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.