2 Reliable Trading Strategies

07/08/2011 9:30 am EST


Steve Todd

Editor, The Todd Market Forecast

Veteran short-term trader Steve Todd says there are two basic philosophies to trading the markets, and these form the basis for his trading. Here, Steve explains his two proven strategies and the indicators he counts on to find winning trades.

Every trader at some point in their career has to settle on one strategy or at least one time frame that they’re comfortable trading in order to become successful.

Our guest today is Steve Todd; he’s a very short-term trader, and he’s going to talk about what he looks at. So Steve, talk about your overall philosophy and approach to the markets.

There are two basic philosophies with trading: One is to buy weakness and the other is to buy strength. Buying weakness, as an example, would be the “Dogs of the Dow,” the worst-performing stocks from the previous year. That’s an example of buying weakness. 

Buying strength, I’m sure you’ve heard the old theory “The trend is your friend.” That’s essentially buying strength; you know, you’re buying high and selling higher.

I prefer buying weakness; that just fits my personality better.

I use several short-term indicators. For instance, if in a particular day, if we have 1500 net-declining issues, frequently you’ll find that predicts a rebound in the next few days. Sometimes it comes in a fairly significant bottom lasting maybe two or three weeks.

That’s one of the indicators that I look at, and it’s good because usually when you see this type of day reported on the news, the newspeople will say “A lot of damage was done to the market today.” If they were technically oriented, they would say “Well, a lot of opportunity was created today by the market.” 

I don’t expect that to happen and I don’t want it to happen. The less popular technical analysis is, the better it works. I don’t want everybody piling in on it. 

Another example would be just the price action itself. For instance, I found that if the S&P or the Dow drops by 1% or more in a single day—again, that’s about 120 points on the Dow, for instance—but when that happens, you tend to have rebounds coming back in fairly soon. 

Now you’ve got a better rebound if you’re in a bull market and that happens. If you’re in a bear market and that happens, you still get rebounds, but maybe a little bit more anemic. 

Those are a couple of things that I look at in my trading techniques.

How do you approach the risk side of it all to make sure that if you do go long because you see weakness, you’re protected in case the trend continues down?

Every time I put a stop in, I get stopped out, so I’ve learned not to put stops in. No matte where I put it, it goes down and gets me and then goes back up again. 

I found the best way to control risk is just trade lightly enough so you don’t have to put a stop in, and that’s the way I control risk. 

Do you scale into positions?

No, because we’re so short term. I jump in; I typically don’t stick around more than a couple of days. I jump in and jump out. I don’t scale it because I’m not looking at a longer-term approach to the market.

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