As individual traders, we should, according to Dr Alexander Elder, have our own set of criteria for a ‘perfect trade’, which he calls an A Trade. If we don’t have a set of criteria, he politely suggests that we have no business trading in the market. Harsh but fair. Elder states that his profits increased when he stuck to A Trades, and abandoned all inferior trades.

On this basis, I have found it a useful exercise to define my criteria for an A Trade. They are:

  1. The asset price is above the 30-week MA (10 points)
  2. The 30-week MA is rising (20 points)
  3. The price is in the value zone between 13-week MA and 26-week MA (20 points, reasonable subjectivity allowed).
  4. Favourable MACD – rising histogram (10 points, reasonable subjectivity allowed)
  5. The weekly ATR x 1.5 must be less than 10% of the share price (20 points)
  6. The 20-day low must be within 10% of the share price (10 points)
  7. The share price must be within 10% of its best fit support MA (10 points, reasonable subjectivity allowed).

A score above 80 points, out of a possible 100, qualifies as an A trade.

The weekly chart is used unless otherwise stated.

For the sake of brevity, I have made no reference to volume, relative strength or volatility contraction. But there’s no reason why other traders can’t incorporate these factors.

There is also no reference to fundamentals. My only criterion here would be that the asset is not junk.

An example of an A Trade might currently be $IWM – the ETF of the Russell 2000 Index (US small caps). I hold.

This might be scored:

  1. 10 points (> 30-week MA)
  2. 20 points (30-week MA is rising strongly)
  3. 15 points – the value zone is quite narrow so I’ve allowed myself some leeway as the price is just above the 13-week MA.
  4. 5 points – the weekly MACD has stuttered a bit but is basically favourable.
  5. 20 points (weekly ATR x 1.5 = 7.8%)
  6. 10 points (20-day low is 4.1% below current price)
  7. 10 points (using the 26-day MA as best fit support, although one could use the 30-week MA here)

Total = 90/100, so comfortably an A trade by my criteria.

According to Investopedia, the Russell 2000 is currently lagging the other US indexes and is likely catch up quickly once there is good evidence of a strong US economic recovery. By my calculations, the downside risk is 5-8% whilst the…

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