Given the Fibonacci reversal signals that occurred Wednesday, as noted in my column, some people are asking what they should do now.
If you are just now recognizing that the market may have peaked and you want to dilute your exposure to that risk without sacrificing return, use a proactive strategy with integrated risk controls that can work if the market increases, declines, or trades sideways. I will offer an example of one here, and explain how to use it.
I call this the Lock and Walk Strategy. It is designed to lock in small gains every day and stop trading. It is a proactive trading strategy with integrated risk controls that can work in any market environment and regardless of economic conditions, so it fits the profile.
Obviously, when the market goes straight up, most investors do not find the need to control risk, so proactive strategies, ones that require a little more work, fall out of favor. However, because these can work regardless of market direction they usually come right back into favor when the tides turn like them seem to have begun to do already.
The Lock and Walk Strategy uses the Nasdaq and the ETFs associated with the Nasdaq to take advantage of market cycles intraday. It has no overnight risk because it ends every day in cash, and you can set this up to be automated. The process of executing the trades is simple:
1. If support is tested, buy ProShares Ultra QQQ QLD, -0.16%
2. If resistance breaks higher, buy QLD
3. If support breaks lower, buy ProShares UltraShort QQQ QID, +0.21%
4. If resistance is tested, buy QID.
These are the four basic rules of the strategy. The obvious stops are part of this, too, and although some will argue that this is no way to approach the market, it actually is quite efficient. It helps you act like a machine because you do the same thing every day no matter what happens, and that can be very useful when the going gets tough in the general market.
It helps to remove emotion, it helps to calm nerves, no overnight risk helps, and so do the automated options. Performance matters, obviously, and in this case, is a natural byproduct of risk control.
All you need to do to create this strategy for yourself is to evaluate the technicals of the market, and apply what you find to the four rules above. We use four markets and three tiers in our analysis, so we write 12 charts in this process every day.
We use the Russell 2000, Nasdaq, Dow and S&P, but the trading catalysts come solely from the Nasdaq. We use four markets because we often find anomalies, and we want to distill those anomalies whenever possible. This method helps us do that.
This is not a fundamental analysis. We are not trading stocks that we need to conduct fundamental research on. We are actually not investing, but instead incorporating a trading practice into our approach when we use Lock and Walk, but some people consider investing in a strategy the same as investing in a stock. We feel the same way. The choice is to invest in a strategy that can work in any market.
When we first started this strategy, our Lock rule was set to 1%. We tried to secure 1% every day, but that was greedy, it did not work, so we backtested the program and we found that 0.62% was much better. We recommend that you use a 0.62% as your lock rule accordingly, and whenever you have a daily gain in that amount, close down and do not allow your program to trade again until the next day begins.
Activate your program every day, let it run, and let it manage your risk while you work, play golf, or trade other stocks.