Game Plan Summary

GAME PLAN SUMMARY

In each trading example highlighted in the preceding section, once we have utilized at least one of the prior 20 or so indicators to enter into a trade, we are on the lookout for a low-risk intraday signal in the opposite direction to indicate that we should exit the trade. The best indicators that do so intraday are TD Sequential, TD Combo, and TD Setup Trend, all of which can be applied effectively anywhere from daily charts to one-minute charts; and TD Lines and TD Relative Retracements, where qualified intraday breakouts are preferred over disqualified intraday breakouts. This doesn’t mean the other indicators cannot be applied intraday, especially on larger time frames, such as hourly charts, but they are not tailored to identify the types of price momentum swings that the former five indicators do. Unless we receive a long-term indicator informing us not to, and unless we have not already done so, we typically exit our day trades prior to 15 to 30 minutes before the close of that trading day, since most of the day trading public and floor traders tend to exit their positions around that time, which can cause an unexpected adverse price swing in the market. However, keep in mind that we do not require that one must exit one’s position that trading day, as most of the indicators presented—especially when applied to daily charts—are effective for more than simply one price bar, or day, of activity.

Therefore, to summarize, what we are looking far in selecting an ideal trading candidate is an option that is liquid, is close to expiration, and trading at-the-money or slightly in-the-money. We will also consider trading options that have a low total cost in order to have a lower level of risk. Additionally, option trades resulting from low-risk entry indications that have sufficient time to develop, are in alignment over several different time periods, and are synchronized with other indicator readings increase the likelihood of success.

OTHER OPTION TRADING TIPS

We have presented a series of indicators designed to make a trader’s job of identifying market turning points simpler. Not all may suit your trading needs and some may require adaptation before their implementation. We encourage you to research and establish a level of trading comfort with at least a few of these techniques. Make certain you understand their intricacies and the nuances associated with each. Apply the methods to the market on paper before trading with your own funds. Try to integrate the indicators into your own trading regimen. Once completely understood, follow the plan religiously and detach your emotions from any decision making. Once trading has begun, establish intervals of trading evaluation and only then begin to introduce any enhancements and revisions to your methodology. Once again, the testing phase should be extensive before any deployment of assets. Trading survival is crucial and traders must avoid any interference which may jeopardize or place into risk a substantial portion of their capital at any one time.

For those who trade as a hobby as opposed to a full-time profession, we recommend that one shy away from using these indicators on an intraday basis. To be a successful day trader, one must devote an extraordinary amount of time and effort to following the markets, evaluating each of several different market situations as they unfold. Unfortunately, day trade options or the underlying security with these indicators is just not for everyone. However, this does not preclude or prevent one from utilizing these market-timing techniques altogether, it simply means one must alter one’s time horizon. In fact, for those who can’t afford to day trade for one reason or another, we encourage you to apply these indicators to daily price charts to see how they can enhance your investing abilities over the following days, weeks, or even months. The beauty of these indicators is that they are versatile and are not limited strictly to one time frame—they can be applied on both a daily and an intraday basis, each with consistent and effective results. If one does not wish to take on the larger risks inherent in, or the greater time commitments required for, day trading, one can become a longer-term position trader, or an investor, and reduce each of these items considerably. These indicators can provide the framework, the structure, and the discipline to analyze and trade the markets; it’s just up to you to decide what you will choose to do with them.

We realize that trading options is a game of chance and statistics. By including various proprietary indicators, as well as our market-timing experience and insight in this book, our goal has been to tilt the option playing field in your direction rather than in favor of the option writers. We attempt to provide you with a perspective on the overall market environment and from there to make certain that you are anticipating trend reversals properly. Our entire concept is to buy weakness and to sell strength, thereby removing the emotional premium attached to so many trend-following trades. We are not implying that one should buy (buy calls) whenever the market is down or sell (buy puts) whenever the market is up, regardless of the reasons the markets have perpetuated these moves, we are simply saying that in these environments one should look for low-risk opportunities in which to initiate these contratrend positions. The common denominator of most all of our market timing approaches to option trading is a theme of price exhaustion or antitrend analysis. Each approach is designed to be purely objective and mechanized. It has always been our belief that our research work is an unfinished project. We do not want to force our settings and qualifiers for the various indicators upon any user, rather we encourage others to experiment and perfect our techniques. This is not to imply that the work is unfinished or indecisive, by any means, but we are open-minded to the possibility that you may be able to contribute to the enhancement of these indicators. If we had presented this information as systems, then the impression would be that they are turnkey and complete and not subject to any chance of improvement. This is not the case. We have found and continue to be firm believers that results derived from creativity and development are unpredictable and oftentimes very rewarding. Unless an approach is near perfect, there is always a need to perform additional research to improve it. So, our invitation is extended to you to work with the concepts we provide, paper trade them, put them into effect, and further research and upgrade these techniques. In time, doing so should greatly improve one’s trading success.

EXPANDING YOUR HORIZONS

Having read this book, a reader may conclude that to arrive at a number of option trading possibilities many of the indicators must first be applied to the underlying security. One could ask, “Well, why can’t I simply day trade the underlying security itself?” Well, the truth is, you can. The majority of these indicators were created prior to the advent of the options market to predict price movement in different securities markets. It was only once standardized, publicly traded options came into existence and became popular that we realized these indicators which applied to the securities markets could be used as well to initiate positions in a derivative securities market such as options. In other words, for those indicators that are not directly applicable to options trading, one can use the results obtained from applying the indicators to the underlying security. The primary reason we are recommending trading options based upon our indicators is because they provide a structure which allows traders to limit their risk, keep their rewards unlimited, and allow them to control more size for less money. However, this does not mean traders should necessarily trade options exclusively. If traders feel more comfortable day trading the underlying asset, then they should by all means do so.

Likewise, a trader is not restricted to day trading when applying many of these indicators. We appreciate the fact that not all of our readers are either prepared or capable of enduring the emotional and physical demands of day trading. Additionally, the time commitments for day trading either options or the underlying securities are great. Therefore, for those of you who are not ideal candidates for short-term day trading, we suggest applying these indicators in the context of position trading. Because all of our indicators are dynamic and apply equally well to all markets, regardless of the time frame in which they are utilized, traders can expand their time horizons and become position traders in either options or securities, as opposed to simply day traders of options or securities. Because these indicators are so versatile, traders can customize the work to meet their trading needs.

Also, there is nothing in our work that says one can’t find a balance between day trading and position trading. What may begin as a day trading position can, and oftentimes will, evolve into a longer-term position this added dimension will increase one’s trading opportunities and profits dramatically. By trading rigidly, traders limit their rewards—always. Traders must be willing to experiment with and rationalize trading positions. This practice will make a successful trader.

For those of you new to trading, either options or securities, the path you choose is up to you. However, the questions you must consider are many and can have a drastic impact on your livelihood. If you feel unsure about the trading style you should take, our suggestion is that you start on a longer-term time frame, analyzing daily charts and applying the indicators to positions over a period of days or even weeks, and consider trading small. Once a level of comfort in the options and/or securities markets is attained, you can gradually increase your participation and your exposure. Taking small losses and letting profits run is much easier to manage, both financially and emotionally, than taking large losses and then trying to recover. Keep in mind that the name of the trading game is to live to see the next day of trading. In the investment business, there is no life after financial death.

The important fact is that readers understand we are not providing them with a trading prescription, rather we are offering a new way of analyzing and trading existing markets. Hopefully, they will find the most ideal means of implementing this work into their trading arsenals in a way that is harmonious with their trading styles.