If you’re looking for an educational source on options trading then one place to consider is BetterTrades. Here’s more about what they offer. One of the things I found interesting in the context of options trading is the fundamental considerations mentioned in the last paragraph.

BetterTrades focuses on options trading, providing all the tools traders need to profit in the stock market. One such strategy used to make better trades is a long straddle position. This involves the purchase of timely call and put options. In this case, investors can limit their potential loss to premiums paid while assuring all of the upside to a sharp price move in either direction. Other options strategies BetterTrades arms our traders with are bull put and bear call spreads, iron condors, covered calls and protective puts.

Most insiders think market turbulence will remain while credit default swap spreads remain artificially high and banks are unwilling to lend excess reserves. BetterTrades investing tutorials and trading seminars bring to light the tools necessary to raise your trading IQ. Some of the better trades our students are making come right from our coaches’ playbooks.

One sub-sector that could produce an optimal options trading channel is the semiconductor space. President-elect Obama’s pledge for a push towards energy independence could pay dividends to the semi industry. Although falling energy prices have relaxed some of this summer’s panic when crude topped out near $145/bbl, a green revolution appears to be waiting in the wings. Citigroup recently upped the semiconductor industry. For option traders, this means semiconductor names could see a fundamental push towards resistance while downbeat macro data sinks stocks towards support. The semiconductor industry has the added benefit, at least for options traders, of being intrinsically volatile. Whether you’re a day trader or passive investor, BetterTrades’ investment courses can unlock a path towards financial freedom.

I’m getting fairly comfortable with my DAX trading style, particularly with timeframe, risk, entries and expectancy profile. One thing I am ’struggling’ with, i.e. tinkering and not really happy with much is exits. Which just reminded of something I wrote 3 years ago almost to the day. It was valid back then for stocks and is still valid now for futures. That’s because it’s just a sign of a developing trading style, one where there’s not enough experience and data yet to conclusively convince the trader to have faith and confidence in the rules. Many traders obssess with their entries, coming up with a gazillion indicators that will give them the ‘best’ entry. I have 4 short lines of rules written in a notepad text file. Exits though are tough, both to design and execute diligently.

Stops and Exits : Trader Eyal

The more I trade the more I find myself obsessed with stops and exits, it is an endless guesswork of what makes a better exit strategy, particularily for trailing once your initial stop is safe. One of the most annoying things as mentioned in an earlier post is to see a position reverese immediately after your stop was hit. But then instead of just getting upset about it the real value is in figuring out that if this is a repeated pattern then something is wrong with the stop strategy.

Have I become wiser since that post and is it easier now? Well yes and no. I have no problems at all taking a loss, you get used to that :-) especially with a 40% hit rate. A hard stop is always in place, position size is accordingly, stop is never widened, if it’s hit I’m out and that’s it. If it sets up again, I may re-enter. End of story. But exiting with a profit, now that’s a tough cookie especially on small intraday timeframes where end-of-day, end-of-week etc. are irrelevant. So, what are my general guidelines for designing my exits? I try to follow these rules:

1. Keep it as short and simple as possible (but without sarcificing quality)
2. Make it unambiguous, straight forward and easy to follow
3. No one can predict future prices, so let the market price tell you when to get out instead of guess when it’s “extended”
4. It’s never going to be perfect and you’ll almost never get out at the best place so (try to) stop fussing about it
5. You don’t need to get out at the top/bottom to make good money
6. Execute it consistently

Quite basic and simple, but oh-so-hard to do sometimes. I try to remind myself and keep in mind that if I followed my rule and got out too early, it’s a bummer but I accept it as part of the game/rules I set. But if I didn’t follow my rules and got out too early/late then that’s seriously disturbing for me, definitely something to avoid.

I’ve just watched a talk by Russell Sands on his experience as a turtle trader and what it means to be a trend follower. It was quite an interesting talk. When that finished I watched another one by Chuck Le Beau about exit strategies. This is a topic I’m very interested in recently as I’m working on the futures methodology. One of the interesting concepts he covered there was varying exit strategies based on what the market is doing. He’s a very strong supporter of using ATR so he was talking about things like activating a different trailing method once you have let’s say 5 ATR of open profit. But this idea can be applied in other ways. For example, you could be counting bars, either all or particular type (long range, NRBs, etc.) or you could be watching for volume patterns and use that as a trigger to activate a new type of trail/exit. They key is looking at your data and then finding a meaningful pattern. There are quite a few good lectures on INO TV, worth checking it out if you haven’t already.

A couple of interesting videos analysing 2 of the most exciting markets out there.

The first covers Gold and analyses if it has topped out

The second one looks into the recent moves in Crude

Let me know if anyone checks them out and what they think..

Here’s an example of some of what how I’m working on as part of my new trading method for futures. I’m currently only actively trading on 2 instruments - the DAX and the ES. (That is aside from the normal stocks trading I still do). I’m using the NinjaTrader simulator and I’ve been taking trades daily. I love this tool and just got a full lifetime license.

Anyways, just a small disclaimer, I’m not running it as a tight ship yet and I’m at the beginning of the process so below is just a brain dump. The reasons it’s not full on for met yet are:

1. My rules aren’t firm yet. This has a whole host of issues but I’ll get back to this in another post probably.

2. I’ve got ‘no skin’ in the game. I’m not risking real money during this development phase and that affects things. I’m not “cheating” as that will be silly but the dynamics are different - in my case I think I actually do a lot better when I do risk money in the market to test ideas.

