Step back from the crowd and trade weekly patterns

You don’t have to be glued to your trading screen to take advantage of the strategies used by top market players to profit from stocks, futures and forex. Start with a giant step back, and focus on weekly patterns that work out more reliable highs and lows than daily or intraday price action. Then build driving rules that allow you to sleep at night, while the fast-paced crowd tosses and turns, fixated on the next opening bell.

Algorithms, also known as high-frequency trading (HFT) robots, have added significant risk to intraday trading in recent years, pushing prices higher and lower to eliminate volume bands, stop losses and inflection points where human traders will make poor decisions. Focusing on weekly charts avoids this predatory behavior by aligning entry, exit and stop losses with the edges of longer-term uptrends, downtrends, support and resistance.

The Big Picture Approach

This big-picture approach significantly lowers noise levels, allowing the weekly trader to spot opportunities missed by short-term players flipping through their daily charts at night. Admittedly, these trade setups require patience and self-discipline, as it can take several months for weekly price bars to reach active trigger points.

However, higher reward potential makes up for this lower activity level, while total work effort allows the trader to have a real life away from the financial markets.

Use weekly charts

Weekly charts use specific risk management rules to avoid getting caught up in big losses:

Reduce position size and avoid overusing margin. A few hundred stocks will do the work of a thousand or more when you let prices move many points before taking your profit or loss. Be selective in position selection. As a general rule, high-cap stocks and the most popular exchange-traded funds (ETFs) generate better weekly deals than small-cap darlings or high-flying biotechs that can drop 30% to 50% after an adverse FDA decision. Focus on the edges of long-term ranges and moving averages. Opening a weekly trade in the middle of a 15- or 20-point sideways pattern is a surefire way to lose money, while buying a pullback to the 50-week EMA can produce excellent results. Respect the power of opportunity cost. The capital you set aside for a weekly trade lasting several months cannot be used for a higher reward setup that magically appears while you manage the other position.

Feel free to add fundamental techniques to your weekly technical trading criteria. For example, solid earnings growth will increase your confidence when buying a stock that approaches a weekly support level after a selloff. Additionally, dollar cost averaging can be used aggressively, adding to positions as they approach and test these action levels. But don’t be blinded by the company’s balance sheet if support breaks because you will have to take your loss aggressively.

A Historical Example

Let’s look at an example from the past using four weekly trading setups carved out by Powershares QQQ Trust (Nasdaq: QQQ) over a 14-month period in 2013 and 2014.

The fund entered a weekly trading range, with support near 85 in November 2013. It rose above 90 and sold off in early 2014, returning to long-term range support in April. Weekly traders can build low-risk positions at that level (1), before a 7-week bounce that added more than 7 points. Additionally, a second buy signal broke out when it rose above January resistance (2), favoring a new entry or continuation of the first position, which is now held at a significant profit.

The steep October slide set up a third weekly trade entry as it dropped to support above 91 (3), created by the June breakout. That level also lined up perfectly with support at the 50-week moving average, greatly increasing the odds of a bullish outcome. The fund went vertical from that support zone, tested the annual high and broke out after year-end. A final buy signal goes off when it breaks out into triple digits in November (4).

April and October pullbacks in weekly support (red circles) bring an important issue in the execution of weekly trades. Both dips breached mid-week support and bounced back, ending Friday’s session above those contested levels.