Getting started - developing a system

There are millions of ways to trade. There are discretionary traders that use technical indicators and those who use other types of indicators. There are traders who use the news, chicken entrails, astrology, etc. There are also traders who develop technical 'systems' with the idea that a system will give them an edge or statistical advantage.

I am not going to tell you what approach to use, but find your way and follow it faithfully. All indicators will work in certain situations only to fail miserably in others. Research the indicators and determine what you choose to do with your trading.

Good Luck!!
 
Options expire on the 3rd Friday of each month. 19th in January and 16th in Feb.

The time value of options decreases exponentially in the week of options expiration. For example, if you made an educated guess, and thought google would end at $500 next Friday, you could do a "butterfly spread" with options.

I know it sounds complicated, but let me explain briefly. When you execute a butterfly spread, you make the most amount of money if the stock expires at a certain strike, for example, $500 in this case.

The butterfly spread in this case would cost you $260. (plus commisions)

It consists of the following :

Buy 1 GOOG Jan 490 call
Sell 2 GOOG Jan 500 calls
Buy 1 GOOG Jan 510 call

In this case, the most you could lose is $260. The most you can make would be $740. You would break even as long as the stock closed between $492.60 and $507.40 on Friday.

Of course, things can get a little more sticky, i.e. , the stock closes at $500, so you made the $740, but you would have to sell the $490 call back into the market before close, or else you would be long 100 shares of GOOG at a price of $490 come Monday morning.

The folks who purchased your $500 calls might also exercise them after the close even though GOOG closed at $500. If that happend, you'd be short 200 shares of GOOG at a price of $500/share. So overall, you'd be short 100 shares of GOOG on Monday morning at a price of $500, assuming you did nothing and let the position just sit there on Friday. You could also close out the entire position early on Friday before close, and yield a substantial profit, although it would not be exactly $740, it would be somewhere in the general area.

Obviously, there is quite a bit more to learn about options as well, such as what "calls" and "puts" are exactly, and how they trade. I wouldn't put any trades on until you know exactly what you are doing. I just presented the above example to show you that expiration week can be quite lucrative if you know how to play it correctly.


If you wanted to do something like this, I'd recommend going with a broker such as Think or Swim, as places like Scottrade will not let you do it.
 
This is the beauty about trading, what works for one person, may not work for the other. Even if you were let in on a successful strategy, it may, or may not work for you. Simply because, it may, or may not suit your personality.

If you haven't been doing this long, one thing you need to understand is, it's going to take time. Just study, whatever that comes across your path, and one day, that light bulb will go off, and you'll know what works for you.

You said, you just couldn't figure out when to enter, and exit. That's because you don't have a solid system yet. You may think, you do, but you don't. Because, if you did, you wouldn't be pondering where to enter, or exit.

So, keep an open mind, learn everything you can, and sooner, or later, you'll find yourself, what works for you, and what don't.

Enjoy the journey, do not rush in to place that trade for the fear of missing out on a nice run. You will know, when you're ready :)

Schaefer
 
Quote from IronFist:

I guess I'm asking for tips on how to do that.

Rhody, you said you use volatility as a guide. Are there specific indicators you use for this?

Is there any free software that lets you backtest indicator strategies, like "go long when MACD turns positive and CCI crosses 100 going up and sell when CCI crosses 100 going down" or anything like that?
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I'm a bit reluctant to tell you what I use for the simple reason that it will just perpetuate your indicator cycle. Do a search on "Identifying Budding Trends with Bollinger Bands" in Google or your search engine of choice, though, and you'll get the jist of what I do with volatility.

As for free software, I don't know of anything, which isn't to say there isn't something out there. There's always Excel. I've used it many times to evaluate trading methods even though I have Metastock too. Excel just lets me get deeper and closer in to things sometimes.
 
