Day of the Month Investing

Amazingly one of the most consistently profitable trading methods I've found is a system designed to go long on the first trading day of the month. It's absurdly simple, and has tested well even in bear market. It's also an uncomfortable system to trade since I want an indicator or some confirmation to go long. It just makes me feel better about the trade than just blindly going long on the first trading day of the month.

Anyway here are the results of my testing. You should always verify results on your own and keep in mind I'm not recommending this system. I'm using it but it's only one of many strategies I use during the month. It only gives you one trade per month but it has captured most of the gains in the market for such a short exposure.

Okay let's take a look at the following example.

The rules were buy 100 shares of spy at the market close on the last trading day of the month, and sell on the market open on the 2nd trading day of the month. No other rules were used. (The trading day is not the same as the day of the month. For example the 1st day of the month might be a Saturday so the first trading day of the month would be the 3rd day of the month. )

Here is the equity curve:

This is impressive considering that buying 100 shares of spy back in 1988 and selling it on the same date as this test would have given you $10760. This strategy of being in the market only a couple days per month collected almost all of the gains in the market without the massive draw downs of buy and hold.

I've run other tests and perhaps I'll add the results on to this post later. Day trading this method works as well. Simply buying the open on the 1st trading day of the month and selling on the close of that day did very well also.

I'm not suggesting you run out and do this strategy immediately. Do your own homework. I find it very impressive that most of the overall market performance in the S&P 500 is on the 1st few trading days of the month.

Larry Connors in his book Short Term Strategies that Work also looks at this property of the markets. He, however found significant out performance toward the end of the month. He found an up bias toward the end of the month which I did as well in my testing.

Also in Robert Colby's book The Encyclopedia of Technical Market Indicators, he found significant out performance of a buy and hold strategy on the Dow by buying on the 26th of the month, and selling by the 6th of the next month.

And finally here is another blog entry that did a similar test: http://www.crossingwallstreet.com/archives/2011/04/investing-on-the-first-day-of-the-month-2.html

Using Foliofn Trade Window for Short Term Trading

Foliofn is an online broker that allows commission free trades during 2 daily trade windows. One window is at 11:00 and the other at 2:00.

I have found these window very useful for keeping transaction fees in check in conjunction with a swing trading system. I'm using a 2 period RSI pullback system that is discussed in Larry Connors Short Term Trading Strategies that work. I'll give the details on how I'm using this in another post. You can open many positions, add to them in multiple steps all for zero transaction costs. Doing this without a window would require a very substantial account to overcome the transaction costs since you may hold 15+ open positions each of which can be added to 4 times before they are sold.

This is how I use the trade window. I check my stock and etf screens nightly. I make a list of the potential buys I would like to make and put them on my watch list. I enter the trades on foliofn that night. If the stocks or etfs are trading below the previous day's close or no more than .25 percent higher I will allow the trades to be executed in the window. Any stocks that moved higher than .25 percent of the previous day's close I will cancel that order.

Trades will be exited according to rules on the next day's trade window. If I have been in a trade for more than one day the 2:00 window can be used to exit a profitable trade. This is useful since the trade window is at 11:00 not at the market open. I will sometimes exit a trade at the 2:00 window.

You cannot use stops with foliofn trade windows. The Larry Connors system does not use stops which opens your position to risk against unusual events.

There are 3 ways to deal with this risk. As you know stops do not protect you from overnight events that drive the stock market down. Therefore stops do not offer full protection. The only way to get full protection is to buy out of the money puts to protect against those rare events. The other way to protect your portfolio is set a mental stop for execution in the next trade window should the stock close below that "mental stop". This requires considerable discipline and since the orders are not executed instantly you are open to more risk than a standard stop. The 3rd way is to attach a stop after the window order has executed. You won't be able to attach the stop until the end of the trade window so there is a brief period of time you will be exposed with no stop and it requires you to put the stop in during the day which may not be possible.

Monday April 4th Short Term Long Trades

Orders I'll place  Monday April 4th.
Short term 2 period RSI stock pullback longs

Dell - I will be buying Dell through Foliofn trade window at 11:00 Monday April 4th if the stock is trading in the area of Friday's close of 14.34 prior to the trade window. A limit order the open for 14.34 is another way to get into this position.

I will be buying my 1st buy in which is 10 percent of final position.

Xlnx -
limit order long 32.15. Buy 1st 10 percent of position. Execute trade during Foliofn trade window or a limit order from 32.15 at the open.

