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Mikey's Short Term Trading Rules

1) Make up a list of stocks, commodities or ETF's to trade. This list should be names that have good earnings and high relative strength.
2) Monitor this list and throw out the weaker names
3) Buy only stocks or ETF's that are intermediate and daily up (green) and the market is Daily and intermediate term up (green)
4) Buy pullbacks on these stocks to the 20 and 50 day averages
Usually you get 4 to 6 20 day pullback buys and 2 or 3 50 day pullback buys in an intermediate term trend
5) More agressive traders can buy the 7 day average in the first 3 to 8 weeks of the uptrend.
6) Buy pullbacks not runups. A buy should not be easy or exciting but difficult and somewhat scary. DO NOT CHASE
7) Place stop at 5% below the buy price. Do not remove
8) Sell 3 to 5 days after the stock price takes out its most recent 2 week high with at least 15% gains
9) Uptrends that are 12 weeks or more may be ripe for a correction. The first 2 pullbacks to the 50 day are usually safe.
Intermediate term uptrends and downtrends generally last from 8 to 16 weeks with 12 weeks being the norm.
10) Shorting is a viable strategy in downtrends for experienced traders only. In general, reverse the above rules
11) Tweet Mikey @themarketshadow with questions or ideas

Wednesday, August 18, 2010

RSI ..Relative Strength Number

The RSI is a measurement of the strength of one stock or average vs the the overall market. A reading of less than 50 means that that stock is not performing as well as the market. A reading of greater than 50 means is is performing better than the overall market.

Generally, if the RSI is greater than 50 and rising the stock is in a uptrend. If the stock is less than 50 and falling it is in a downtrend. I will be reporting these numbers on my blog from time to time when I see shifts taking place.

An RSI number of 55R would mean that the RSI is 55 and it is rising. A reading of 40 F would mean that the RSI is 40 and falling. This way if you like to go by the numbers it will be an easy way to determine what the current trend. Of course, these trends can reverse at any time so you need to keep your eye on them.

The RSI on the DJIA is 35 F which means that the RSI is 35 and it is falling, That would indicate that some kind of a downtrend is going on now. I will post RSI numbers that I find interesting and I am working on a format to do this now.

The pros like to work with the extremes. A number of 90 or greater tells them they have a very strong stock. A RSI of 20 or lower tells them they have a very weak stock. They will usually buy an RSI of 90 and short an RSI of 20. The idea here is that a strong stock will stay strong and a weak one will stay weak. This will work most of the time particularly in the very short term.

Traders are not in the business of economics, they are pragmatic. It is just an odds play. They could care less about the earnings or the economy or the Fed. They could also care less about what is going to happen next month. The RSI does well in a trending market. In a trading range market it will whipsaw you. It is just another tool I use to help me trade.

The RSI number will tell you what the institutions and traders are thinking at that moment, it will not forecast a trend change. I look for trend changes that are brought on by economic changes. My outlook is based on mainly econmic fundamentals. That by itself can get me into trouble. I have to respect the technical aspects of the market because the market can go along way against the fundamentals before it breaks.


Mikey
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