80-20 Setup Scan
January 26, 2008
In the book written by Linda Raschke and Larry Connors called “Street Smarts: High Probability Short Term Trading Strategies” the 80-20 is a day trading set up that can be used as a scan to find the profitable trades. This book is highly heralded by many successful day traders. Linda was one of the first to train and mentor traders via the online trading room with success. She has many setups that are later copied and modified by others in the field. One of the better-known counter-trend trades in the book is called the 80-20 setup. This setup is fairly simple so putting into the SwingTracker Scan wasn’t so difficult.
VOLUME > 300000 AND OPEN > ((HIGH-LOW) * .8 + LOW) AND CLOSE < ((HIGH-LOW) * .2 + LOW) AND LOW < LOW1 - .15
We’ll dssect the formula into one expression at a time:
1. VOLUME > 30000 means we’ll look only at stocks that trade with volume greater than 30000. (This can be modified to trader’s requirements).
2. OPEN > ((HIGH-LOW) * .8 + LOW) means yesterday’s open must be above 80% of the end of day’s high and low. For example, if the stock’s high was 10 and the low 9, the open had to be 9.8 or above.
3. CLOSE < ((HIGH-LOW) * .2 + LOW) means yesterday’s closing must be lower than 20% of yesterday end of day high and low. Taken from the example above, the close had to be 9.2 or below in order for the criteria to be met.
4. LOW < LOW1 - .15 means today’s low must be below yesterday’s low at least by .15 or more. (This can be modified between .05 to .15 according to the authors).
Although this strategy focuses of the entry, the authors mentioned about placing the stop loss and vaguely about how to place trailing stop. This is up to each trader to determine on his own to make this a successful strategy. Here are some of the examples from the scan.
Figure 1 Prices went below yesterday’s low and immediately rebounded and never look back.TXT fits the typical action this ideal setup. Having opened above the 80 percentile of the previous day’s high and low and closed below the 20 percentile. Finally, the last criteria was made when the prices dipped below the previous day’s low by more than 15 cents. Upon making the dip, prices reversed. When it got back to the previous day’s low, a buy signal was taken. With the stop loss placed at the day’s low and a trailing stop or predetermined target.
Figure 2 small gap up then dipped down by midday.The scan showed AKAM as a candidate with the right setup. The previous was a heavy selling day. The next day, prices remained higher than the previous day’s low at the opening, but then moved lowered then suddenly reversed. When it moved back above the previous day’s low, a long entry was alerted. However, this up momentum didn’t stay very long. Either profit had taken immediately or moved the stops to breakeven (at yesterday’s low)).
Figure 3 A quick move in the opening hour.HPC was another candidate but this time it happened at the opening hour. Prices gapped up then moved down past the previous day’s low, then moved back up again. A small gain would have sufficed given the nature of the bearish market.
Below is an example that the scan would not have caught in the filter. Because prices never moved back to yesterday’s low, the scan didn’t alert the trader and therefore had sit out of a losing trade. On the bottom horizontal line is the low of yesterday, that is also the long entry point should prices decide to move back up. Fortunately, the stock opened with a gap up but then moved down straight away and never came back above the previous day’s low. This is one the advantage of this strategy: weeding out highly momentum stocks.
Figure 4 A stock the scan would not have picked up.
Try this scan and do your own research and modify the settings however you feel comfortable. This setup is one of the more risky trader due to it being a counter-trend trading. But the profits are quick, exactly what the day traders look for.
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