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TitleAndrew Goodwin -.trading.secrets.of.the.inner.circle(pdf).pdf
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Page 2

Chapter 1

Market Wizard Filter

This chapter will detail a sophisticated method using interest rate and market breadth

models to filter a simple S&P oscillator system. This use of intermarket data can be very

useful in your timing operations if used judiciously. In fact, one S&P trader, profiled in

Schwager's "Market Wizards" uses a version of the filter I am giving you to assist in his

highly profitable trading operations.

First things first:

Basic Method of calculating the RSI index:

The formula for RSI:

RSI =100-(100/1+RS)

Where

RS= Average of x day's up close to close changes/average of x day's

down close to close changes.

For 8 day RSI you will be averaging the close to close changes of the last 8 up days.

Then you will divide this figure by the average close to close changes of the last 8

down days.

Page 49

58 Trading Secrets of the Inner Circle

The following will appear in your Tradestation software for Pattern #5.

{Set TradeStation to close trade at end of day}

value 1=lowest(range,2) * .45;

if high[2]<low[5]

and high>highest(high,2)[ 1]

and close<open

then buy ("Buy D5") tomorrow at open tomorrow + value1 stop;

Daily Pattern #6: The Fakeout Follow Up
When the market opens above the previous day's high and then sells off so that it

closes lower that previous day, we call the open a fakeout. Those who buy into the

euphoria of a big open generally feel the need to sell out their positions when the

positions turn into losses. The jaws of the fakeout close upon the victims. When the

weak players are liquidating their losing trades at the close, we look to enter the

contracts the very next day on a rally off the open of 30% of the highest range in 3

days. Historically, this trade has been good for $25,720 in profits with about 70%

accuracy. The fakeout pattern must be recognized to be exploited. Incidentally, when

this pattern has occurred on Tuesday, the trade has not been worth taking. The

"Countertrend Tuesday Effect" distorts certain patterns so we just sidestep this day for

trading them.

The following code will appear in your Tradestation software for Pattern # 6.

{Set TradeStation to close trade at end of day}

value 1 =highest(range,3)* .3;

if dayofweek(date)<>2

and open>high[l]

and close<close[l]

and high-close>close-low

then buy ("Buy D6") tomorrow at open tomorrow + value1 stop;

Page 96

Why the Large Hedge Funds Win and How You Can Too 109

screens have excellent track records in selecting stocks that outperform market averages.

When a stock reports earnings higher than analyst consensus estimates, the Wall Street com-

munity rapidly changes its forecasts.

With this knowledge, we can employ a sophisticated method to get into stocks before the

analysts and mechanical screens reach all traders that use them. Here is my special method for

getting in front of Wall Street.

Our Power Stock Selection Method: The Value Line Outflanking Maneuver:

I subscribe to the Value Line Investment Survey. Each week I receive a summary and index

report that lists stocks that have been upgraded or downgraded on their scale of 1-5 for

timeliness. Stocks that are ranked a 1 have a dramatic history of outperforming the averages

and to some degree the outperformance may be self fulfilling. If you look at the section in the

weekly report called "Noteworthy rank changes," you will see the stocks that have changed in

rank and the reason for the change. In the overwhelming majority of cases it is the stocks that

have reported earnings surprises that get listed.

We are going to try to identify stocks that are about to be upgraded to the ranking of 1 in the

Value Line Investment Survey. What we do to accomplish this is to monitor all the stocks

ranked 2 or 3 in the survey on our quote machine ticker. This news monitoring can be done on

many quote machines by ticker symbol. Anytime a stock ranked 2 or 3 in Value Line Reports

a positive earnings surprise, we will buy it at the market immediately following the announce-

ment.

Since the analysts at the major firms did not get their consensus estimates correct in evaluating

the stocks we are buying, it will certainly cause them to either change their estimates upward or

to look more carefully at the reporting company. In addition, since many of the quantitative

screens used by top money managers employ earnings surprise data, we will get the jump on

many portfolio managers using our method. Ideally, the Value Line Investment Survey will

also give a new ranking to the stock, and we will hit a homerun.

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