Laurence Connors - Trading Stocks and Options With MA

ConnorsResearchTradingStrategySeries
TradingStocksand
Optionswith
MovingAverages
AQuantified
Approach
By
ConnorsResearch,LLC
LaurenceConnors
MattRadtke
www.forex-warez.com | skype: andreybbrv | andreybbrv@gmail.com
P a g e |2
Copyright 2013, Connors Research, LLC.

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Copyright 2013, Connors Research, LLC. All Rights Reserved.
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Disclaimer
By distributing this publication, Connors Research, LLC, Laurence A. Connors and Matt Radtke
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Table of Contents
Section1Introduction.............................................................................5
Section2StrategyRules...........................................................................8
Section3TestResults............................................................................15
Section4SelectingStrategyParameters...............................................21
Section5UsingOptions.........................................................................25
Section6AdditionalThoughts...............................................................29
Appendix:TheConnorsRSIIndicatorandHistoricalVolatility..............31
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Section1
Introduction
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Indicatorsarenotalwayswhattheyappeartobe.Movingaveragesarewidelyusedasatrendfollowing
tool.Inmanyofthetradingstrategiesthatwehavedevelopedovertheyears,the200daymoving
average(MA)isusedtoidentifythedirectionofthetrend.Wehavefoundthattakingbuysignalsonly
whenthepriceisabovethe200dayMAcanimproveprofitabilityinmanysystems.
Recently,wecompletedresearchthatshowsmovingaveragescanalsobeusedaspartofastrategyto
findshortterm,meanreversiontradingopportunities.Thismaybesurprisingtosometradersbecauseit
mightseemoddtouseatrendfollowingindicatorlikeMAsinashortterm,meanreversionstrategy.
WhileMAsareusedinthisstrategy,theMAisnotbeingappliedinitstraditionalway.Aswehighlighted
inthe2004bookHowMarketsReallyWork,itisimportanttodevelopuniqueinsightsintothebehavior
ofprices.
InHowMarketsReallyWork,wetestedcommonknowledgeanddiscovereditwasnotalwaysbestto
followwidelyacceptedmarkettruths.Wefoundthatitwasbesttobuyshorttermweakness,for
example,andresearchshowedthatselectivebuyingwhenmarketbreadthwaspoorwasmore
profitablethanbuyingwhenmarketbreadthindicatorswereuniformlypositive.Wealsodiscoveredthat
changesinvolumewereirrelevanttomakingbuyandselldecisionsdespitethewidespreadbelief
amongtradersthatvolumeisneededtoconfirmanuptrend.
Wehavecontinuedthattypeofresearchandwealwayslookatdataratherthanwidelyacceptedtruths.
Indoingso,wefoundthatmovingaverages(MAs)canbeusedasshorttermtimingtools.
Traditionally,MAsareusuallyusedastrendfollowingtools.Buysignalsaregivenwhenpricesclose
abovetheMAandsellsignalsresultfromclosesbelowtheMA.Whiletheycanbeusedprofitablyinthis
way,therearealsoanumberofproblemsassociatedwithMAs.
Whenamarketisrangebound,whichismostofthetime,tradersexperienceanumberofwhipsaw
tradeswhilewaitingforthenexttrendtoemerge.Whipsawtradesareentriesthatarequicklyreversed.
Commissionsandothertradingcostscanbesubstantialwhenpriceswhipbackandfortharoundthe
movingaverageandthosecostsdecreaseprofits.
SignalsbasedonMAswillalsoalwaysbelate.ThisisbydesignsinceMAstrailthemarket.However,
thesedelayscanleadtomissinglargepricemoves.ThepriceofSPDRS&P500ETF(NYSE:SPY)increased
morethan30%afterbottominginMarch2009,forexample,beforelongtermMAsgavebuysignals.
SystemsbasedonMAsgenerallyhavelowwinratesandamajorityofthesystemprofitscomefromonly
afewofthetrades.Mosttradesendinonlysmallgainsorlossesthatresultfromwhipsaws.
TheseproblemsmakeMAsdifficulttotrade.Inbacktestingoverlongperiods,theyseemtobe
profitablebutinrealtime,thedelayedsignalsandlargenumberoflosingtradesleadmanytradersto
abandonthesystem.
WeviewedtheproblemsofMAsasanopportunitytodevelopatradingsystembasedonmean
reversion.
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WhipsawsarecausedbythebinarynatureoftheMAsystem.Itisalwayseitherinoroutofthemarket,
orisalwayslongorshort,basedontheinteractionoftheMAwithprices.Wecanreducethisproblem
bydefiningrulesthatonlytakehighprobabilitytrades.Manymarketsareuntradeablethemajorityof
thetimeandrulescanbedesignedtorecognizewhenthemarketisatanextremeandtradeonlyunder
therightconditions.
AnotherweaknessofMAsystemsisthattheygivebacklargeamountsofprofitsafterthetrendreverses
beforetheyexitortheyrequiredelaysthatmisslargeprofitsbeforeenteringtrades.Thisiscausedby
thefactthatpricesmovesignificantlyawayfromtheMAwhenmarketsaretrending.Sometraders
addressthisproblembyclosingtradeswhenpricesdeviatetoofarfromanMA,whichleadstoanother
problembecausestrongtrendswillbemissedandtheprofitabilityofthesystemwillbereduced.We
addresstheproblemofbyusingtwoMAswhichminimizesthedelaysatturningpoints.
Allofthestrategyrulesarefullydetailedinthenextsection.ThisisapowerfulnewwaytouseMAsthat
candeliverprofitsinanymarket.
WehopeyouenjoythisnextinstallmentoftheConnorsResearchTradingStrategyGuidebookSeries.If
youwouldliketoseemoretopicsfromourStrategyResearchSeriespleaseclickhere.
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StrategyRules
Section2
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Movingaveragesaregenerallyusedtofollowthetrends.SometraderswilluseMAstohelpidentify
overboughtoroversoldmarkets.Thisapproachusuallyinvolvesidentifyingwhenthepricehasmoved
toofarfromtheMA.TodeterminewhenpricesaretoofarfromanMA,channels,basedon
percentagesorstandarddeviations,areoftenaddedtotheMA.Channelsfailtoidentifystrengthand
areinvariablywrongduringthemarketslargestadvancesordeclines.
TheQuantifiedMovingAverageStrategyusestwomovingaveragestoreducetheprobabilityofbeing
wrongatmajormarketturns.Bothmovingaverageswillmovealongwithpricesandtherelationship
betweenthetwoaverageswillhighlightoversoldmarketextremes.
ThisstrategyexecutestradesusingasimplethreestepprocessconsistingofSetup,EntryandExit.The
rulesforeachofthesestepsaredetailedbelow.
AQuantifiedMovingAverageStrategySetupoccurswhenallofthefollowingconditionsaretrue:
1. Thestockspricemustbeabove$5.
2. Thestocksaveragedailyvolumeoverthepast21tradingdays(approximatelyonemonth)
mustbeatleast250,000shares.
3. Thehistoricalvolatilityoverthepast100days,orHV(100),mustbegreaterthan30.(Seethe
Appendixforadefinitionofhistoricalvolatility).
