The attached TB for overall, NASDAQ vs GLG and it's group and sector is a good example of what a strong trend (GLG) looks like vs a choppy trendless TB (Overall-NASDAQ)
Note the sector and group strength, this is a good example of when to trade counter to market if you can find trending (short or long) sector/groups
donv
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Donv:
Good illustration!!!! Well done!!!! I need to revisit my process.
Thanks, Jon
Donv:
Some additional thoughts. How have these types of trades performed when done against overall mkt. When I review my data, success rate is higher when following overall market or NADAQ vs individual trade. What's your experience?
Jon
Jon,
If the group and sector TB are in sync they work fine. Of course you have to go a little further and consider why a sector or group is non-correlated with the market, in the case of gold and metals it is common for those to trade on their own. Energy for most of 2005 was another example along with other commodity based stocks.
The group and sector analysis is the important part, many individual stocks can trade counter trend for awhile but if their sector/group is weak the risk of failure is higher when the market is not trending.
My first choice is always to trade with the market but many times the market has little or no trend. It is common for us traders to see what we want to see and when the market is choppy we want to force a trade in what we think is a trend. Sector analysis is an alternative to standing aside or forcing a trade. This doesn't mean it is magic there are times when it is difficult to find strength anywhere.
Not sure what trades your data includes but if you are only taking trades when market is in a strong trend then yes the results should be better. If the market is choppy and you are taking trades of strong individual stocks with little sector or group strength the results will likely be poor.
Even when the market is trending consistency will improve if you focus on sectors and groups that are the strongest and select the best stocks within those groups.
I have used TJ's products for over 8 years they are excellent products, the best IMO. However when I started incorporating sector and group analysis as a major focus of my trading consistency and equity curve improved immediately.
Hope this helps as you can tell I am a big fan of using sector rotation to improve results. Money is always flowing in and out of sectors/groups sometimes it is significant and actionable, it is our job to identify when and then take action.
donv
cjrsouth Wrote:Donv:
Some additional thoughts. How have these types of trades performed when done against overall mkt. When I review my data, success rate is higher when following overall market or NADAQ vs individual trade. What's your experience?
Jon
Donv:
I read some of your earlier posts re Sectors. I agree with your observations & request to DT. I trade equity options in SB-SD rooms. Among other elements I require a profit potential of $2 - $3 to cover adequate return, bid/ask spread. Because I am not taking shorter-term trades, I am looking for more stable conditions or trending vs oscillations.
I also have used GET. In past year I achieved 50% return (net of losses & comm), but was as high as 180%. Had trouble defining exit points, hence my entry with DT. My background is fundamental analysis, I have also had touble with commodity based companies. Whatever I decided based my logic, was spot on, just wrong in terms of time frame.
Have to go now, will continue later.
Jon
cjrsouth Wrote:Donv:
I read some of your earlier posts re Sectors. I agree with your observations & request to DT. I trade equity options in SB-SD rooms. Among other elements I require a profit potential of $2 - $3 to cover adequate return, bid/ask spread. Because I am not taking shorter-term trades, I am looking for more stable conditions or trending vs oscillations.
I also have used GET. In past year I achieved 50% return (net of losses & comm), but was as high as 180%. Had trouble defining exit points, hence my entry with DT. My background is fundamental analysis, I have also had touble with commodity based companies. Whatever I decided based my logic, was spot on, just wrong in terms of time frame.
Have to go now, will continue later.
Jon
SD is my favorite time-frame but I will trade others except the day-trade rooms. I trade some options too, generally I buy puts or calls on a delta ratio and then trade stock around the options. It avoids having to trade in and out of the options on every contra trend move, I hold the options and trade the stock around them, thin liquidity and wide spreads make trading the options too expensive.
If DT can somehow make the sector/group TB into something that could be sorted for strength/weakness it would be great. Then it would be a somewhat easy task to find where the strength/weakness is and focus on the best groups in sync with market trend. If the market is chopping or in a range it would still be useful to find groups that are trending and offer potentially high RR longs or shorts.
For now I will continue with what I have always done to find strong and weak sectors.
donv
Looking at sectors basic materials is the only broad sector with strength across most rooms the others are neutral to bearish. Have not looked at groups yet there are 200 of them and only 12 sectors.
Within basic materials there are 4 strong groups, I added a few leading stocks from each group based on TB. If you look at the stocks in these groups there are some that are extremely weak so it is always important to drill down and find the leaders and trade those after qualifying with profile and other filters.
1. Gold and silver: ABX, AEM, AU, GFI, GLG, PDG, RGLD
2. Fabricated Plastic and rubber: SHLM, TWP only 3 stocks in this group so group strength doesn't mean much
3. Iron & Steel: ATI, CRS, STLD, STTX, X
4. Metal Mining: RTP, BHP, CCJ, FCX, CMC
donv
Donv:
Are you trading ratio call spreads? What software are you using to analyze trade parameters including break-even points, intrinsic value and time premium?
To keep things simple and minimize requiried capital, I just use ATM calls with Delta as close as possible to 50. If profit develops, I will roll when/if Delta reaches 90, of course deciding factor is range to profit target. I try to keep risk exposure </= $3.5. Occaisionally, if expensive stock ($>50 - 60 )really looks attractive, I will do spread. To avoid wide bid/ask spread, I only enter positons with outstanding contracts =/> 100, only accept positions where max bid/ask spread is at acceptable levels, and thus only enter trades where avg volume is =/> 300k shares. To keep things simple,I won't do any follow-up or repair action. I use stop-loss points based on DT or Jon judgements of deteriorating conditions.
That's all for now, too many parties where my presence is required. I am tired.
Let me hear more details of your investing style.
