Short Term Trading Strategies That Work by Larry Connors and Cesar Alvarez

Short-term trading is a strategy used by traders to take advantage of small price movements in the market. Larry Connors and Cesar Alvarez, renowned experts in this field, have outlined several strategies that can be particularly effective for short-term trading. In their approach, they emphasize quantitative methods, using historical data and statistical models to inform trading decisions. Here's an in-depth look at their strategies, focusing on how to implement them effectively and what makes them stand out.

Key Strategies

1. Momentum Trading
   Momentum trading is based on the idea that assets which have been rising will continue to rise, and those that have been falling will continue to fall. Connors and Alvarez suggest using momentum indicators such as Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) to identify strong trends. Traders typically look for signals that indicate when an asset is overbought or oversold.

   Implementation:

   • RSI: An RSI above 70 may indicate that an asset is overbought, while an RSI below 30 may suggest it is oversold.
   • MACD: A MACD line crossing above the signal line may indicate a buy signal, while crossing below may suggest a sell signal.

2. Mean Reversion
   This strategy is based on the concept that the price of an asset will revert to its mean over time. Connors and Alvarez use mean reversion strategies to trade against extreme price movements, betting that prices will return to their historical average.

   Implementation:

   • Use indicators like the Bollinger Bands to identify when an asset's price is significantly deviating from its average.
   • Moving Averages can help identify the mean price level to which the asset is expected to revert.

3. Seasonal Patterns
   Connors and Alvarez highlight the importance of seasonal patterns, which can significantly influence short-term trading decisions. For example, some stocks exhibit predictable patterns based on the time of year or specific dates.

   Implementation:

   • Analyze historical data to identify consistent seasonal trends.
   • Incorporate these patterns into your trading strategy, adjusting for any current market conditions that might affect these trends.

4. Breakout Trading
   This strategy involves identifying key levels of support and resistance and trading when the price breaks through these levels. Connors and Alvarez suggest using volatility indicators to confirm the strength of the breakout.

   Implementation:

   • Use indicators like Average True Range (ATR) to gauge volatility.
   • Set entry and exit points based on historical support and resistance levels, adjusting for current market conditions.

Example Analysis

To illustrate these strategies, let’s consider an example using a hypothetical stock, Stock XYZ.

Momentum Trading Example:
Suppose Stock XYZ’s RSI has risen to 75. This suggests that the stock might be overbought. If the MACD line crosses below the signal line, it could be a signal to sell or short the stock.

Mean Reversion Example:
Stock XYZ’s price has moved significantly above its 20-day moving average, and the Bollinger Bands are showing a significant upper band breakout. According to mean reversion principles, the stock may soon revert to its mean price level.

Seasonal Patterns Example:
Historical data shows that Stock XYZ tends to rise during the last quarter of the year. Based on this pattern, a trader might look to buy Stock XYZ as the year-end approaches.

Breakout Trading Example:
If Stock XYZ breaks through a resistance level of $100 with increased volume, it might indicate a strong bullish signal. A trader might enter a position at this breakout level, setting a stop-loss below the resistance level now turned support.

Conclusion

Larry Connors and Cesar Alvarez's short-term trading strategies offer a structured approach to navigating the complexities of the market. By leveraging momentum, mean reversion, seasonal patterns, and breakout trading, traders can increase their chances of success. These strategies require a solid understanding of technical indicators and market conditions, but with careful analysis and implementation, they can provide valuable opportunities for profit in short-term trading.

By integrating these strategies into your trading plan, you can better navigate market fluctuations and capitalize on short-term opportunities. It is essential, however, to continuously analyze market data and adjust strategies as needed to remain effective.