How a Top Trader Uses Moving Average Crossovers

04/27/2012 7:00 am EST

Focus: FUNDS

Jim Rohrbach

President and Founder, Investment Models, Inc.

In Part Two of our interview with Jim Rohrbach of Investment Models, the longtime trader describes his strategy for using moving averages. He also tells us about his favorite mutual funds for capturing market trend shifts. (Part One, about moving averages and trend trading, appeared yesterday.)

Kate Stalter: I want to talk a little bit about what you are seeing, what your indicators are showing you that’s going on in the market right now. And perhaps a little bit about leading stocks.

Maybe we can start with Apple (AAPL), because obviously so much attention has been on Apple, and what that stock has been doing as it’s corrected. As we are speaking here, they just reported about an hour or so ago.

James Rohrbach: I didn’t hear that. Right now I’m out of the market.

Kate Stalter: They’re up after hours. They beat views.

James Rohrbach: OK, so why fight that? If you’re an Apple investor and it’s going up, stay with it. But I’m telling you, and don’t tell anyone this one, Kate: A 15/30 crossover is all you need, or a 10/20 depending on how quick you want to get out.

Keep in as long as the ten is above the 20. Most people don’t know anything about that, and the sad part is nobody’s going to tell them.

Isn’t that awful? I had a girl one time call me, and she asked me if I traded Japanese stocks or if I had a model for the Japanese market? I said I do not. Then I sat with her and I set up this program, and I think I used a 15/30, we’ll say. And I said, “Now give me a symbol.”

She gives me a symbol, Japanese symbol, I didn’t even know if it would come up. We put it in and it popped up, and her first words were, “Oh my God.”

I said, “What?” She said, “I sold that too soon.”

I said, “How do you know that?” She said, “Well, if you look at the chart, you can see that the 15-day is above the 30-day, and it was above when I sold it. I should have waited for it to turn down. And now it’s turned down and the stock is dropping.”

And I said, “If you got a call from your broker tomorrow and he said, ‘Buy this stock,’ what would you say?” She said, “Absolutely not.”

I would wait for the 15-day to cross up over the 30. This may sound complicated to a lot of people, but it’s really not. And it’s visual. You can see it. You can check it every day and tell. Do you use it at all, Kate?

Kate Stalter: I absolutely was trained in chart reading, and that’s the only way I make my buy and sell decisions.

Do you prefer exponential moving averages to simple moving averages? At least, that’s my understanding from our previous conversations? Is that the case and why?

James Rohrbach: Yes, and I do that because mathematically it places more emphasis on what’s happening right now with an exponential.

Simple moving average is a moving average of everything that took place in the last 30 days or whatever. Yeah I like exponentials.

Kate Stalter: Are there cases where a simple moving average would work as an alternate? Because I believe some charting programs only show you a simple moving average.

James Rohrbach: Oh yeah. Absolutely. It’s probably it may be as good, or almost as good, except I’m focused on exponentials.

I don’t know why other than the fact that I’ve been using them for so many years, and I believe that it’s more important to know what’s happening right now.

And that’s all that’s important really. People say, "Well, what do you think the market’s going to do for the next six months?" Or, "Send me your past signals. I want to go and work them up and see how I would’ve come up with an investment."

I say: Don’t look to the past; look to the present. It’s all that counts. What’s happening right now? You can hope for it to continue up, but it might go down.

If it goes down get out. Don’t argue with it. I don’t argue with the market; I’m not smart enough to do that, but I’m smart enough to know when it changes direction, and I’m smart enough to go with that trend. Most people can’t do that. Even if they know it.

Continued…

|pagebreak|

Kate Stalter: It’s hard to fight those emotions a lot of times, and the noise you constantly hear, as you pointed out. Let me ask you this: Are you mostly trading larger, more liquid big-cap stocks, or does your methodology apply to any market cap?

James Rohrbach: It applies to anything, but I’m a very conservative investor. Right now, all I’m trading is the S&P 500.

I do use a leveraged S&P 500 fund, so it’s 2X the S&P. But I don’t want to do any more than that. It’s easy and here’s why it’s easy: I trade with ProFunds and Rydex funds.

Some people say, “Why not use the ETF?” Fine if you want to. I don’t want to trade with a broker or anything; I want to deal with the fund itself. I want to be able to make a phone call today.

If I’ve got a buy signal today, I would call the fund and say buy X number of shares of the stock fund. And then when it’s time to sell, I call them and say, “Move it into a money market fund," and I hang up. I go back to sleep. It’s that easy.

Now my money’s in a money market fund; it’s not earning any money, but it’s ready to be transferred back into the stock fund. So I make probably three round trips a year. I sleep a lot. My emotions are out of it because I’m a mechanical investor.

Mechanical is very difficult to become. That means that every time I get a buy signal, I accept it and I act on it, mechanically.

I don’t get into the emotions of what’s happening in Spain or Greece or the election. I don’t need that. All I know is mathematically, the market changed direction; I’m going with it. It’s so simple and so profitable that I don’t even need to play an Apple.

Kate Stalter: Can you say which specific funds you do use, so listeners can follow along with you at home?

James Rohrbach: Yeah. I use, and I’ll tell you why I use, Rydex and ProFunds. They have no redemption fees.

You know, some of these funds, if you don’t stay X number of days they charge you maybe up to a 2% redemption fee.That’s ridiculous. I don’t think any organization should tell me how long I have to hold an investment. So I use ProFunds and I use Rydex funds.

Rydex funds has a money market fund that invests in US Government obligations, and therefore I like that. Your money’s not safe anywhere, but it’s probably safer in government obligations. Who knows, but I like that.

I trade ProFunds UltraBear (URPIX). URPIX is two times short the S&P 500. Then ProFunds UltraBull (ULPIX) is two times long the S&P 500. And then Rydex 2x the S&P 500, long and short. [Editor: RYTNX and RYPTX]

Now why do I pick those two? It’s not for favoritism. I don’t get paid anything. But they know how to manage their cashing in. When people go to cash in, they know how to manage that money flow.

I like them. I deal with them personally, and they don’t charge any commissions. I like that.

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