I will  monitor these positions nightly. Exits will be placed for the next trading day open or Foliofn trade window.

The above listings are for informational purposes only are are not investing advice.

Larry Connors Short Term Trading Strategies That Work Review

Short Term Trading Strategies That Work by Larry Connors and Cesar Alvarez belongs on your shelf if you are interested in swing trading and I'll tell you why.

Larry Connors is very well known in the field of investing. He managed a hedge fund and has created many books on trading techniques all based on quantified research. I have read many of his books and I think this particular book is probably his best.

The foundations for this book really started with the book that was published a year before this one called How Markets Work. In that book Connors and his researcher Alvarez put forth quantified research that showed a clear edge for investors who buy pullbacks and sell rallies for those using a short term horizon measured in days. They demonstrated through their market research that buying a very oversold stock or etf outperformed the market on a short time horizon and buying an overbought stock or etf underperformed the market on a short time horizon. On a longer term horizon buying those oversold breakouts may in fact work but within the shorter term context he clearly demonstrates the edge lies with buying what everyone currently hates, and selling when everyone loves. You can see how the development of the specific strategies Connors proposes in Short Term Trading Strategies That Work really began. Though I do recommend How Markets Work, I think of it as the foundation for Connors later work and an optional read ,not essential, as it does not contain the specific strategies developed in Short Term Trading Strategies that Work.

Now that we have discussed the background of the book let's take a look at what's in it. The book itself is rather short and concise but don't let that fool you. The first 7 chapters focus on some general trading rules that are really the foundation for the strategies that come later in the book. One of the rules for example is to go long stocks or etfs above the 200 day moving average and to short stocks or etfs below the 200 day moving average. Sounds simple right? Many mutual funds follow this rule but how many people out there have been seriously burned trying to "catch a falling knife", or pick a top in a market that keeps going up? This rule alone could have saved investors a lot of money during the market crash we experienced. . Connors gives you the stats to back this up and should make you think twice about going against the long term trend. There are several other market observations that talk about the vix, intra-day pullbacks, holding positions overnight, and a very clear and surprising opinion about stops. All of this comes with quantified research to back up the findings.

Now for the strategies. Overall the strategies are incredibly simple. Surprisingly simple. Many of you might look at them and say that's it? Where is the complexity? Connors would say he is very wary of strategies that have too many rules. I can tell you from my experience as well, that trying to take into account too many market variables will hurt your performance over the long term. You will freeze or wait too long for the perfect set ups. Just identify a strategy that has an edge and execute it.

One of my favorite strategies in the book, and one that I use is the 2 period RSI. This is a unique application of the RSI indicator and it does in fact work as the book suggests. I can verified this through my own back testing. The testing done by Connors and Alvarez is complete but anyone who is going to trade a strategy should do their own extensive testing and I think you will find these strategies do give you an edge as Connors and Alvarez propose.

All of the strategies, though different, work on the premise discussed above. Buy markets that are extremely oversold and sell markets that are overbought. The strategies vary by the methods used to identify overbought and oversold conditions.

One complaint that I read about this book before I bought it was that the wins were rather small. This may be true but depends on your point of view. The wins do tend to be small percentages (1-3 percent perhaps), but the winning percentage is quite high. It can be as high as 75-85 percent, and if you scale into the position the potential winning percentage is even higher. It would require a decent sized account, however, to take advantage of the small percentage returns per trade. If you are looking for larger gains per trade then these strategies are not for you.

Even though you won't get many "home run" trades,  I think this is great for newer traders who are beginning. You want to get some wins under your belt and develop some consistency. These strategies provide you with that possibility. Don't think that you can't fail with these strategies because you can. Taking these trades is very tough to do. Why might you ask? Because you are buying when everything looks terrible. You are going long a stock when everyone thinks the market is heading down. Trust me, if you pay attention to the financial news and are using these strategies, you are going to hesitate and put yourself at a disadvantage. Don't listen to the news! This is where the new trader can get off the mark and start second guessing. Everything around you in the news is going to tell you not to take the trade, but the statistics of the system should give you confidence to take them. You do have to develop that mental toughness that all traders need to develop or you won't succeed with it. Hey those analysts might be right on a longer time frame but that's not what these strategies are about.

Even if you decide that these methods are not for you I still think this book is worth the investment. You will be getting some robust strategies, and a little better understanding of the workings of big money in the markets.