Cycle Trading Strategies
There are tons of trading strategies that traders developed, some work and some don’t. Some trading strategies work for some traders, but fail for others. The most common reason being traders apply the wrong trading strategies to the wrong time. There are trading strategies that work well during recession but failed miserably in a bull market, and vice versa. Today, we are going to look at two powerful trading strategies that you can use for different stock market conditions.
In short term swing trading or day trading, almost all trading strategies incorporate technical analysis and chart patterns for trade setups, profit taking and stop losses, and that’s exactly what we will use for our trading strategies. Let’s begin.
What is Cycle Trading?
Cycle trading is a way that traders use to find support and resistance of a stock and buy stock when the stock hit a cycle low and sell stock when the stock hit a cycle high. This strategy is best used when a stock is trading in cycles.
Cycle Trading Pattern
The Cycle Trading Pattern looks like a Sin wave. When the stock market or an individual stock is trading in a range, it is what we called a stock is trading in a cycle. It fails to drop lower than the cycle low and fails to rise higher than the cycle high. Sometimes, a stock may trade in cycles for many years. When you recognize this pattern, you should buy the stock at cycle low and sell it when it approaches cycle highs.
4 Phases of a Trading Cycle
There are generally 4 phases of a trading cycle, Business Phase, Recession Phase, Depression Phase, Recovery Phase. There are short term and long term cycles of a stock or the general economy. If you buy stocks during the Business Phase or the Recovery Phase, you could make a really nice profit.
Cycle Trading Chart
Here's the chart for AMAT which was trading in cycle in the past 2 years with a cycle low of 10.0 and a cycle high of 16.5.
Short Term Cycle Trading
There are short term cycles within long term cycles and you can literally find cycles on any daily or intraday chart. Your goal is to buy stocks at the support level or cycle lows and sell them on cycle high or the resistance level. You should set your stop loss right below the support level if you go long and the stop loss should be above the resistance level when you go short.
Trend Following Trading Strategies
During a bull market, trend following strategies work really well and it performs better than any other trading strategy. If you apply trend following strategies in the recent month, you could have pick up winners like AAPL and BAC.
If you have traded in the stock market for over half year, you must have heard “The trend is your friend”. This is exactly what trend following strategies is all about, to ride the trends.
Here are a few ways that you determine whether or not a stock is trending.
1. Trend Line
- Draw trend lines on a chart and see if a stock is trending higher. Connect each higher lows and the trend line should be going up. The stock close of each trading day should stay above the trend line. You can draw trend lines manually or you can use a trading software like MarketClub where you can draw directly on the chart. The green triangles on the chart are buying signals generated by MarketClub and the red triangles are selling signals.
2. Moving Average Orders
- You can use a few moving averages or exponential moving averages and arrange them in ascending orders. For example, you can use a 5-day EMA, 10-day EMA and a 20-day EMA. When the 5-day EMA is above the 10-day EMA, and the 10-day EMA is above the 20-day EMA, that is a signal for a trending stock. You can use a longer or shorter period of EMA depends on what type of traders you are.
On 1/5, the following chart triggers a buy signal for BAC where the 5-day EMA is above the 10-day EMA and the 10-day EMA just crossover the 20-day EMA. The stock then went from $6.32 a share to $8.03. That is a 27% gain in 5 weeks.
3. Overbought Stocks
– The third method to see if a stock is trending is to use the overbought indicator. If you use a technical indicator like RSI or stochastic, you can easily check if a stock is overbought. A stock is considered overbought when the RSI rise above 70 or when the Stochastic is Indicator rise above 80. When a stock stays in the overbought area for a long term, the stock becomes a trending stock. If you look for stocks manually, it can take hour to find these overbought stocks. You can use our stock screener to find these stocks quickly and it will save you a lot of time.
Screen for overbought stocks with a stock screener
a) Find the stochastic crossover scan
b) Select the stochastic value between 80 and 100
c) Click the Submit button next to it and you will get a list of stocks that are overbought.
4. ADX Indicator
- ADX is a technical indicator that measures the strength of a trend. When ADX rise above 25, the stock is in a strong trend. If the value is over 30, that means the trend is even stronger. ADX below 25 means the trend is weak and any value under 20 means there is no trend for the stock. Again, you can use the technical stock screener to scan for these stocks.
a) Find the ADX Crossover
b) Select ADX Value >= 25 (You can set this value to 30 or 35 for extremely strong trends)
c) Click the submit button next to it and you will get a list of stocks with strong trend.
5. Daily Trending Stocks
- This is a free service by INO where you can get the daily top 50 trending stocks. These are great stocks for day traders and swing traders.
Click here to check it out.
There are other ways to find trending stocks, but these are pretty good strategies that you can use.
These two trading strategies work well for short term traders.