4. Todaysclosemustbeabovethe200daymovingaverage,orMA(200).
5. ThefastMAisatleastY%belowtheslowMAwhereY=2.5,5.0,7.5,or10.0%.The
followingMAscenarioswillbetested:
Scenario
1
2
3
4
5
Fast MA
MA(C,5)
MA(C,5)
MA(C,5)
MA(C,10)
MA(C,10)
Slow MA
MA(C,10)
MA(C,20)
MA(C,50)
MA(C,20)
MA(C,50)
IfthepreviousdaywasaSetup,thenweEnteratradeby:
6. SubmittingalimitordertobuythestockatapriceX%belowyesterdaysclose,
whereXis2,4,6,8or10%.
Afterweveenteredthetrade,weExitusingoneofthefollowingmethods,selectedinadvance:
7a. Theclosingpriceofthestockishigherthanthepreviousdaysclose.Wetypicallyreferto
thisexitastheFirstUpClose.
7b.ThestockcloseswithaConnorsRSIvaluegreaterthan50.
7c. ThestockcloseswithaConnorsRSIvaluegreaterthan70.
7d. Theclosingpriceofthestockisgreaterthanthe3daymovingaverage,orMA(3).
7e. Theclosingpriceofthestockisgreaterthanthe5daymovingaverage,orMA(5).
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Letslookateachruleinalittlemoredepth,andexplainwhyitsincludedinthestrategy.
Rules1&2assurethatwereinhighlyliquidstockswhichcanbereadilyboughtandsoldwithtight
bid/askspreadsthatreducetradingcosts.
Rule3assuresthatthestockhasenoughvolatilitytoallowforlargemoves.
Rule4identifiesthedirectionofthelongtermtrend.Byrequiringtheclosetobeabovethe200day
MA,wearefindingstocksthatareoversoldbutremaininalongtermuptrend.
Rule5identifiesshorttermoversoldextremes.
Rule6allowsustoenterthetradeatanoptimalprice.TheSetuprulesidentifyanoversoldstockand
theentryrulewaitsforittobecomeevenmoreoversoldonanintradaybasis.
Rule7providesawelldefinedexitmethod.Fewstrategieshavequantified,structured,anddisciplined
exitrules.Rule7givesyoutheexactparameterstoexitthetrade,backedbyover12.75yearsof
historicaltestresults.Aswithallotherstrategyparameters,weselectinadvancethetypeofexitthat
wewilluse,andapplythatruleconsistentlyinourtrading.
Rules7band7cuseConnorsRSItodefinetheexit.Inthepast,manyofourstrategiesuseda2dayRSI,
orRSI(2)toidentifyoverboughtandoversoldconditions.OurrecentresearchhasshownConnorsRSIto
beamoreeffectiveindicator.IfyourenotfamiliarwithConnorsRSI,detailscanbefoundinthe
Appendix.
InourtestingweclosedalltradesatthecloseoftradingonthedaythattheExitsignaloccurred.Ifthisis
notanoptionforyou,ourresearchhasgenerallyshownthatsimilarresultsareachievedifyouexityour
positionsatorneartheopenthenextmorning.
Nowletsseehowatypicaltradelooksonachart.
Fortheexamplebelow,welluseastrategyvariationthatrequiresthe5dayMAtobemorethan10%
belowthe20dayMAontheSetupday.Thelimitorderwillbeplaced6%belowtheSetupdaysclosing
price.WewillexitwhentheConnorsRSIisgreaterthan70,theexitmethoddefinedbyRule7c.
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ChartcreatedinTradingView.ReprintedcourtesyofTradingVew.com.
Figure1:Smith&WessonCorp.(SWHC)Trade
ThechartaboveisforSmith&WessonHoldingCorp.whosesymbolisSWHC.Inthechart,thetoppane
showsthepricebarsinblack,the5dayMAorMA(5)inblueandthe20dayMAorMA(20)ingreen.The
greenarrowshowswhenthetradewasenteredandtheredarrowhighlightsthedaytheExitruleis
triggered.
Rule1issatisfiedbecausethestocksclosingpriceis$7.96onAugust22,2012,wellabovetheminimum
valueof$5.
Rule2ismetbecausetheaveragedailyvolumeonthedaytheSetupiscompletedismorethan1.9
million,abovetheminimumof250,000.
Rule3requiresthehistoricalvolatilityoverthepast100days,orHV(100),tobegreaterthan30onthe
daytheSetupiscompleted.TheactualvalueofHV(100)onthatdaywas67.64.
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Rule4issatisfiedbecauseSWHCclosedat$7.96,abovethe200dayMAwhichwas$6.43onthatday.
Rule5requiresthefastMAisatleastY%belowtheslowMAwhereY=2.5,5.0,7.5,or10.0%.Weare
using5daysforthefastMAand20daysfortheslowMAwithY=10.0%.
The5dayMAwas$8.09andthe20dayMAwas$9.24onAugust22.Inthiscase,thefastMAwasmore
than12%belowtheslowMA.TherelationshipbetweenthetwoMAscanbefoundwiththefollowing
formula:
Percentabove/below =((FastMA/SlowMA)1)*100
=(($8.09/$9.24)1)*100
=((0.8756)1)*100=12.44%
IfthefastMAisabovetheslowMA,thisvaluewouldbepositive.
SinceallfiveSetupruleshavebeensatisfied,weenteralimitorderforthenexttradingday,whichis
August23rd.Ourselectedstrategyvariationtellsustousealimit6%belowtheSetupdaysclosingprice
(Rule6),sowewouldusealimitpriceof:
LimitPrice
=Closex(1Limit%)
=$7.96x0.94=$7.48
OnAugust23rdthepriceofSWHCdroppedaslowas$7.40,soourlimitordergetsfilledandwebuythe
stockatthelimitpriceof$7.48.
Onthenexttradingday,August24th,thepriceofSWHCclosedat$8.05.TheConnorsRSImovedupto
72.22.Thisisabove70,triggeringourExit(Rule7c).Wecloseourpositionatorneartheclosingpriceof
$8.05,whichgivesusaprofitonthetradeof7.6%beforecommissionsandfees:
Profit
=Gain(orLoss)/CostBasis
=($8.05$7.48)/$7.48
=$0.57/$7.48=7.6%
Letslookatanotherexampleusingslightlydifferenttradeparameters.Inthisexample,wewillrequire
the5dayMAtobemorethan5%belowthe20dayMAontheSetupday.Thelimitorderwillbeplaced
8%belowtheSetupdaysclosingprice.Wewillexitwhenthepriceclosesabovethe5dayMA,theexit
methoddefinedbyRule7e.
ThechartbelowisforSpreadtrumCommunications(SPRD),andusesthesameconventionsasthe
previouschart.
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ChartcreatedinTradingView.ReprintedcourtesyofTradingVew.com.
Figure2:SpreadtrumCommunicationsInc.(SPRD)Trade
TheSetupdayforthistradewasDecember13,2011.AsperRule1,theclosingpriceisabove$5at
$20.74.Rule2ismetbecausetheaveragedailyvolumeonthedaytheSetupiscompletedisabove1.9
millionshares,abovetheminimumof250,000.Rule3issatisfiedbecausetheHV(100)is77.60.Rule4is
takencareofwhenSPRDclosedat$20.74,aboveits200dayMAof$19.50.
