Two indicators to improve your advantage | chart of art

There is no magic bullet, but you can improve your trading edge by starting your selection process with two proven concepts: trend and momentum. These are probably the two most powerful forces in the market. The idea is relatively simple. It’s about staying on the right side of the trend and focusing on the leaders. This is basically double momentum. Starting the process with these two steps will increase your chances of success. First select a time period and then select two indicators.

When it comes to trend momentum strategies, my research shows that longer time frames are more effective than shorter time frames. This means that 200 days is more effective than 50 days. Shorter time frames, such as 20 and 50 days, are better suited to mean reversion strategies that trade pullbacks within an uptrend. 200 days means approximately 9 months. This is long enough to absorb a 2-3 month correction, but short enough to allow for a trend extension.

Next, you need a trend-following indicator. There are dozens of options, but a simple 200-day SMA is very effective in identifying long-term trends. The idea is to filter out stocks that are trending down and focus only on stocks that are trending upward (above the 200-day SMA). Below the 200-day SMA, negative results are more likely, and above the 200-day SMA, positive results are more likely. It’s as simple and effective as that.

The chart above shows the META for the 50-day and 200-day SMA. In the indicators window, you can see the percentage higher than the MA indicator, which shows the distance between the closing price and the moving average. META has broken above its 50-day SMA several times, but none of these breakouts have resulted in a trend reversal. These breaks simply marked a tradable decline within a larger uptrend. Since the stock held its 200-day hold and extended higher, it would have been more profitable to accumulate on a 50-day break.

After filtering out stocks that are trending upward, you need a momentum indicator to quantify their performance. There are dozens of choices here too. Rate of change is the purest measure of momentum and works very well. As with SMA, we will use the 200-day rate of change to capture long-term performance. You can then rank the stocks and focus on those with the strongest momentum.

The CandleGlance chart above shows the top performing stocks in the S&P 500. I created a ChartList with S&P 500 stocks, viewed the list with CandleGlance, and sorted it by ROC(200). This will display the best performing stocks at the top and allow you to scroll through this list to create a shortlist for further analysis.

This week TrendInvestorPro introduces two new rotation strategies using variations of this concept. These strategies are fully systematic and traded once a week. This is aimed at investors as it involves less frequent trading than our rotation trader strategy. S&P 500 Rotation Trader Strategy Up 38% in 2024 The image below shows the equity curve (green line) for this strategy and the buy-and-hold (black line) for the S&P 500. This strategy has more than 3x the upside of Buy and Hold and has a much lower downside due to the market regime filter. Click here for more information.

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S&P 500 Stock Rotation Trader (+38% in 2024)

Rotating Trader of Nasdaq 100 Stocks (+17% in 2024)

Cyclical Investors in S&P 500 Stocks (debut next week)

Cyclical Investors in Nasdaq 100 Stocks (debut next week)

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