Grail Investing

Sure, you can make money as a trader or investor, have a good time, and get some great stories to tell. But, the extrapolation of profits will not come as much from your trading and investing skills as how you manage your money.
– Larry Williams

As you know, with the RSI Reversal Strategy I like to buy on the close of a trading day and sell on the open. I prefer to do it with other longer-term strategies as well, but with a short-term strategy I think it’s more important.

When I first introduced the buy-on-the-close and sell-on-the-open approach on this site I linked to a Bloomberg article called “Bull by Night, Bear by Day Is Best Strategy, Goldman Sachs Says.” Using the S&P futures contract, it makes the point that there is an advantage in buying on the close and selling on the open.

Well, the CXO Advisory Group cites a new academic study called “The Lure of Trading at the Open?” that comes to a similar conclusion. CXO summarizes by saying…

In summary, evidence from a fairly large recent sample of U.S. stocks indicates that traders may be able to suppress trading friction by systematically executing sales at the open and buys later in the trading day.

So that’s why I do it that way.

And, speaking of RSI Reversal, for tracking purposes I have to have an entry price and an exit price. So I use the official closing price for entry and the official open price for exits. But, as a practical matter, you don’t have any way to know in advance what the closing price will be. So there are several ways to execute orders.

For example, if there is an RSI Reversal buy signal on the close, you could buy it in extended hours trading. Or you could place a market order to buy shortly before the close. Sometimes you’ll get a better price than the closing price, sometimes it will be worse. And another way to do it would be to place a limit order at the closing price to buy during the next day’s trading session. Sometimes you’ll miss the trade altogether by doing it that way, but you’ll usually get your price.

No one way is better than another, you’ll just have to choose the method that works for you. And as far as exits are concerned, in my opinion and in my experience there is only one way to do it — when it’s time to get out, get out. In other words, sell at the market. Again, sometimes you’ll get a little lower price than the official opening price, but sometimes it will be a little better.

But what you don’t want to have happen is to place a limit order to sell and not get a fill. If you do that, you have a whole new problem. How are you going to get out?  There is room for honest disagreement, but in my experience you can afford to be picky when entering a trade, but you can’t afford to be picky when it’s time to exit. Just get out.

Also, I’m sometimes asked about the liquidity of the leveraged ETFs we’re using with RSI Reversal. Some of them trade extremely high volume and with others the volume is very light on most days.

Volume is not the way to measure the liquidity of an ETF. It’s the liquidity of the components of the ETF that is important. For example, some of the leveraged Treasury bond ETFs trade light volume. But the U.S. Treasury market is among the most liquid of all markets. So just because a leveraged ETF may only trade an average of something like 20,000 shares a day, the components that determine the price may be very liquid. That’s what I’m looking for when I choose leveraged ETFs to track — I’m looking at the liquidity of the components, not the volume of the ETF.

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