Rule5requiresthefastMAisatleastY%belowtheslowMAwhereY=2.5,5.0,7.5,or10.0%.Weare
using5daysforthefastMAand20daysfortheslowMAwithY=5.0%.
The5dayMAwas$21.82andthe20dayMAwas$24.39onDecember13th.Inthiscase,thefastMA
wasnearly11%belowtheslowMA.TherelationshipbetweenthetwoMAscanbefoundwiththe
followingformula:
Percentabove/below =((FastMA/SlowMA)1)*100
=(($21.82/$24.39)1)*100
=((0.8946)1)*100=10.54%
WithallofourSetupconditionsmet,wearereadytoplacealimitorderforthenextday.SinceSPRD
closedat$20.74,thelimitorderwillbeplacedat$19.08($20.74*0.92)asperRule6.
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OnDecember14th,thepriceofSPRDhitanintradaylowof$17.51,whichisbelowourlimitprice,soour
ordergetsfilledandweenterthetrade.
TheExitistriggeredonDecember20,whenSPRDclosedat$21.38,aboveits5dayMAforthefirsttime
sincethetradewasentered.
Thistradewouldhavegeneratedaprofitofapproximately12.1%beforecommissionsandfees.
Nowthatyouhaveagoodunderstandingofthetrademechanics,welllookatthehistoricaltestresults
fordifferentvariationsofthestrategy.
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Section3
TestResults
P a g e |16
Wecanneverknowforsurehowatradingstrategywillperforminthefuture.However,forafully
quantifiedstrategysuchastheonedescribedinthisGuidebook,wecanatleastevaluatehowthe
strategyhasperformedinthepast.Thisprocessisknownasbacktesting.
Toexecuteabacktest,wefirstselectagroupofsecurities(sometimescalledawatchlist)thatwewant
totestthestrategyon.Inourcase,thewatchlistconsistsofnonleveragedstocks.
Nextwechooseatimeframeoverwhichtotest.Thelongerthetimeframe,themoresignificantand
informativethebacktestingresultswillbe.ThebacktestsforthisGuidebookstartinJanuary2001and
gothroughtheendofSeptember2013,thelatestdateforwhichwehavedataasofthiswriting.
Finally,weapplyourentryandexitrulestoeachstockinthewatchlistfortheentiretestperiod,
recordingdataforeachtradethatwouldhavebeenentered,andaggregatingalltradedataacrossa
specificstrategyvariation.
OneofthekeystatisticsthatwecangleanfromthebacktestedresultsistheAverage%Profit/Loss,also
knownastheAverageGainperTrade.Sometradersrefertothisastheedge.TheAverage%P/Listhe
sumofallthegains(expressedasapercentage)andallthelosses(alsoasapercentage)dividedbythe
totalnumberoftrades.Considerthefollowingtentrades:
TradeNo.
1
2
3
4
5
6
7
8
9
10
%GainorLoss
1.7%
2.1%
4.0%
0.6%
1.2%
3.8%
1.9%
0.4%
3.7%
2.6%
TheAverage%P/Lwouldbecalculatedas:
Average%P/L=(1.7%+2.1%4.0%+0.6%1.2%+3.8%+1.9%0.4%+3.7%+2.6%)/10
Average%P/L=1.08%
Average%P/Listheaveragegainbasedoninvestedcapital,i.e.theamountofmoneythatweactually
spenttoentereachtrade.
Forshorttermtradeslastingthreetotentradingdays,mosttraderslookforanAverage%P/Lof0.5%
to2.5%acrossalltrades.Allotherthingsbeingequal,thelargertheAverage%P/L,themoreyour
accountwillgrowovertime.Ofcourse,allotherthingsareneverequal!Inparticular,itsimportantto
considertheNumberofTradesmetricincombinationwithAverage%P/L.Ifyouuseapproximatelythe
P a g e |17
sameamountofcapitalforeachtradethatyouenter,youllmakealotmoremoneyontentradeswith
anaverageprofitof4%pertradethanyouwillononetradethatmakes10%.
AnotherimportantmetricistheWinningPercentageorWinRate.Thisissimplythenumberof
profitabletradesdividedbythetotalnumberoftrades.Inthetableabove,7ofthe10tradeswere
profitable,i.e.hadpositivereturns.Forthisexample,theWinningPercentageis7/10=70%.
WhydowecareaboutWinRate,aslongaswehaveasufficientlyhighAverage%P/L?Becausehigher
WinRatesgenerallyleadtolessvolatileportfoliogrowth.Losingtradeshaveawayofclumpingup,
andwhentheydothat,thevalueofyourportfoliodecreases.Thisisknownasdrawdown.Those
decreases,inturn,canmakeyoulosesleeporevenconsiderabandoningyourtradingaltogether.If
therearefewerlosers,i.e.ahigherWinningPercentage,thenlossesarelesslikelytoclump,andyour
portfoliovalueismorelikelytogrowsmoothlyupwardratherthanexperiencingviolentupanddown
swings.
***
P a g e |18
LetsturnourattentiontothetestresultsforthedifferentvariationsoftheQuantifiedMovingAverage
Strategy.
Thetablebelowsortsthetestresultstoshowthe20variationsthatproducedthehighest
Average%P/L.Allvariationsthatgeneratedfewerthan100tradesignalsduringthe12+yeartesting
periodhavebeenfilteredouttoavoidskewingtheresults.
Top20VariationsBasedonAverageGain
#
Trades
Avg
%P/L
160
166
236
980
591
712
360
246
175
379
525
617
267
1,125
273
1,074
874
395
1,731
394
5.51%
5.14%
4.99%
4.78%
4.76%
4.52%
4.51%
4.50%
4.49%
4.48%
4.40%
4.26%
4.24%
4.23%
4.17%
4.16%
4.10%
4.08%
4.04%
3.93%
Avg
Days
Held
3.8
3.9
4.3
3.9
4.0
4.5
4.0
3.9
4.7
4.0
4.5
3.7
4.7
4.1
3.9
4.7
2.4
4.4
3.8
4.5
Win%
MAScenario
MAStretch
Limit
%
ExitMethod
75.63%
69.28%
68.64%
73.47%
70.56%
69.24%
70.28%
70.73%
69.71%
70.18%
69.52%
71.15%
69.29%
70.76%
68.86%
70.86%
72.20%
69.87%
73.43%
68.27%
MA(5)/MA(10)
MA(10)/MA(20)
MA(10)/MA(20)
MA(5)/MA(10)
MA(5)/MA(20)
MA(5)/MA(20)
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(10)
MA(10)/MA(20)
MA(10)/MA(20)
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(20)
MA(10)/MA(20)
MA(5)/MA(10)
MA(5)/MA(10)
MA(10)/MA(20)
MA(5)/MA(10)
MA(5)/MA(10)
10.0
10.0
10.0
5.0
10.0
10.0
7.5
10.0
10.0
7.5
7.5
7.5
10.0
7.5
10.0
5.0
5.0
10.0
5.0
7.5
10
10
10
10
10
10
10
8
10
10
10
8
8
10
8
10
10
8
8
10
Close>MA(5)
Close>MA(5)
CRSI>70
Close>MA(5)
Close>MA(5)
CRSI>70
Close>MA(5)
Close>MA(5)
CRSI>70
Close>MA(5)
CRSI>70
Close>MA(5)
CRSI>70
Close>MA(5)
Close>MA(5)
CRSI>70
Close>MA(3)
CRSI>70
Close>MA(5)
CRSI>70
Belowisanexplanationofeachcolumn.