Regards, Jon
No not really doing ratio spreads something different, not really an option strategy as much as a trading strategy. Will explain tomorrow it is a simple strategy but can get confusing trying to explain the dynamics on a message board.
donv
Donv:
As we discussed prior to year end, I would still like to learn more about your trading style. Jon
Hi Jon,
I apologize for taking so long to reply just been swamped this past week.
I'll try and answer your question regarding earlier post where I mentioned a strategy of "Trading around options"
The basic idea with this strategy is to be long puts or calls based on my analysis of the market trend as a substitute for stock. If I believe the market is going higher I will buy calls if it looks weak I buy puts. The time-frame for these types of trades are usually 2 weeks or longer sometimes months. Generally the options are on broad based ETF's like QQQQ since this strategy is based on the overall market direction but can also be used on individual equities.
The position size is determined using a ratio of the current option delta. What I would due is calculate a normal position size if I was buying shares as an example let's assume a normal position size is $25K.
Using QQQQ as an example it is currently trading around $42 so a $25K position is 595shares let's round up to 600. To keep the math easy we will assume the option delta is .50. My goal is to substitute options for stock but to keep the $$ profit/loss potential the same if I owned the shares. In this example I would need options on 1200 shares or 12 contracts. As the QQQQ moves up or down my options position should move in sync on a dollar basis with an equivalent 600 share position. Of course the delta can change while the position is open.
I will use this strategy when options are "cheap" as they have been for a couple years for the most part, implied volatility has been low reducing premiums substantially on most options especially QQQQ.
The downside of using options is the lack of liquidity and large spreads that make short term trading cost prohibitive. Since these positions are 2 weeks or longer there are always short term counter trend moves within the trend. I like to take advantage of these moves to take small pieces of profit selling and then buying back lower on these short term swings. As I mentioned this is difficult to do with options so instead of trading the options on each swing I will trade the underlying stock around the options. In the current example assuming I was long QQQQ calls I would sell short 600 QQQQ on a swing high and then cover near the lows leaving my original options position intact. These small swing scalps can net .50-1.00 and reduce the cost of the original options position. Over the period of the entire options trade this can sometimes be done 2-3-4 times with the effect of having a risk free options trade. This is what I describe as "trading around the options"
Another benefit of this strategy is having a hedge on the overall market while the position is open. In the above example I would be hedged against any short positions I might take. Because the market is dynamic across time frames options positions as described above allow for a variety of trading strategies on various time-frames without having to trade the options. One can be short, long, in various degrees depending on day to day price action and swings but still benefit from the overall directional movement of the original option position.
Of course we still have to be correct on market direction and our analysis of the short term swings but it does allow for multi directional trading and the choice at any given time of how long, short or flat we want to be.
As I indicated in my earlier post this is more of a trading strategy using options as a part of it then an options strategy itself. The idea is to go beyond a single position single direction trade. I hope my explanation makes some sense and again I apologize for not replying sooner.
donv
cjrsouth Wrote:Donv:
As we discussed prior to year end, I would still like to learn more about your trading style. Jon
Donv:
Thanks for info. How are you projecting short-term moves within longer trends?? Whenever I have tried, even with GET, my results (mostly with paper trading) have not been as strong (and thus not acceptable) as my other trading style that I previoudsly noted. Before GET, I was a pure "Warren Buffet/Peter Lynch" fundamentalist.
When I take positions, I will enter stop-loss & profit target orders for exit. For better or worse, I prefer not to sit all day in front of trading screens. I have occaisionally picked up short-term advantageous price moves, e.g. + 30% in 1 day. But I try to stick with price target identified with GET and now DT.
Jon
cjrsouth Wrote:Donv:
Thanks for info. How are you projecting short-term moves within longer trends?? Whenever I have tried, even with GET, my results (mostly with paper trading) have not been as strong (and thus not acceptable) as my other trading style that I previoudsly noted. Before GET, I was a pure "Warren Buffet/Peter Lynch" fundamentalist.
When I take positions, I will enter stop-loss & profit target orders for exit. For better or worse, I prefer not to sit all day in front of trading screens. I have occaisionally picked up short-term advantageous price moves, e.g. + 30% in 1 day. But I try to stick with price target identified with GET and now DT.
Jon
Jon,
Regarding identifying the swings within the trend I look at lower time-frames ie: 60 min, 30, 15 etc. The original options positions are usually based on a daily chart and as I said last 2 weeks plus or at least that is the goal on entry. Dropping down to a lower time frame (60-30-15 min) allows me to trade shorter term setups counter to the daily trend. With AGET all the setups are the same regardless of time-frames your just trading with a different group that reacts based on that time-frame. The current market is not a good example because all time-frames are going up in sync but this is not the case much of the time.
The best case for this strategy from an AGET standpoint would be to catch a W-3 on the daily and trade all the little swings along the way using lower time-frames. Sometimes I will use stochastic, 5/17 Osc and other tools to scalp those swings.
If your using a daily for the main trend there is no need to stare at the screen all day, check the lower time frames usually the 60 every couple hours and see if their is an opportunity.
If you still have AGET put up a daily NEM with a stochastic on the bottom pane. With arrow tool draw a thick line from the Nov low in the direction of the trend and project it past the current prices. Hit the - key or drop to a 60 min scroll back to the Nov lows and notice each time the stochs got overbought above 80. Each one of those pullbacks could have been shorted while the call option was open. Not everyone would have worked but the risk was low because you were always hedged with the calls.I use a simple trend line technique to enter these scalps, identify the overbought enter on a break and cover when stochs close to 20-25 and never be greedy because these little scalps are gravy, they allow some time premium recovery and a reduced cost for the option.
If you want more scalps you can go to a 15 min or even 5 but then the scalps get very small and you will be on the screen the whole day.
donv