PowerRatings (for Traders) are the single most popular tool we have on TradingMarkets. In this article, we will show you how you can potentially improve your trading edge even further with PowerRatings Nightly Signals. With the addition of two simple rules, PowerRatings simulated performance improves dramatically.

When we first published PowerRatings beginning in 2005, the simulated results were based upon a holding period of five days. If a stock had a PowerRating of 10, its simulated returns were based upon buying a stock on the opening and exiting the stock five trading days later. But, as we will teach you here, one can dramatically improve the simulated edges in PowerRatings further by adding two simple trading rules to them.

Here are the rules:

1. Only buy a high PowerRating stock (8 or higher) on a limit order below yesterday’s close.

2. Instead of using a static exit and waiting for five days, use a dynamic price exit by exiting the trade when the stock closes above its 5-day simple moving average (SMA).

By adding these two rules, the simulated returns rise substantially and expand the edges even more.

Here are the PowerRatings simulated returns from January 1995 to September 2006 using a standard five day exit.

Now let’s add the two rules mentioned above. Only buy the higher PowerRatings stocks (8 or higher) on a limit order below yesterday's close, and only exit on the open the day following a close above the 5-day SMA. Here are the results when we add these two rules.

The first table shows what has happened by entering a high PowerRating stock on a limit order 3% below yesterdays close and exiting on the open the day following a close above the 5-day SMA. As you can see, not only does the average gain improve in all cases, but the % correct improves substantially too.

3% Limit, 5-day SMA Exit

Here are the results for using a 5% limit and using the 5-day SMA exit.

5% Limit, 5-day SMA Exit

Again we improve in all cases, and we now see the % correct rise to 72% going all the way back to 1995 on 83,874 trades.

Here are the results for using a 7% limit with the 5-day SMA exit.

7% Limit, 5-day SMA Exit

Even though the number of trades drops, the % correct rises to 74%, and the average gain per trade jumps to 5.99% per trade. The edges on the 9’s and 10’s are even more extreme, with nearly four out of every five signals being profitable and returns rising to 9.06% per trade for those stocks which had a top PowerRating of 10.

Overall, by using a limit entry and a 5-day simple moving average exit, the gains rise substantially. And, PowerRatings Platinum subscribers are provided with a daily list of stocks with specific entry and exit levels based upon these two rules.

The table below shows some recent entry signals:

One caveat to the above is that most days, PowerRatings are viewed by thousands of traders. Too many people entering or exiting at a fixed price, or on the open, will potentially have an impact on price behavior (and likely make at least a few specialists and market makers wealthier). Also, in low volatility environments, fewer stocks trade to the 4-7% levels than in high volatility environments. Therefore, if you apply PowerRatings to your investing and trading, please be cognizant of these facts when entering and exiting positions.

For this reason, we provide you with a 3% limit order entry range and the 5-day SMA exit price. These levels allow the highest number of traders to take advantage of this strategy on a daily basis.

We hope this information is helpful to you. If you would like to attend a free class which covers this research and strategy further, please click here to view the calendar of the upcoming online classes. For a free PowerRatings Platinum trial, click here. If you have any questions on the research or the strategy please feel free to email us or call 213-955-5858 ext 1.

Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.

Ashton Dorkins is Editor-in-Chief of TradingMarkets.com.