#TradesisthenumberoftimesthisvariationtriggeredfromJanuary1,2001September30,2013.
Avg%P/Listheaveragepercentageprofitorlossforalltrades,includingthelosingtrades,basedon
investedcapital.Thetop20variationsshowgainsrangingfrom3.93%to5.51%overthe12+yeartesting
period.
AvgDaysHeldistheaveragetradedurationexpressedasanumberofdays.Therangeforthevariations
aboveisrelativelysmall,averagingjustover4days.
P a g e |19
Win%isthepercentageofsimulatedtradeswhichclosedoutataprofit.Mostofthetop20variations
havewinratesinthelow70s.Thisisahighpercentageofprofitabletradesinaworldwheremany
tradersareaimingfor5060%.
MAScenariodefinesthetwomovingaveragesusedinthetest.ThiscorrespondstoRule5andshows
thevaluesforthefastandslowMAs.ThefollowingMAscenariosweretested:
Scenario
1
2
3
4
5
Fast MA
MA(C,5)
MA(C,5)
MA(C,5)
MA(C,10)
MA(C,10)
Slow MA
MA(C,10)
MA(C,20)
MA(C,50)
MA(C,20)
MA(C,50)
MAstretchcorrespondstothevalueofYinRule5ofthestrategy.ThiscolumnshowsthevalueofYfor
therulewhichsays,thefastMAisatleastY%belowtheslowMAwhereY=2.5,5.0,7.5,or10.0%.
Limit%isrelatedtoRule6ofthestrategyanddeterminesthelimitpricethatwillbeusedtoenterthe
trade.Wetestedlimitsof2,4,6,8or10%belowtheSetupdaysclose.
ExitMethodistherulethatwasusedtoexittradesinthisstrategyvariation,asdescribedinRule7.
Next,letslookatthestrategyvariationsthathavehistoricallyhadthehighestfrequencyofprofitable
tradesorWinRate.
Top20VariationsBasedonHighestWinRate
#
Trades
Avg
%P/L
160
980
1,731
2,956
2,012
874
1,763
318
3,673
1,558
1,502
617
3,517
5.51%
4.78%
4.04%
3.09%
3.60%
4.10%
3.24%
3.88%
3.09%
3.57%
3.14%
4.26%
2.80%
Avg
Days
Held
3.8
3.9
3.8
3.6
3.9
2.4
3.6
2.3
4.0
2.3
1.6
3.7
3.7
Win%
MAScenario
MAStretch
Limit
%
ExitMethod
75.63%
73.47%
73.43%
73.04%
72.47%
72.20%
71.75%
71.70%
71.47%
71.44%
71.17%
71.15%
71.14%
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(20)
MA(5)/MA(10)
MA(5)/MA(20)
MA(5)/MA(10)
MA(5)/MA(20)
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(20)
10.0
5.0
5.0
5.0
7.5
5.0
10.0
7.5
5.0
5.0
5.0
7.5
7.5
10
10
8
6
8
10
6
10
8
8
8
8
6
Close>MA(5)
Close>MA(5)
Close>MA(5)
Close>MA(5)
Close>MA(5)
Close>MA(3)
Close>MA(5)
Close>MA(3)
Close>MA(5)
Close>MA(3)
FirstUpClose
Close>MA(5)
Close>MA(5)
P a g e |20
1,926
880
1,035
2,792
4,792
1,572
1,074
3.60%
3.56%
3.88%
2.28%
2.06%
3.12%
4.16%
4.6
1.9
3.8
3.4
3.5
1.8
4.7
71.13%
71.02%
71.01%
70.99%
70.97%
70.87%
70.86%
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(20)
MA(5)/MA(20)
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(10)
5.0
5.0
10.0
10.0
5.0
5.0
5.0
8
10
8
4
4
8
10
CRSI>70
CRSI>50
Close>MA(5)
Close>MA(5)
Close>MA(5)
CRSI>50
CRSI>70
All20ofthetopvariationshavehistoricallyproducedaprofitonatleast70%oftheidentifiedtrades!
Noticethatthereisagooddealofoverlapbetweenthislistandtheonepresentedintheprevious
sectiononAverage%P/L.Thisoverlapindicateswehavemultiplestrategyvariationsthathave
historicallywonconsistentlywhileproducingexcellentedges.
P a g e |21
Section4
SelectingStrategy
Parameters
P a g e |22
Inpreviouschapterswevedescribedthedifferentvaluestestedforstrategyparameterssuchasthe
movingaveragesweuse,thedistancethefastMAfallsbelowtheshorterMA,entrylimit%andexit
method.Inthissectionwelldiscusssomeadditionalfactorstoconsiderasyoudecidewhichvariation(s)
touseinyourtrading.
Letstalkconceptuallyaboutentriesandexitsforamoment.Bothentryandexitrulescanbethoughtof
intermsofhowstricttheyare,i.e.howeasyordifficulttheyaretoachieve.Youmightalsosaythat
strictnessisameasureofhowfrequentlyorinfrequentlytheruleconditionsoccur.Foroscillatorssuch
asConnorsRSI,valuesthatareclosertotheextremes(0and100)aremorestrict(lesslikelytooccur)
thanvaluesinthemiddleoftherange.
Stricterentryruleswillbesatisfiedlessfrequentlythanmoreleniententryrules,andthusastrategy
thatreliesonthestricterruleswillgenerallygeneratefewertradesthanastrategywhoseentryrulesare
moreeasilysatisfied.Witharobuststrategy,therewardforfewertradesisusuallyahighergainper
trade,onaverage.Ifyoubuyaslightlyoversoldstock,itsmostlikelytoprovideamoderategain.Butif
youwaitforthestocktobecomeextremelyoversold,thechancesaremuchhigherthatitwill
experienceasignificantpriceincreaseandresultinabiggerprofit.
Incontrasttoentryrules,thestrictnessofexitruleshaslittleeffectonthenumberoftradesgenerated
bythestrategy.However,justliketheentryrules,stricterexitrulestypicallyresultinhigheraverage
profits.Why?Becausestricterexitrulestendtokeepyouinyourtradesforalongertime,givingthe
stockmoretimetoexperiencethemeanreversionbehaviorthatwereattemptingtoexploitwitha
strategylikethisquantifiedapproachtoTradingStocksandOptionswithMovingAverages.Thus,for
entriesthetradeoffisbetweenmoretradesandhighergainspertrade,whileforexitsthetradeoffis
betweenshortertradedurationsandhighergainspertrade.
***
P a g e |23
NowletsturnourattentionbacktothestrategydescribedinthisGuidebook.Inthetablebelow,we
comparefourvariationsofthestrategythatallusethesamemovingaveragescenario(5daysforthe
fastMAand10daysfortheslowMA),thesamelimitentry(6%)andthesameexitmethod(ConnorsRSI
>70).OnlythevalueoftheMAStretchfortheentrythresholddiffersbetweenthevariationsshown
below.
