Developing a Trading System?

Choad · Aug 1, 2005

Quote from Tyler Durden:

Hey guys,

I know this is somewhat of a newbie question so just bear w/me. How do i develop my trading system. I mean, are there proven systems out there that many traders use, or do i pick a stock I like and start doing analysis of the last X months to find trends?

For the most part, i will be trading options. I know i want to just buy calls and puts to begin with until i am more experienced. How do i go about picking the stocks i want to buy calls and puts on? Do most here use the DJIA stocks, or the S&P stocks to trade?

Any advice is appreciated
(btw, i am reading a few trading books, but still baffled)

Yes you can make money trading options.

But, in my experience (goes for stocks too): short term = Hard, longer term = Not as Hard

Think about trading LEAPS. These are options with lives > 8 months.

Find this book: LEAPS, by Harrison Roth

Please do note that it still ain't going to be easy. I'd say your chances, or anybody's, will not be good.

On that bummer note - good luck!

C

Tyler Durden · Aug 1, 2005

Quote from Choad:

Yes you can make money trading options....... I'd say your chances, or anybody's, will not be good.

On that bummer note - good luck!

C

This doesn't make sense to me........if im losing money, then someone is making it. If your losing money, then im making it. With all due respect, maybe there is a lack of skill on this board and therefore everybody here has a bad taste in their mouths concerning options???

Choad · Aug 1, 2005

Here's the deal; short term trading of any kind is not that easy. How can it be? If it was, everybody would be rich.

As in most things financial, the few will take money from the many.

There are many many many ways to play options, but one thing is darn near constant for the retail trader: The killer b/a spreads of most options. This inefficiency, added to the fact that it is very easy to over-lever your account with op trades, and you have the usual recipe for disaster in oft-quoted warnings about option trading.

No if I'm winning, then you, your friend, and his brother-in-law are probably all losing.

A solid method and good "adjustment" and "repair" strategies, along with a careful eye on risk and money management, and throw in a good bit of patience and a hellofa lot of experience and study, and THEN you might make it.

Like everything else, hard work and perseverance will pay off eventually. Do you have it in you?

Regards.

C

smallfil · Aug 2, 2005

Tyler.......Only thing I can say is practice, practice, practice, study, study and study. It is a combination of what I have learned from different sources which I am using. A speaker at a seminar said,
"you have to develop your style." What works for me does not necessarily work for you and vice versa. Also, be more selective.
A lot of people over trade----I used to be guilty of that when I traded stocks. Now, I try to be patient. I have done just 3 options trades. Will do more after this seminar I am attending next week.
I hope to tie all the information together into a systematic trading plan. You need a map to take you where you are going.

On a side note, that option on ANSI (UAIKH)----it went up to $12.90 per contract today, 08/01/05 and I sold out at $9.40 (bought it a $3.70).
About $1150.00 additional profits left on the table. Important lesson for me though. Next time, I will sell a little bit as it rises and more as it rises some more!!!

Read George Fontanills book, The Options Course, 2nd Edition.
Take note that I do not work for Optionetics (did not even attend their expensive seminar like $3500) but, I did attend the preview seminar and read this book. This book is full of good ideas and explains options in plain English.

And get out when you are wrong. I got out of UWTXE when I knew I was wrong. I expected the stock to drop and yet, it kept rising although, slowly. I had to take a $550.00 loss which nobody wants----a 55% loss but, I was able to save capital and parlay it into something which turned out to be a nice winner!!!

Tyler Durden · Aug 2, 2005

Quote from smallfil:

Read George Fontanills book, The Options Course, 2nd Edition.
Take note that I do not work for Optionetics (did not even attend their expensive seminar like $3500) but, I did attend the preview seminar and read this book. This book is full of good ideas and explains options in plain English.

And get out when you are wrong. I got out of UWTXE when I knew I was wrong. I expected the stock to drop and yet, it kept rising although, slowly. I had to take a $550.00 loss which nobody wants----a 55% loss but, I was able to save capital and parlay it into something which turned out to be a nice winner!!!

Good Advice! I also attended the Optionetics preview seminar and Im also reading the Options Course! It sounds like their course, in print form very very informative.

gettingtooold · Aug 2, 2005

Quote from TruthTeller:

I'm going to give you some good advice that you will probably ignore, but you shouldn't. It is based on years of experience.

You should not go near options, of any kind, until and unless you have completely mastered the trading of equities. Your success with options will be based on your ability to successfully trade the underlying securities. If you have not first mastered that, then options will only accelerate your losses and your pain.

There are many reasons for this. But chief among them is the fact that when buying calls and puts, you are already behind the eight-ball because you will be fighting time decay and spreads. If you don't really have your act together in knowing how to trade the underlying, you will, to put it mildly, have a bad time of it.

good honest advise.

I have bought many options versus writting them for protection. Most times the money is wasted upon expiry. I prefer a mix of both writting and buying to help ensure a profit. Volitility, strike price etc all effect your chance of making a profit on the trade.
They are so many angles and styles of trading with options.
I personally know of a young trader who tried the option trading without any or very little knowledge and lost close to 100kusd in less than six months.
Losses early in a career stunt very quickly ones confidence and ability to succeed, especially if the funds you are trading are to establish income revenue.

gettingtooold · Aug 2, 2005

Quote from Tyler Durden:

This doesn't make sense to me........if im losing money, then someone is making it. If your losing money, then im making it. With all due respect, maybe there is a lack of skill on this board and therefore everybody here has a bad taste in their mouths concerning options???

Sir, I didn't hear any one say they didn't trade or make money with option trading. They/we are just giving you some of the con's. The pro's take time to develop. I trade successfully options every month. The problem is that stock news or intervention, mergers etc all effect the options price. In many an occassion I have written a call out of the money to have the stock fall several dollars to have the option still not come into the money. Also with a common wide bid/ask spread it is not uncommon not to be able to exit your position. This happens in all stocks.

I prefer to write. I like the premium but always must be prepared to receive the stock.

bvam1 · Aug 3, 2005

100k loss in less than 6 months? Not bad!

I lost 50k in less than a month! CAn't be impatient trading options! Always, trade spread! Limited profits, but safe, and that's the way to do it!

Nana Trader · Aug 3, 2005

Quote from bvam1:

100k loss in less than 6 months? Not bad!

I lost 50k in less than a month! CAn't be impatient trading options! Always, trade spread! Limited profits, but safe, and that's the way to do it!

What you mean by "trading spread"? Is it an option technique?

jnhighland · Aug 3, 2005

Hi Tyler,

Perry Kaufman's "New Trading Systems and Methods" is a very good book in which you will find good ideas.

One of the simplest trading systems proposed by the good Perry is the Bollinger Bands:

+Buy (close out shorts and go long) when the price penetrates (closes above) the upper band.
+Sell (close out longs and go short) when the price penetrates (closes below) the lower band.

This technique is always in the market with a maximun risk equal to the width of the band at the time of the entry. Alternately you may prefer to exit from each trade when prices move into the zone between the bands.

+Buy (go long) when prices penetrate the upper band. Close out longs when prices reverse and go below the moving average value (the center of the band)
+Sell (go short) when prices break below the lower band. Cover shorts when prices penetrate upwards through the moving average value.

Richard L. Weisman in "Mechanical Trading Systems, Pairing Trading Psychology with Tecnical Analysis", says that Bollinger Bands has a very good Superior Profit to Maximum Drawdown (P:MD) Ratio and that even though MACD might be more attractive more money is needed due to the Maximum Drawdowns you might experience.