50% Retracement
This idea originally was
made popular by Tony Oz in this book "The Stock Trader: How I Make a Living
Trading Stocks" with his scans to trade his stocks but this method has been
around for some time. One of the daily scans he used was the 50% Retracement
from the nearest low and nearest high. This area is one of the reliable areas
where reversals happen often.
This Retracement area has
two significant factors in the technical analysis arena:
1. 50% is the most reliable number in the Fibonacci tool
2. 50% is also the Pivot Point of the Floor Traders Pivot used in the
pits.
Taken from this knowledge, SwingTracker can
be used to scan to look for stocks closing in this area. We will look for
setups showing bearish and bullish retracements. The formula below can be
modified to each trader's preferences and trading styles. It is highly
recommended to experiment and test them to verify that they work as expected.
VOLUME > 30000 AND
CLOSE > 10 AND CLOSE > (MAX20-MIN20)/2+MIN20 AND CLOSE <
(MAX20-MIN20)*.62+MIN20 AND MAX20-MIN20 > 10 AND MIN20 - MIN40 > 0
We'll dissect the formula
into one expression at a time:
- VOLUME
> 30000 means we'll look only at stocks that trade with volume greater
than 30000. (This can be modified to trader's requirements).
- CLOSE
> (MAX20-MIN20)/2+MIN20 means the close must be higher then the 50%
(midpoint) from the highest price in the last 20 days and the lowest
price in the last 20 days. (MAX and MIN can be modified to longer period
such as MAX40 AND MIN40), if it's changed, all MAX and MIN periods must
be the same).
- CLOSE
< (MAX20-MIN20)*.62+MIN20 means the close must be below 62% of the
highest price in the last 20 days and the lowest price in the last 20
days. We are looking for stocks are the in the 50%-62% range. (This
percentage can be changed to anything greater than .51, but recommended
to use .75 as limit).
- MAX20-MIN20
> 10 means we want to have this highest price and lowest price to be
at least 10 points apart. Why? If the range wider then there is more room
to take advantage of a greater profits potential. If range is too small,
little movement is too narrow for profit potential. (This can be modified
to smaller or greater).
- MIN20
- MIN40 > 0 means that the lowest price in the last 20 days and the
lowest price of the last 40 days must be greater than 0. This is to
filter to make sure there is a trend in the stock and that it's been
moving up upward. That is, the lowest price of the last 40 days was much
lower than last 20 days.
After running the
scan, here are a few sample results. Note that the first chart shows that even
though the stock in general is trending up, it shows a bearish retracement, due
to the fact that the lowest price in the last 20 days was close to the last bar
than the highest price in the last 20 days. In this case, caution must be used
to short this as it is a counter-trend trade. The best strategy is to wait for
it to close above 50% and buy from there.
The charts above and below show an excellent area to go long for two reasons:
1. It's retracement 50%
2. It's at longer term price support (the red horizontal line)
Usually when there are more technical indicators confirming the area, then
higher the chance of a successful trade will result.
This last chart here shows the great wide range between the highest price and lowest
price (greater than 10) in last 20 days. This stock has been on a tear and with
price confirming the push up when higher volume. Now it's at the 50%
retracement is an ideal entry after such a pullback.
There are other options
in using Price categories, such as MAX40 (highest price in last 40 days),
MAX125, MAX250 as well as MIN40, MIN125, and MIN250. Other options can be used
such as substituting Close with High or Low. Try these scans on www.SwingTracker.com and make a few
modifications to your current strategy and see how flexible these scans can be.
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