TheEffectofMAStretchEntryThresholdforQuantifiedMAStrategy
#
Trades
Avg
%P/L
10,059
3,360
1,106
407
1.98%
2.83%
3.11%
3.51%
Avg
Days
Held
4.6
4.6
4.7
5.0
Win%
MAScenario
MAStretch
Limit
%
ExitMethod
68.76%
70.30%
68.44%
66.34%
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(10)
2.5
5.0
7.5
10.0
6
6
6
6
CRSI>70
CRSI>70
CRSI>70
CRSI>70
Noticethatthemostleniententryinthetable,thefirstlinewithanMAStretchof2.5%,generatedthe
mosttradesignalsandthelowestgainpertrade.Astheentryrulebecomesstricter,i.e.theMAStretch
thresholdrises,weseefewerandfewertradesignalsbuthigherandhigheraveragegainspertrade.The
variationwithanentrythresholdof10%increasestheAverage%P/Lbyabout75%comparedtothe
firstvariation,butalsohaslessthan1/20ththenumberoftrades.
Itshouldcomeasnosurprisethatthepatternemergesagainwhenweholdallparametersconstant
excepttheLimit%usedtodeterminethelimitentryprice.IfwekeeptheSetupconditionsconstant,
thentherewillobviouslybemorestocksthatexperienceapullbackof2%orgreaterthenextdaythan
therewillbethosethatpullbackbyatleast10%.
VariationswithDifferentLimit%EntriesforQuantifiedMAStrategy
#
Trades
Avg
%P/L
8,317
5,509
3,360
1,926
1,074
1.34%
1.97%
2.83%
3.60%
4.16%
Avg
Days
Held
4.4
4.5
4.6
4.6
4.7
Win%
MAScenario
MAStretch
Limit
%
ExitMethod
65.88%
67.83%
70.30%
71.13%
70.86%
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(10)
MA(5)/MA(10)
5.0
5.0
5.0
5.0
5.0
2
4
6
8
10
CRSI>70
CRSI>70
CRSI>70
CRSI>70
CRSI>70
Wehaveconfirmedthatstricterentryrulesresultinfewertradesbuthigheraveragegains.Nowlets
lookattheexits.HereweholdtheSetupandentrycriteriaconstant,butvarytheexitmethods:
P a g e |24
VariationswithDifferentExitMethodsforQuantifiedMAStrategy
#
Trades
Avg
%P/L
420
403
379
430
525
2.19%
2.98%
4.48%
2.49%
4.40%
Avg
Days
Held
1.9
2.6
4.0
2.0
4.5
Win%
MAScenario
MAStretch
Limit
%
ExitMethod
65.95%
68.24%
70.18%
67.67%
69.52%
MA(10)/MA(20)
MA(10)/MA(20)
MA(10)/MA(20)
MA(10)/MA(20)
MA(10)/MA(20)
7.5
7.5
7.5
7.5
7.5
10
10
10
10
10
FirstUpClose
Close>MA(3)
Close>MA(5)
CRSI>50
CRSI>70
Allfivevariationsgeneratedaverysimilarnumberoftradesignals.Therangeisfrom379tradesto525
trades.However,thevariationthatusesthemostlenientexitmethod(coveringthepositiononthefirst
daythatthestockpriceclosesup)generatesanaveragegainthatisabouthalfofthestrictestexit
methods.Wecanalsoseethatstricterexitsincreasetheaveragegainandwinratesbycomparingthe
twodifferentMAandConnorsRSIexits.MA(3)isalessstringentexitrequirementthanMA(5)andMA(3)
islessprofitableonaveragethanMA(5)althoughtherearemoretradeswiththelessstringentrule.The
sameistruewhenusingConnorsRSItotriggertheexitrule.
Armedwiththisinformation,youwillnowbeabletoselectstrategyparametersthataremostlikelyto
producethenumberoftradesignals,averagegains,andtradedurationthatbestcomplementyour
overalltradingplan.
P a g e |25
UsingOptions
Section5
P a g e |26
Optionstradinghasbeenamajorgrowthindustryoverthepastseveralyearsinthemarkets.Thisis
becausespreadshavetightened,liquidityhasincreased,andtheabilitytoeasilytradecomplexoptions
hasneverbeensimpler.
Wellnowfocusonapplyingoptionstradingtotheshorttermmarketmoveswehavejustlearned.Like
everythingelseinthisGuidebook,therearedefinitiverulesastohowtoexecuteanoptionstradewhen
astrategysignaltriggers.
Beforewegoon,itwillbehelpfultoreviewafewtermsandconceptsrelatedtooptions.
Theownerofacalloptionhastheright,butnottheobligation,topurchasetheunderlyingsecurity
(stockorstock)atthestrikepriceonorbeforetheexpirationdateoftheoptioncontract.Thevalueofa
calloptiongenerallyrisesasthepriceoftheunderlyingsecurityrises.Acalloptionisconsideredtobe
InTheMoney(ITM)whenitsstrikepriceisbelowthepriceoftheunderlyingsecurity,andOutofThe
Money(OTM)whenitsstrikepriceisabovethepriceoftheunderlyingsecurity.Forexample,ifthe
incrementbetweenstrikepricesforSPYoptionsis$1andthepriceofSPYiscurrently$162.35,thenthe
first(closest)ITMcalloptionistheonewithastrikepriceof$162.ThefirstOTMcalloptionisthe$163
strike.
Theownerofaputoptionhastheright,butnottheobligation,toselltheunderlyingsecurity(stockor
stock)atthestrikepriceonorbeforetheexpirationdate.Thevalueofaputoptionusuallyrisesasthe
priceoftheunderlyingsecurityfalls.AputoptionisconsideredtobeInTheMoney(ITM)whenits
strikepriceisabovethepriceoftheunderlyingsecurity,andOutofTheMoney(OTM)whenitsstrike
priceisbelowthepriceoftheunderlyingsecurity.IfthepriceofSPYiscurrently$166.55,thenthefirst
(closest)ITMputoptionisthe$167strike,andthefirstOTMputoptionisthe$166strike.
Thestrategydescribedinthisguidebookistobuystocksthatareoversoldbasedonquantifiedmoving
averagerules.Toimplementthatstrategywithoptions,callswouldbeused.Putoptionswouldbeused
toimplementstrategiesdescribedinotherGuidebooksthattakeshortpositions.
Mostoptioncontractscontrol100sharesoftheunderlyingstockorstock.However,thepricequotedby
mosttradingplatformsisthepricepershare.Therefore,thecostofpurchasingtheoptioncontractis
typically100timesthepershareprice,pluscommissions.Thus,ifaSPYcalloptionhasaquotedpriceof
$1.27,thenitwillcostyou$127.00pluscommissionstopurchasethecalloptioncontract.Sometimes
youwillhearthepriceofanoptionreferredtoastheoptionspremium.
Alloptioncontractshaveanexpirationdate,afterwhichthecontractisnolongervalid.Thethreemost
commontypesofoptionexpirationsare:
Weekly:Contractexpiresonthelasttradingdayoftheweek,typicallyaFriday.
