to consider.
And that is what might be happening on a longer term timeframe.
If we were to enter in this area here, where it shows on the daily chart to be a good position, what if, for example on a weekly chart, we’re still in a downtrend? It’s possible that we would enter a trade long on the daily chart, where the daily chart gives us all the signal that we need, only to find that we’re fighting the weekly chart. And shortly after we get into the trade, it ends up going against us, going in the wrong direction and stopping us out.
That is the purpose of these two ribbon indicators that we see at the bottom of the chart. The top one is an indication of trend and momentum in the intermediate term, and the bottom one is an indication of trend and momentum in the longer term.
We’re going to see light green when an uptrend is in place, turning to a dark green when the uptrend has become very strong. And we’ll see red when a downtrend is in place, turning to dark red when the downtrend has become very strong.
So what we’re looking for here is, when we receive a signal that we think we would like to enter on the daily chart, we want to confirm that both of these ribbons down here are confirming the direction of the trade we would like to take.
So, if we want to trade long on the daily chart, which all these examples are, we want to see a green or dark green ribbon on both of these here. This gives us the extra confidence that not only are we seeing a viable signal on the daily chart, but that the longer time frames are also backing up this trade.
We Now Have Four Elements In Our Favor
To recap, we have four elements in our favor here. We have the data from the website telling us that this particular stock based on its relative strength ranking is stronger than 99% of other stocks in the market. It’s in the strongest 1 percent of stocks.
We see on the daily chart itself that stock is trading above its 50 period channel here which tells us that it’s in an uptrend.
Once we see on a daily chart that the uptrend is in place, in a valid place for us to trade in the daily chart, we also now have confirmation that the intermediate term and the longer-term are backing this trade up.
So let’s look at a couple more examples and go back to REGN, which we looked at originally.
And we can see that, actually the uptrend in this started on the 5th of February. And when we get to the 27th of February, here, which is round about where the general market started its large fall, REGN has gone sideways, as we mentioned earlier.
In other words, it’s proved much stronger than the general market. And when it trades above its channel on the daily chart, indicating that it’s ready for a trade on the daily chart, we look down and we see that we have a very strong trend in both the intermediate and the longer-term timeframe.
So RGEN is a very, very strong signal at this point. And, sure enough, an entry here would have done very nicely for us.
SGEN gave us a similar signal here. 26 of February through to 23rd of March, this is the period where the general market experienced its sharp and big fall. SGEN has clearly been much stronger than the market through that period.
And, here, we’ve traded very conclusively above the channel, on the daily chart. The channel is starting to turn up and, by the time we reach the 30th of March here, we have a confirming trend and momentum in both the intermediate term and the longer term, to back the trade up.
And once again had we taken an entry in this area, we’ve got an extremely good result, from a trade taken there.
Great Data + Simple Confirmations = Great Trades
Okay, so that’s a few examples. I just wanted to show how, in addition to the data that is provided on the website for relative strength, some simple trading confirmations can narrow the field to put us into stocks that have a fantastic chance of giving us a really really very good trade indeed.
Okay, that’s it for today. Bye for now, see you another time
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