As technology advances, the variety of tools and strategies available to individual traders increases accordingly, and for newer traders the sheer number of techniques and strategies on offer can be daunting. Short Term Trading Strategies That Work by Larry Connors is a nice introduction to some of the trading rules and strategies that have proven consistently helpful for navigating the markets.
One of the best things about this text is that each strategy or technique is treated in quantitative terms. Even perennial bromides about being long when stocks are above the 200-day moving average or about not using tight stops are presented in light of the real edge they offer in concrete terms. Many of the strategies explained here have been covered previously on the TradingMarkets site, so some material may be familiar.
The chapter titles effectively convey the principles covered:
1 – Introduction
2 – Think Differently; Rule 1- Buy Bullbacks, Not Breakouts
3 – Rule 2- Buy the Market After It’s Dropped; Not After It’s Risen
4 – Rule 3- Buy Stocks Above Their 200-Day Moving Average, Not Below
5 – Rule 4- Use the VIX to Your Advantage… Buy the Fear, Sell the Greed
6 – Rule 5- Stops Hurt
7 – Rule 6- It Pays to Hold Positions Overnight
8 – Trading with Intra-day Drops – Making Edges Even Bigger
9 – The 2-Period RSI – The Trader’s Holy Grail of Indicators?
10 – Double 7′s Strategy
11 – The End of the Month Strategy
12 – 5 Strategies to Time the Market
13 – Exit Strategies
14 – The Mind
15 – The Finale
Of these, the chapter advocating against the use of stops is probably the one most likely to meet with resistance: practically, because it is psychologically difficult to watch a large loss get even larger, and theoretically, because abandoning stops seems likely to increase the variance of returns for a given strategy.
One feature we noticed is that the majority of the techniques explained in Short Term Trading Strategies That Work rely on mean reverting tendencies to generate a trading edge. Some examples: the Relative Strength Index (RSI) is widely used as an indicator of “overbought” and “oversold” market conditions, where the “over” implies that an underlying has moved too far too quickly and is likely to revert in the direction of a recent mean. The “Double 7′s Strategy” likewise takes contrarian positions when an underlying closes at a 7-day high or low. So, mean reversion plays a big role in this book, and that’s not a criticism (cf. our “Using Options to Trade Mean Reversion“). Still, we would caution traders to keep an eye on the behavior of the markets in general: mean reversion, after all, has not always been quite such a forceful tendency, and contrarian strategies are bound to underperform during markets characterized by momentum trading.
Michael over at Marketsci has been testing some of these trading rules, with largely positive results, so be sure to check out that series.
And you can read a sample chapter from the book here.