Monthly:ContractexpiresontheSaturdayfollowingthethirdFridayofthemonth,whichmeans
thatthelastdayfortradingtheoptionisthethirdFriday.
Quarterly:Contractexpiresonthelasttradingdayofthecalendarquarter.
P a g e |27
InthisGuidebook,wewillbefocusedentirelyonoptioncontractswithmonthlyexpirations.The
monthlycontractwiththenearestexpirationdateisknownasthefrontmonth.Forexample,iftodayis
June10th,thenthefrontmonthcontractistheonewhichexpiresinthethirdweekofJune.Thenext
availableexpiration(inthiscaseJuly),isknownasthesecondmonth.ThedayafterJuneexpiration,July
wouldbecomethefrontmonthandAugustwouldbecomethesecondmonth.
StrategiesintheGuidebookgenerallyfollowcertainpatterns:
1.Themajorityofthemovesfromentrytoexithavebeenheldaveryshortperiodoftime(212
tradingdays).
2.Theaveragegainspertradehavebeenlargewellbeyondthenormaldistributionofprices
overthatshortperiodoftime.
3.Ahighpercentageofthemoveshavebeendirectionallycorrect.
Whenwelookatthistypeofbehavior,itcanleadtomanystrategiesbutonestrategystandsout(and
thishasbeenconfirmedbyprofessionaltraders).Thestrategyistobuythefrontmonth,inthemoney
calloption.
Whyfrontmonth,inthemoneylongoptions?Becausetheywillmovemostcloselytothestockitself.
Andthecloseranoptionmoveswiththestock,thegreaterthegainwillbeonapercentagebasiswhen
themoveiscorrect.
Herearetherules.
1.Asignaltriggers.
2.Buythefrontmonthinthemoneycall.Ifyouwouldnormallytrade500sharesofthestock
buy5callcontracts(every100sharesshouldequalonecalloptioncontract).
3.Exittheoptionswhenthesignaltriggersanexitonthestock.
Letsgofurther:
1.Whatdoesinthemoneyexactlymeanhere?
Inthiscaseitsdefinedasonetotwostrikepricesinthemoney.Thiswillbebelowthecurrentmarket
priceforacalloption.Ifthepriceofthestockis$48andtheintervalbetweenoptioncontractsis$5,
thenbuya$45or$40call.
2.Whatdoesfrontmonthmeanhere?
Becausetheholdingperiodissoshort,youwanttotradetheoptionswhosemonthlyexpirationisthe
closest.Iftheclosestmonthiseighttradingdaysorlessfromthefrontmonthsoptionexpirationdate
(meaningthesecondWednesdaybeforeorcloser)usethefollowingmonthastheonetotrade.
P a g e |28
3.WhathappensifIminthepositionanditexpires,yetthesignalforthestockisstillvalid?
Inthiscase,rolltothenextmonth.Youretradingthestocksignalssoyouwanttohaveexposuretothat
signal.
4.Whataboutliquidityandspreads?
Theressomediscretionhere.Thereisnohardandfastruleastowhatexactlyliquiditymeansin
options.Manytraderslookforminimumvolumeand/oropeninteresttodetermineliquidity.
Assumingthereisactivevolumeintheoptions,lookatthespreads.Iftheoptionistrading$3.00bid/
$3.30offer,thespreadis10%.Canyoureallyovercomea10%spread?Notlikely.Nowcomparethisto
anoptionthatstradingat$3.25bid/$3.30offer.Thisisfarmoreacceptableandtradable.
5.Whataretheadvantagesofbuyingcalloptionsinsteadofthestock?
Assumingthespreadsandliquidityarethere,theadvantagesarelarge:
1. GreaterpotentialROIoncapitalinvested.
2. Lessmoneytiedup.
3. Lesspointsatrisk.Thismeansifyoubuyastockat$50,thepricecantheoreticallyfallto
zeroandyoucouldloseup$50ashare.Theoptionscanonlyloseuptothepremiumyou
paid.So,ifyouboughtthe$45callfor$5.50,theriskisonlythepremiumof$5.50.
4. Theresgreaterflexibility.Forexample,letssaythestocktriggeredabuysignalat$50and
youpaid$5.50forthe$45calls.Ifthestockimmediatelymovesup(letssayto$56),you
havechoices.Youcanexit,oryoucanrollintothe$55callgettingmostofyourmoneyout
andnowturningthisintoanearlyfreetradeifyoubelievethatpriceswillcontinuetorise.
Therearenumerousexampleslikethisandyoucanfindthesetypesofstrategyopportunitiesinmost
optionsbooks.ButtradinganythingexoticordifferentthansimplybuyingITMcallsisagainsttheadvice
ofthemanyprofessionalsweposedthisquestionto.
Inconclusion,optionsprovidetraderswithagoodalternativetoowningthestockoutright.The
structuredmethodologyforourstrategiesis:frontmonth,inthemoney,withequivalentsizing(1
optionper100shares),andexitingwhenthestocksignalsanexit.
Theaboveoptionsstrategy,inmanyexpertsopinion,isthebestandmostefficientstrategybasedupon
thehistoricaldatafromthesesignals.
P a g e |29
AdditionalThoughts
Section6
P a g e |30
1.AsyouhaveseenthroughoutthisGuidebook,theQuantifiedMovingAverageStrategyhashadlarge
quantifiededgeswhenappliedinasystematicmanner.
2.Thereareliterallyhundredsofpotentialvariationsforyoutouse.Byadjustingtheinputvariables
describedintherules,youcancustomizehowthestrategywillperformforyou.Wantmoretrades?
LookatvariationswithfastermovingaveragesorsmallerMAstretchvaluesfortheentryrules.Bigger
averagereturns?Checkoutthevariationsthathavethestrictestentrycriteria(highMAStretchvalues
andhighLimit%entryrules)andlongestdurations(ConnorsRSI70exitmethod).Wanttogetinandout
oftradesmorequicklytoreduceovernightriskandfreeupyourcapitalforothertrades?Trythe
variationsthatutilizetheFirstUpCloseexitmethod.
3.Whataboutstops(andweincludetheanswertothisinallourStrategyGuidebooks)?
WehavepublishedresearchonstopsinotherpublicationsincludinginourbookShortTermTrading
StrategiesThatWork.
Whatwehavefoundisthatstopstendtolessenperformanceandinmanycasestheycompletely
removeedges.Yes,itfeelsgoodwhenastockkeepsmovinglowerandlowerandastopgotyouout.On
theotherside,theresearchwhichisbackedbyuptotwodecadesoftestresultsonmanyshortterm
tradingstrategiessuggeststhatstopsgethitoftenandaccumulatemany,manylosses.Fewtrading
strategiescanovercometheseaggregatedlosses.
Formanytradersstopsareamust.Psychologicallyitallowsthemtotaketrades,especiallydifficult
trades.Whetheryouusethemornotisapersonalchoice.Onthewholethough,theedgesyouseein
thisstrategyandmanyothershorttermstrategiesarelowerwhenstopsareappliedtothem.Againthis
isapersonalchoiceonlyyoucanmakeforyourself.Weknowsuccessfultradersinbothcamps.
