This entry was posted on Wednesday, February 6th, 2008 at 9:29 pm and is filed under Education, Trades, chart patterns, market commentary, system trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
I wanted to present another system that presents an opportunity to buy fear in a weak market. This particular system has quite a good track record and thought I would mention it because it could trigger on tomorrows close. The system is quite simple. It first requires 4 consecutive red candles. Meaning four consecutive days where the close is lower that the open.
I ran some tests on the SP500 tracking ETF to give you an idea how powerful this setup is. Your job as a trader, based upon the data I present would be to “frame” the trade. Maybe you like the historical data - maybe not. But if you decide to take the trade you must use proper risk management. What percentage of your portfolio do you allocate? That would have to based on many factors I can not see for anyone but myself. Each trader needs to do his/her own analysis.
Ok, so here is what you looking for if you decide to watch/trade this. We have had 3 consecutive red candle days - and tomorrow would need to close below the open. Oh yes and the close needs to be a down day as well. Keep in mind we will most likely gap down based off the CSCO news and we would need to close below that open. If we do you’ll need to buy the closing price of the SPY.
The exit is quite simple:
- a 3% profit target
- holding for 7 days
Whichever triggers first. That is it. Simple.
Now I shall present the data of this setup since the beginning of the SPY in 1988. It is actually quite good. Many systems of this nature tend to have good win percentages but it is at the expense of having losers a bit larger that winners. That is not the case with this system over the past 25 years. I have included a link to a spreadsheet showing all the trades below. And a graphic showing some visual stats.
Basically we have seen 71% winners - with winners averaging about 2.27% and losers about 1.24%. Quite impressive. Maybe a red candle is not always such a bad thing.
Have a Great Night!
Dave Johnson
February 7th, 2008 at 11:08 am
[...] wanted to make a quick clarification of the 4 Red Candle System I mentioned last night. The 4 red candles all need to be a down days. Meaning each candle’s [...]