Swing Trading with PowerRatings: Model Trade of the Week in THQ Inc.
One of the merits of a quantified, systematic approach to trading is that it helps traders and active investors alike to stay on track, only pursuing those opportunities where the historic and statistical edges are significant.
Traders can calibrate their approach to be more or less active in their trading, buying and selling with greater or lesser frequency. But importantly, systematic trading strategies and methods tend to keep traders out of the market when edges are few and far between, providing another potential safeguard against incurring outsized trading losses.
If you are using PowerRatings to help you find the best stocks to trade every day, then this may describe your trading experience over the past few days, as the number of top-rated stocks has been very small, and many of the lower-rated stocks – the ones that are best avoided or sold short – have often sold off before providing traders with an ideal entry opportunity. This was certainly the case with stocks like Global Partners (GLP), which sold off dramatically just one day after earning our lowest PowerRatings of 1 out of 10.
One opportunity that did develop for traders, however, was in the market for shares of THQI, Inc. (THQI). As shown in the chart below, shares of THQI earned a one-point PowerRatings downgrade on October 27, after climbing into overbought territory below the 200-day moving average. For traders who were monitoring the stock, all that would be required for a short entry was follow-through to the upside of at least 3% on the following day.
That follow-through came, as THQI reached an intraday high of 2.35 on the 28th – just enough for traders looking for a 3% intraday entry to take a short position in the stock near session highs.
And just as quickly, THQI sold off the very next day, dropping by more than 4% to close beneath its 5-day moving average and out of overbought territory.
But for traders who were able to take a short position in the stock using a 3% intraday entry strategy, the gains likely were far more than 4%. In fact, with the intraday entry strategy allowing trader to take short positions near the previous day’s high, total gains were closer to 9%.
While stocks earning our lowest PowerRatings of 1 – as THQI did – have the biggest quantified edges to the downside, similarly low ratings of 2 or even 3, can also serve as alerts that a stock potentially has moved too far too fast and may be vulnerable to reversal. Traders need only look at the even more recent performance of THQI, which is down more than 7% early in trading on Tuesday after closing with PowerRatings of 2 out of 10 for the past two days in a row.
For more information about trading stocks using PowerRatings, click here.
David Penn is Editor in Chief of TradingMarkets.com