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What is “Evidence-Based Trading?”

I consider myself an evidence-based-investor. The benefit it offers is to minimize the influence of emotions on investing/trading decisions. As a serious investor I’ve learned just how much damage can be done when emotions hijack my brain!

According to www.dictionary.reference.com

EVIDENCE

  1. That which tends to prove or disprove something; ground for belief; proof.
  2. Something that makes plain or clear; an indication or sign
  3. Law . data presented to a court or jury in proof of the facts in issue and which may include the testimony of witnesses, records, documents, or objects.
FBI Evidence Response Team.
Image via Wikipedia

As a Coach at OptionsANIMAL, I work with students learning to apply options to their investing style. Students use virtual accounts to apply the strategies they’re learning for the purpose of gaining first-hand experience without risking any capital.

A student contacted me this week asking a question about applying Evidence-Based methods to a paper trade he had in NUAN. My answer to him was representative of the process I go through routinely, applying “evidence” to my technical analysis of an equity.

WEEKLY CHART:

  • Big range bar week ending 2.10.12 on highest weekly volume in at least five years! and closed within 2% of the intra-week low.
  • Week ending 2.10.12 was also a BREAK OF 10 WEEK Simple Moving Avererage (SMA)…… BEARISH; volume 154% above average weekly volume.
  • Price unable to close any week since then above the 10 week SMA
  • Week ending 2.17.12 was above average volume up week, however, was 1 penny above the close of the previous
    week!…… CHURNING ….. a sign of Institutional SELLING
  • Week ending 3.2.12 was bullish looking, yes, but unable to close week above the 10 week SMA

DAILY CHART:

  • Failed Break Out (BO); BP was $27.07, where 8% below Buy Point (BP) was $24.90.
  • BO occurred on 1.9.12 on volume that was 56% above the daily average volume
  • The price advanced 15% to an intraday high of $31.15 on the day of an earnings event.
  • The EPS and Sales MISSED, resulting in a gap down on volume that was 483% above average daily volume!
  • The IBD method Stop Limit (8% below buy point at $24.90) was triggered on 2.23.12.
  • Friday’s close (3.2.12) was under the 50 day MA

Those are FACTS, pure data, no emotions involved.

Will the price move above the 50 day SMA? Will NUAN remain bullish for a while? I don’t know.

But, all the evidence is pointing to BEARISHNESS.

For me, this is powerful. Does that imply that I don’t look at a stock’s fundamental strength or weakness? NO! However, history taught me that the fundamentals continue to look stunning while a stock’s price tanks more than 60%! (Look at FSLR in May 2008)

My rule? Buy on Fundamentals and Technicals; Sell on Technicals. EVIDENCE is my guide!

Emilu Bailes
OptionsANIMAL Instructor

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