4.Slippageandcommissionwerenotusedinthetesting.Factorthemintoyourtrading(theentriesare
atlimitpricessoslippageisnotanissue)andmakesureyouretradingatthelowestpossiblecosts.
Mostfirmsarenowallowingtraderstotradeforunder1centashare,soshopyourbusiness,especially
ifyouareanactivetrader.Theonlinebrokeragefirmswantyourbusiness.
WehopeyouenjoyedthisadditiontotheConnorsResearchTradingStrategySeries.Ifyouhaveany
questionsaboutthisstrategypleasefeelfreetoemailusatinfo@connorsresearch.com
P a g e |31
Appendix:
TheConnorsRSI
IndicatorandHistorical
Volatility
P a g e |32
ConnorsRSI
LarryConnorsandConnorsResearchhavebeendeveloping,testing,andpublishingquantifiedtrading
strategiessincethemid1990s.Duringthattime,wehavehadtheopportunitytoevaluateagreat
numberofdifferenttechnicalindicatorsandtoassesstheireffectivenessinpredictingfutureprice
action.Nowwevetakenthenextstepandcreatedanindicatorofourown:ConnorsRSI.Inthischapter
wewilldescribetheindicatorandprovidedetailsonitscalculation.
ConnorsRSIisacompositeindicatorconsistingofthreecomponents.Twoofthethreecomponents
utilizetheRelativeStrengthIndex(RSI)calculationsdevelopedbyWellesWilderinthe1970s,andthe
thirdcomponentranksthemostrecentpricechangeonascaleof0to100.Takentogether,thesethree
factorsformamomentumoscillator,i.e.anindicatorthatfluctuatesbetween0and100toindicatethe
leveltowhichasecurityisoverbought(highvalues)oroversold(lowvalues).
BeforewediscusshowtocalculateConnorsRSI,letsreviewWildersRSI.RSIisaveryusefulandpopular
momentumoscillatorthatcomparesthemagnitudeofastock'sgainstothemagnitudeofitslossesover
somelookbackperiod.Wilderhimselfbelievedthat14periodswastheideallookback.Weoftenuse
theshorthandnotationRSI(14)forthe14periodRSI.TheformulabelowcomputesRSI(14)foraseriesof
pricechanges:
IfwewantedtocomputeRSIforadifferentnumberofperiods(N),thenwewouldreplace14inthe
formulaabovewithN,andreplace13withN1.Regardlessofthenumberofperiodsusedinthe
calculation,theresultwillalwaysbeanumberbetween0and100.TraderswhouseRSI(14)typically
lookforvaluesgreaterthan70toidentifyoverboughtconditions,andvalueslessthan30toindicate
oversoldconditions.
OurpreviousresearchhasshownthatusingshorterlookbackperiodsmakesRSImoreeffectivein
predictingshorttermpricemovements.WehavepublishedmanystrategiesthatutilizeRSI(2),aswellas
P a g e |33
severalthatuseRSI(3)andRSI(4).ChangingthenumberofperiodsalsohasaneffectontheRSIlevels
thatbestidentifyoverboughtandoversoldconditions.Forexample,anRSI(2)valueoflessthan10is
usuallyareliableindicatorofanoversoldcondition,whileanRSI(2)valueover90isagoodbenchmark
foranoverboughtcondition.
NowletsturnourattentionbacktoConnorsRSI.Asmentionedpreviously,ConnorsRSIcombinesthree
components,andasyoumightguess,theyareallelementsthatourresearchhasrepeatedlyshownto
havesignificantpredictiveability:
PriceMomentum:Aswejustdiscussed,RSIisanexcellentwaytomeasurepricemomentum,
i.e.overboughtandoversoldconditions.Bydefault,ConnorsRSIappliesa3periodRSI
calculationtothedailyclosingpricesofasecurity.WewillrefertothisvalueasRSI(Close,3).
DurationofUp/DownTrend:Whentheclosingpriceofasecurityislowertodaythanitwas
yesterday,wesaythatithascloseddown.Ifyesterdaysclosingpricewaslowerthanthe
previousdaysclose,thenwehaveastreakoftwodownclosedays.Ourresearchhasshown
thatthelongerthedurationofadownstreak,themorethestockpriceislikelytobouncewhen
itrevertstothemean.Likewise,longerdurationupstreaksresultinlargermovesdownwhen
thestockmeanreverts.Ineffect,thestreakdurationisanothertypeofoverbought/oversold
indicator.
Theproblemis,thenumberofdaysinastreakistheoreticallyunbounded,thoughwecould
probablyplacesomepracticallimitsonitbasedonpastexperience.Forexample,wemight
observethattherehavebeenveryfewinstancesofeitheranupstreakoradownstreaklasting
formorethan20days,butthatstilldoesntgetustoatypicaloscillatortypevaluethatvaries
between0and100.
Thesolutionistwofold.First,whenwecountthenumberofdaysinastreak,wewilluse
positivenumbersforanupstreak,andnegativenumbersforadownstreak.Aquickexample
willhelptoillustratethis:
Day
1
2
3
4
5
6
7
8
ClosingPrice
$20.00
$20.50
$20.75
$19.75
$19.50
$19.35
$19.35
$19.40
StreakDuration
1
2
1
2
3
0
1
TheclosingpriceonDay2ishigherthanonDay1,sowehaveaonedayupstreak.OnDay3,
thepricecloseshigheragain,sowehaveatwodayupstreak,i.e.theStreakDurationvalueis2.
OnDay4,theclosingpricefalls,givingusaonedaydownstreak.TheStreakDurationvalueis
P a g e |34
negative(1)becausethepricemovementisdown,notup.Thedownwardtrendcontinueson
Days5and6,whichourStreakDurationreflectswithvaluesof2and3.OnDay7theclosing
priceisunchanged,sotheStreakDurationissetto0indicatingneitheranupclosenoradown
close.Finally,onDay8theclosingpricerisesagain,bringingtheStreakDurationbackto1.
ThesecondaspectofthesolutionistoapplytheRSIcalculationtothesetofStreakDuration
values.Bydefault,ConnorsRSIusesa2periodRSIforthispartofthecalculation,whichwe
denoteasRSI(Streak,2).Theresultisthatthelongeranupstreakcontinues,thecloserthe
RSI(Streak,2)valuewillbeto100.Conversely,thelongerthatadownstreakcontinues,the
closertheRSI(Streak,2)valuewillbeto0.Thus,wenowhavetwocomponentsRSI(Close,3)
andRSI(Streak,2)thatbothusethesame0100scaletoprovideaperspectiveonthe
overbought/oversoldstatusofthesecuritywereevaluating.
RelativeMagnitudeofPriceChange:ThefinalcomponentofConnorsRSIlooksatthesizeof
todayspricechangeinrelationtopreviouspricechanges.WedothisbyusingaPercentRank
calculation,whichmayalsobereferredtoasapercentile.Basically,thePercentRankvalue
tellsusthepercentageofvaluesinthelookbackperiodthatarelessthanthecurrentvalue.
