Momentum Pinball | Short Term Trading

One of the most basic questions that gets asked on social media regarding a stock is:  “Should I buy or sell?”

For traders looking for a quick answer to that question, the Momentum Pinball strategy from Linda Raschke should be a welcome relief.

Before starting, keep in mind this is not meant for any long term stock holding and it doesn’t take the overall trend direction into account.

So why consider it?

First, let’s look at the trading indicators we will be using.

 

Momentum Pinball Indicators

First up, we have the ROC (Rate of Change).

The setting for the ROC is 1 period which will show the percent change between current price and the day previous.  This reading will show how much momentum was in the move based on how big a percent change there was.

Essentially, large moves often result in a snapback in price.

rate of changeNext, is the RSI (Relative Strength Index) where we will use a period of 3 and the source will be from the ROC indicator.  You will need a charting package that allows you to use the output of one trading indicator as the source for another.

Essentially, the ROC will give out the percentage change and the RSI will give the strength of that change.

The RSI will then plot and we are looking at either of two readings:

  • 70 and above is overbought
  • 30 and below is oversold

We need to see either one of those and anything in between those, we would ignore this strategy.

If we find ourselves in either of those levels, it’s not an automatic buy or sell signal.  We need price action to show us some confirmation that we are in line for a reversal.

 

Momentum Pinball – The Strategy

To begin using this strategy, we are going to be using the daily charts of virtually any instrument.  The key is to ensure that the average range is wide enough so we don’t get quickly stopped out in small ranging markets.

Using the average true range indicator is something to consider when comparing the charts you want to trade.  You’d probably want to side on the instrument that has bigger moves on a daily basis.

Buy Setups

  1. At the close, RSI has to be below 30 which indicates, at least temporarily, that the market may be oversold.
  2. When the market opens the next day, our strategy is on alert for a buy day.
  3. Allow the first hour of trading to play out
  4. Your buy stop will go above the price range that was made
  5. Your exit will be below the range
  6. If in profit during the day, hold for the next day
  7. On the next day, exit if price is failing or if price is trending, ensure you close by end of day

Let’s define the one hour range.

one hour range

When looking at your charts, you want to map out from 9:30-10:30 on your chart.  In a shorting scenario, you’d then look to sell when price breaks the low of that range.

Understand that the the risk on a trade may be quite large at times.  In this chart above, the range is around $4.00.

The rules for sells are the opposite.

  1. At the close, RSI has to be above 70 which indicates, at least temporarily, that the market may be overbought.
  2. When the market opens the next day, our strategy is on alert for a sell day.
  3. Allow the first hour of trading to play out
  4. Your sell stop will go below the price range that was made
  5. Your exit will be above the range
  6. If in profit during the day, hold for the next day
  7. On the next day, exit if price is rising against you or if price is trending, ensure you close by end of day

Let’s look at some example on the stock chart of Groupon.

groupon momentum pinballAt the end of each day, you would simply look at the RSI (red arrow) and note it’s position relative to the 70 and 30 level.  During the month of January, Groupon had a total of 4 potential trades.

Let’s take a look at 1.

You can see that at the next days open, the first hour saw all of the days range.  There was no break of the high of the range and therefore, no trade on this day.

How about number 2?

2Another big move off the open but eventually this day moves .85 to the downside.

One thing to keep in mind is keep your expectations low for big gains.  Think of these as “quick hits” as you are only looking to hold for two days maximum.

Does day 3 look any better?

3Not really.  We get .63 to the downside but imagine sitting through those long lower shadows.

I’m not going to look at day four because I can tell by the daily chart it just ripped to the upside.

Impressed?  That’s just one stock out of many.

 

Use Multiple Instruments

For the examples, I just picked a random stock off my list.

There’s no sense in just showing you the best but it brings up a good point:  Use multiple tickers or even markets!

If we get big runs at the open, it’s quite possible it eats up much of the average range.  Having multiple instruments open allows you to pick the best of the bunch for the day.

Imagine you had this stock chart up and the day previous gave an oversold setup.

day trading momentum pinball

The first half hour showed buyers in the game and then from 10-10:30, we see sellers step in giving us a smaller candle.  This decreases the range and from a price action perspective, could be setting up for another move higher.

Following the entry rules, you buy over the high of the range and this trade runs $8 to highs.    Price eventually drops into the close and you’d eventually take a loss.

How about this one?

success

The day previous was oversold and we would be looking to buy the next day.

If you had this chart up on the trading day, you’d notice the small opening range for the first hour.  While price did trade below the range, remember we are looking long.

Price rallies and our entry is hit with a stop loss below the range.  This stop was was just under $1.00.

Price did nothing for the rest of the day but we are in profit at the end of the day.

Holding through to the next day, gap up and a $7.00 run to the upside.  Remember, we are looking to profit off of quick hits but there will be times these runs come out of nowhere.

 

Improving The Momentum Pinball Strategy

One of the biggest things you can do to make this more reliable is to watch how big the opening range is.  Too large and the risk is so great that position sizing will be affected.  I could not imagine using an $8 stop on a trade!

Multiple instruments is vital so you can pick the best looking setup.  You may find in your testing that oversold 30 is less reliable than an oversold of 20.

You may consider using a trailing stop as the day progresses.  We saw the example that was up $8 per share only to turn into a loser.

Any deviation from the original strategy is not the original strategy.  I’ve seen too many traders make changes to a method, still call it the method, and complain about the method when it fails.

If you change a rule, it’s your method.

I do like how fast you can scan for possible trades and that during the morning, you can shrink the list down depending on the price action.

I say this all the time, risk management.  As we’ve seen with GME and AMC, traders have abandoned risk protocols to “get rich quick” and that will never work long term.

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