Try this EasyLanguage program with Russell2000($RUT.X):


Inputs: Length(35), StdDevUp(2.0), StdDevDn(-2.0);
Vars: UpBand(0), DnBand(0), Ave(0);

UpBand = BollingerBand(Close,Length,StdDevUp);
DnBand = BollingerBand(Close,Length,StdDevDn);

Ave = Average(Close,Length);

if ( MarketPosition = 0 ) and ( Close > UpBand )
then Buy("BE") tomorrow at market;

if ( MarketPosition = 0 ) and ( Close < DnBand )
then SellShort("SE") tomorrow at market;

if ( MarketPosition = 1 ) and ( Close < Ave )
then Sell("LX") today at close;

if ( MarketPosition = -1 ) and ( Close > Ave )
then BuyToCover("SX") today at close;
 
Quote from IronFist:

So I never realized how hard this actually is.

I've got everything I need. I have a margin account. I have QuoteTracker (thanks to the Software forum for the recommendation). I have two monitors (at work and at home). I understand basic candle formations. I know many of the indicators (and the rest are just a google search away).

But yet for the past few days I've sat and watched the charts update before my eyes and I can't even decide on a good entry point. I'll see a huge down trend (like VOL today) but I'll never enter because I think "it's probably about to end and as soon as I jump in it will reverse." I'll have a few indicators give typical long entry signs (like MACD, TRIX, and CCI), but I won't take it, because I seem to only be able to locate good entry points after they've already happened.

The one time I actually made a day trade (on 12/29/06) it ended up going against me, but I only lost like $35 after comission so i wasn't too upset.

Is this "paralysis from analysis" or whatever they call it? Everytime I learn about a new indicator I think "omg, this indicator is awesome" but after watching it for a day on the charts I think it sucks. I swear I did better when I was paper trading using ONLY candlesticks and volume.

So how did you develop a system that works for you? How do you weed out the crap, or the contradicting indicators, or the ones that you don't like?

And how do you determine risk/reward ratio? I see all the time "oh yeah, my system has a 1:2 risk to reward ratio." So you're risking $1 to make $2. Ok, that's awesome. Is that just because your stop going with your trade is twice as far away from your entry point as the stop going against your trade (ie. I enter @ $20 and will exit @ $20.50 or $19.75)? How do you look at a chart and determine risk/reward?
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VLO was not in a downtrend Friday. It went up off the 49 area at 9:47. It came back and test 49 again around 10:53, and then indicate possibility for more price gain when it broke through 49.50. It finally maxed out in the 50.70 area. A good long trade, but no indication for a short.
 
Quote from reid5525:

VLO was not in a downtrend Friday. It went up off the 49 area at 9:47. It came back and test 49 again around 10:53, and then indicate possibility for more price gain when it broke through 49.50. It finally maxed out in the 50.70 area. A good long trade, but no indication for a short.
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I said VOL, which dropped 12% on Friday. Not VLO. But you are right about VLO.

http://finance.yahoo.com/q/bc?s=VOL&t=5d (5 day chart in case someone clicks this link on the next trading day)

Open $63.18, close $53. It was a pretty steady downtrend all day.
 
Quote from IronFist:


The thing that annoys me with indicators is that I'll find a trade that went well based off of an indicator, and then another trade that didn't go well based off the indicator giving the same signal, and I can't identify anything else that was different between the two trades. It seems random that one was good and one was bad because the setup was identical. It seems like I'm missing something.
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You are not missing anything. You might consider the overall result. Suppose I play a fair coin toss game where I bet 1 $ and flip the coin. If the coin lands tails up then I lose the dollar bet. If the coin lands heads up then I win $ 10. I expect to lose about half the time. Is playing the game and losing a mistake? I think not, because the winners more than pay for the losing trades.

Many indicators are trend following. Trend following means the profit is potentially unlimited.

I think it helps to trade a security that shows a history of long continuing price trends.

Keeping your position size small might allow you to trade (survive financially) longer. You can always increase position size and risk later when you are more experienced.
 
Quote from IronFist:

Is there any free software that lets you backtest indicator strategies, like "go long when MACD turns positive and CCI crosses 100 going up and sell when CCI crosses 100 going down" or anything like that?
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I believe trial software is available. You might consider purchasing test software anyway. The cost of test software may be less than the cost of a losing trade.

You might read Jack Hershey threads starting here: http://www.elitetrader.com/vb/showthread.php?s=&threadid=38777. I find Jack and Spydertrader's description of "failure to traverse" particularly useful. I see many examples in old and new security price graphs of all time scales that show "failure to traverse" behavior before the trend changes.
 
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