Forthiscalculation,wemeasurepricechangenotindollarsandcents,butasapercentageof
thepreviousdaysprice.Thispercentagegainorlossistypicallyreferredtoastheoneday
return.Soifyesterdaysclosingpricewas$80.00,andtodayspriceis$81.60,theonedayreturn
is($81.60$80.00)/$80.00=0.02=2.0%.
TodeterminethePercentRank,weneedtoestablishalookbackperiod.ThePercentRank
valueisthenthenumberofvaluesinthelookbackperiodthatarelessthanthecurrentvalue,
dividedbythetotalnumberofvalues.Forexample,ifthelookbackperiodis20days,thenwe
wouldcomparetodays2.0%returntotheonedayreturnsfromeachoftheprevious20days.
Letsassumethatthreeofthosevaluesarelessthan2.0%.WewouldcalculatePercentRankas:
PercentRank=3/20=0.15=15%
ThedefaultPercentRanklookbackperiodusedforConnorsRSIis100,orPercentRank(100).We
arecomparingtodaysreturntotheprevious100returns,orabout5monthsofpricehistory.To
reiterate,largepositivereturnswillhaveaPercentRankcloserto100.Largenegativereturns
willhaveaPercentRankcloserto0.
ThefinalConnorsRSIcalculationsimplydeterminestheaverageofthethreecomponentvalues.Thus,
usingthedefaultinputparameterswouldgiveustheequation:
ConnorsRSI(3,2,100)=[RSI(Close,3)+RSI(Streak,2)+PercentRank(100)]/3
Theresultisaveryrobustindicatorthatismoreeffectivethananyofthethreecomponentsused
individually,andinmostcases,alsomoreeffectivethancombiningthethreecomponents
independently.
P a g e |35
Historical Volatility
Thehistoricalvolatilityisdefinedasthestandarddeviationofthelogarithmicpricechangesmeasuredat
regularintervalsoftime.Sincesettlementpricesareusuallyconsideredthemostreliable,themost
commonmethodofcomputingvolatilityinvolvesusingsettlementtosettlementpricechanges.We
definedeachpricechange,xi,as:
xi =ln(Pi /Pi 1)
wherePi isthepriceoftheunderlyingcontractattheendoftheith timeinterval.
Pi/Pi 1 issometimesreferredtoasthepricerelative.
Wefirstcalculatethestandarddeviationofthelogarithmicpricechanges:
standarddeviation
0.05778/9
0.000642
.025338
Wethencalculatetheannualvolatilitybymultiplyingthestandarddeviationbythesquarerootofthe
timeintervalbetweenpricechanges.Sincewelookedatpricechangeseveryweek,thetimeintervalis
365/7:
annualizedvolatility
.025338
365/7
P a g e |36
.02533852.14
.0253387.22
.1829(18.29%)
Reprinted from: Nathanberg, Sheldon. Option Volatility & Pricing, Advanced Trading Strategies and Techniques, 2d ed., (Chicago:
Probus Publishing, 1994), Appendix B.
P a g e |37
ReceiveConnorsRSIReadingsforFreefromtheTradingMarketsScreener
http://analytics.tradingmarkets.com/Screener/
P a g e |38
MorefromtheConnorsResearchTradingStrategySeries
BollingerBandsTradingStrategiesThatWork
ThisSystematicApproachtoTradingwithBollingerBandsBringsYouResultsQuickly
BollingerBandsareusedbyhundredsofthousandsoftradersaroundtheworld.Infact,itsconsidered
oneofthemostpowerfultradingtoolsavailabletotraders.Overthepasttwodecadesmany
professionaltradersatlargefunds,successfulCommodityAdvisors,andprofessionalEquityTraders
havestatedtheyrelyuponBollingerBandsasoneofthemainindicatorsbeforetheytakeatrade.
Whentradedcorrectly,BollingerBandscanbeoneofthemostconsistentstrategiesavailableforyour
trading.
Nowforthefirsttime,wearemakingavailabletothepublicafullysystematic,quantifiedapproachto
tradingwithBollingerBands.
ConsistentTradingResultsWhatyouwilllearnwiththisstrategyaredozensofBollingerBands
strategyvariationswhichhavebeencorrectfrom65.43%uptoover82.74%fromJanuary2001toMay
2012.
BollingerBandsTradingStrategiesThatWorkcomeswitha100%MoneyBackGuarantee(asdoallthe
GuidebooksinourStrategySeries).
IfyouwouldlikemoreinformationonBollingerBandsTradingStrategiesThatWorkclickhere.Ifyou
wouldliketoorderanddownloaditnowsoyoucanhaveimmediateaccesstoitpleaseclickhereorcall
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P a g e |39
ETFGapTradingStrategiesThatWork
GapTradinghasproventobeaoneofthelongeststanding,mostsuccessfultradingstrategiesfor
professionaltraders.OverthepasttwodecadesmanyprofessionalMoneyManagersatlargefunds,
successfulCommodityAdvisors,andprofessionalEquityTradershavestatedtheyrelyupongapsasone
ofthereasonsfortheirsuccess.
Whentradedcorrectly,ETFGapTradingcanbeoneofthemostconsistentstrategiesavailableforyour
trading.
Nowforthefirsttime,wearemakingavailabletothepublicETFGapTradingStrategiesThatWork.
Whatyouwilllearnwiththisstrategyaredozensofgapvariationswhichhavebeencorrectfrom72.4%
uptoover78%from2006to2011.
ETFGapTradingStrategiesThatWorkalsocomeswitha100%MoneyBackGuarantee.
IfyouwouldlikemoreinformationontheETFGapTradingStrategiesThatWorkclickhere.Ifyou
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tollfree8884848220ext.3(outsidetheUSpleasedial9734947311,ext.3).
P a g e |40
TheLongPullbacksStrategy
In2005wepublishedwhatweconsidertobeourmostpowerfulshorttermtradingstrategythatwe
originallynamedthe5x5x5Strategy.Manyhundredsoftraderslearnedthestrategyandmanystilluseit
today.Sincethattimewehaveupdatedandimprovedthestrategy,addednewentryparameters,added
newexitstrategies,andhaveupdatedthetraderesultsbeginningfrom20012011.
Whatyouwilllearnwiththisstrategyaremanyhundredsofvariationsthathavebeencorrectfrom
72.4%uptoover78%formorethanadecade.Andtheaveragegainpertrade(thisincludesallwinning
andlosingtrades)hasaveragedover5.6%atradeondozensofvariationsofthestrategy.
Youwilllearnhowtoidentifythesetup,select,theentrylevel,wheretoplacetheorderandwhereto
exittheorder.ThisisdoneonallliquidUSstocks(anditcanbedoneonglobalmarketsaswell).Andas
anaddedbonuswealsoaddedadaytradingcomponenttothisstrategyforthoseofyouwholiketoexit
positionsbeforethecloseeachday.
TheLongPullbacksStrategycomeswitha100%MoneyBackGuarantee(asdoalltheGuidebooksinour
StrategySeries).
IfyouwouldlikemoreinformationonTheLongPullbacksStrategyclickhere.Ifyouwouldliketoorder
anddownloaditnowsoyoucanhaveimmediateaccesstoitpleaseclickhereorcalltollfree888484
8220ext.3(outsidetheUSpleasedial9734947311,ext.3).

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