I ran a backtest on the three major U.S. banks to assess if these stock show momentum or mean reversion characteristics over the short-term. I tested how these stocks performed on the trading session after a having 3 consecutive down days and then after having 3 consecutive up days. 

Here are the results from the last 2 years of price action:

• Bank of America (BAC) trades lower on average the day after having 3 consecutive down days (-0.02%) but trades higher on average the day after 3 consecutive up days (0.25%)

• Citigroup (C) trades lower on average the day after having 3 consecutive down days (-0.15%) but trades higher on average the day after 3 consecutive up days (0.27%)

• J.P. Morgan (JPM) trades lower on average the day after having 3 consecutive down days (-0.10%) but trades higher on average the day after 3 consecutive up days (0.27%)

While these results may seem a little counterintuitive at first glance, different stocks show different patterns, or as traders like to say, stocks have different personalities. 

What I would like to highlight here is the consistency of results among the three stocks. There are a few ways we could extend the study further, refining it and I may get back to this study in the next newsletters.

(chart: StockCharts.com)

Trading Preparation

Successful traders spend more time identifying good trading opportunities than actually putting on and managing trades. Your productivity away from trading is very important for your overall trading success. The time you spend in trading preparation will greatly enhance your probabilities of choosing the right trading setups.

Real Trading Example: I follow about fifty trading systems I have designed, and that consumes most of my trading-related time. I screen, evaluate, and rank them every day. I then decide which systems or setups are most appropriate to trade at any given time. This is the core of my work as a trader; the time I spend executing the trades is relatively small when compared to the time I spend preparing, sorting, and evaluating different trading opportunities.

Annotated quote: Clean and consistent charts

“When it comes to chart setup, there is no right way (…) Everything I do comes from an emphasis on clarity and consistency. Clean charts put the focus where it belongs: on the price bars (…)” - Adam Grimes, short-term trader

(1) Traders should be filling their charts with multiple indicators and lines. This is the emphasis on clarity.

(2) Traders must be looking to the same chart templates over and over again. Find the right template for you (timeframe, bars or candlesticks, colors, indicators) and just stick to it. That is how you will train your eyes to process the data. This is the emphasis on consistency.

Note: This is paid newsletter. Subscribers that signed for the free emails will only get full access to the Trading Insights newsletter till February 1. After that only paying subscribers will get access to all the publications (free email subscribers will get 2 or 3 publications a month) 

There’s more to life than trading

I enjoy listening to a podcast just before going to bed. I think its a strong, healthy habit I developed. Today’s pick will be the latest episode from the Tim Ferriss Show, Sam Zell - Strategies for High-Stakes Investing, Dealmaking and Grave Dancing.