3. I’m stretching myself and spreading a bit thin with the various markets and instruments. I expect this situation to improve after the inital steep learning curve that comes with new ventures like this.

Anyways, right to it. Some of the first considerations and decisions I had to make were way before even considering specific trading methods and rules. In some cases I drew on my experience in stocks and in other cases I had to forget and actively ignore habits and knowledge that came with trading stocks.

1. Which instruments? I decided to go with the most liquid instruments I could find in different timezones. A good trading strategy should work on almost any tradeable market. Besides liquidity I also wanted easy access, low operating costs, good intraday moves, tight spreads.

2. What timeframe? This invovles a lot of trial and error, there’s no forumla, you got to bring up charts for the various instruments you’re considering trading and just try different values to see what suits your personality and style and how fast or slow you want to go. I went with 5000 constant shares on the ES and varying constant shares on the DAX depending on the day’s action.

3. What basic trading style / approach? I’m a trend follower by nature, I’m not attracted to counter trend / range trading. I can take the lower win rates that come with it and have patience to ride longer trends. It’s also actually less work :-) Within the trend following approach I’m most comfortable with taking pullbacks. So I went with that. Price action, identifying trends, finding good risk:reward entry spots and taking a stab at it.

The next set of steps was then to:

1. Scan charts, I do this manually forward walking charts and eye-balling ideas. This is extremely inaccurate and very misleading at times as the eye/brain often sees what it wants to see. But being aware of that helps and it’s a very fast way of throwing different ideas on the table.

2. Come up with some preliminary rules on entry, exit, position size.

3. Start implementing the ideas and taking trades to test the waters. Different markets move and behave differently, there’s no substitute for taking trades on real dynamic data (i.e. either live real-time or playback).

4. Record new ideas, thoughts, lessons learned and analyse the raw data captured by NT which is really extensive.

5. Make adjustments and repeat the above.

So finally coming to an example, here’s a capture of the MAE / MFE analysis for the DAX taken from the Account Performance tab. The MAE / MFE is covered extensively in John Sweeney’s Maximum Adverse Excursion: Analyzing Price Fluctuations for Trading Management.

These results are just based on 55 trades over a few days with a win rate of about 50%. So definitely far from sufficient data, this is just to illustrate the thought process. What we can see is that after entering those trades the average move against the position (MAE) was 2.77 points, the average move in favor of the position (MFE) was 6.05 points. This is not too bad, it shows that the entry + inital stop more often than not put me in a favorable spot to benefit from some trend going my way. The bad part though is that the ETD - average End Trade Drawdown was a very large percent of the MFE. My main take-away from this small part of the analysis was that I was doing something wrong with my exits giving back a huge part of open profits. And that has an adverse effect on the profit factor.

There are many other aspects to developing trading rules. This is just part of how I go about doing it. Different traders approach things in different ways, whatever works and makes money for the individual trader is the way to go.

I finally got around to reading Michael Covel’s The Complete Turtle Trader. I’ve heard of the Turtles way back, I think from Schwager’s Market Wizards book and also from Michael’s own site TurtleTrader.com - I remember it as one of the first ones online that had interesting trading material back in the early days of when I started looking at the markets. The book flows well, going into quite a bit of details on the background of the individuals involved with the experiment. It covers information I wasn’t familiar with before, especially about the Turtles performance numbers, their mindsets at the time and group dynamics, Richard Dennis himself and the aftermath when they went their own separate ways. From a trading perspective there’s very little meat in there, especially for experienced people, so the book reads primarily as an historic / journalistic account of those events. But still quite an interesting account. The main trading related benefit might be for new comers to get a glimpse into some basic trader’s speak and rules of thumb. There’s also the tension I noticed before with Curtis Faith coming through from the book. I’ve not read Curtis’s book so I can’t comment on what his book is like, I saw other reviewers liked it. Curtis’s site also seems to be down so who knows what’s up with that. If I get a hold of Way of the TurtleTrader I’ll check it out as well to see how they compare.

I’ve been using NinjaTrader to paper trade futures in my free time :-) and I must say I’m really impressed with the application. I first came across Ninja at its very beginning almost 5 years ago when it still looked like this. And didn’t even have a logo yet. I tried it out but as a stocks trader never felt I really needed it. With the foray into futures I was looking for a charting / order execution / trades analysis software to augment the stuff for stocks. My first port of call was good ole TradeStation which I used back in 2000 when I was trading from Hong Kong. Alas, TradeStation has lots of nice eye candy and is probably great for building, testing and optimizing automated trading systems but for serious trading it flunks. So hence re-visiting NinjaTrader. And.. it’s got everything I was looking for and then some, like about a 1,000 different ways to enter orders so every trader can choose whatever works for them. I use 2 Basic Entry windows with different configurations and the Chart Trader - entering and updating orders off the chart itself (not the right side panel). Aside from the typical DOM and standard order entry screen, how cool is opening 2 order entry windows of the same type which you can completely customise starting from symbol, to stop strategy all the way to button colours? Besides that, you can also move queued up un-executed orders off the chart itself, making stop tightening a matter of 2 mouse clicks with immediate visual confirmation. Fantastic. There are tons of other cool features like the custom indicators, built-in trade performance analysis and integration with various broker and datafeed technologies. Kudos to the NT guys, they took the software a very long way and made it into a really nice product.

Gee, I almost forgot one of the best parts - free! Free charting, free trading simulator including playback of data and you can feed it data from IB TWS. Of course if you want to place real trades off it you have to subscribe. I wish the multi-broker option was cheaper so I wouldn’t have to think too much about which version to get but can’t have it all I guess.