Two High Probability Trades in ROC System

A high probability trade, to me, is one that is correct at least 70% of the time. The truth is you can make money in trading if you’re right at least 40% of the time if you strictly limit the size of the losses. When a trader is right on 70% of their trades, they can make a lot of money... this week my system signaled two high probability trades.

#-ad_banner-#I use a 26-week rate of change (ROC [2]) strategy to find trades. ROC measures how fast a stock is moving up. I've developed a portfolio for TradingAuthority.com that holds the top three rated ETFs -- the strategy has averaged gains of 15% a year since 2007.

In any strategy, some trades work better than others. Because each trade is strictly defined by rules, I can back test to see exactly how each buy signal has worked in the past.

The first ETF I’m buying, Vanguard REIT ETF (VNQ), has been a winner 65% of the time after one month, 70% of the time after two, and 100% of the time after three months.

The buy signal is triggered when the ROC (shown in the chart below as the black line) crosses above its upper Bollinger Band (shown as the blue dashed lines). Most of the time, an indicator will stay within the Bollinger Bands [3] which means breakouts offer [4] important clues about what the price is doing. An upside breakout when the price is above its moving average [5] is bullish [6], as the back tested results show.

There are other reasons to be bullish on VNQ. The chart shows that the price of VNQ is breaking above resistance that dates back to April of last year. The ETF is at a new 52-week high [7], another sign of strength. Traditional momentum indicators like MACD [8] are also bullish.

The second ETF I’m adding to the portfolio is the SPDR [9] S&P 500 ETF (SPY). In many ways, the chart is similar to VNQ's chart. Stocks have started 2012 very strongly, and the ROC system says that we should expect even more gains over the next three months.

Testing shows that buying SPY when the ROC crosses above the upper Bollinger Band has a winning percentage of 71% in one month, 80% after two months and “only” 83% after 3 months.