Stock & Options Indicators for Effective Trading Systems April 25, 2010 Price Headley, CFA, CMT
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What Makes for a Winning Mindset? The Best Traders THINK differently Processes before Profits Accountability to your own improvement Measure Your Growth Discipline Must Follow your Method Exactly Focus Know What You Will (and Won t) Focus On Confidence to Execute under Uncertainty Start Small, Build Habit of Execution, Then Scale Up
Top 10 Problems of Traders How Many Challenges Do YOU Have? 1. Not Pulling the Trigger 2. Not Taking Losses Quickly 3. Letting Most of the Profits Slip Away 4. Small Profits & Large Losses 5. Hurt by Adverse Market Moves 6. HyperTrading or OverTrading 7. Reacting Based on Fear & Greed 8. Overconfidence 9. Psychologically Drawn Down 10. Information Overload
RULE #1 for Systems Development 1. Define Your GOAL in $ Gain, or % Gain Begin with the End in Mind Know Your Personality Type: -Slow to Act -Active -HyperActive and make sure your system manages Your Emotions and keeps Your Ego out of sight
RULE #2 for Systems Development 2. Define Your TimeFrame I see too many traders jumping around, trying too many timeframes, or losing track of which timeframe they were focused on Remember: Noise Increases as you go to shorter time frames! I prefer Weekly, Daily, Hourly as main choices
RULE #3 for Systems Development 3. Define Your Indicators to Find the Trends Some say try to find trends early with options, being too early can be trouble I prefer the strongest trends, up and down, with indicators like Percent R, Acceleration Bands, Efficiency Ratio. If you get too many signals, add filters to focus
RULE #4 for Systems Development 4. Define Your Risk Before making money, realize that your first goal should be to avoid losing much money Retest Methods uaually make for better Risk/Reward ratios than Breakout Methods why? A) Breakout at 31.00, risk to 29.50, Target 37 B) Retest at 30.00, risk to 29.50, Target 37
RULE #5 for Systems Development 5. Learn How to BackTest Remember that you must have an EDGE when trading test for that EDGE Paper trading is nice but is no substitute for TRADING SMALL when you first start implementing your system
RULE #6 for Systems Development 6. Know the METRICS to evaluate systems Winning Percentage is only Part of the equation Size of Average Win vs. Size of Average Loss is another big key Coin Flip = 50% winners X 1.00 Avg Win/Loss Peak-to-Trough Drawdown can you handle it?
RULE #7 for Systems Development 7. Always FOLLOW YOUR RULES The worst thing that can happen to a trader is to win after they have violated their rules. It sets in place a lack of discipline, which leads eventually to a loss of confidence in their method, and ultimately ends in analysis paralysis.
What is it about ACHIEVEMENT that makes so many come up short? I believe the Answer is. DISCIPLINE (or lack thereof) How many times have you been Undisciplined (knew you should do X, but did not) And paid the price? Here s how to get on the Fast Track to transfer Knowledge into Results Page 12
Acceleration Bands: Nasdaq 100 PowerShares (QQQQ) Daily Page 13
Percent R Convention vs. BigTrends Larry Williams Created the Williams Percent R indicator. Used 14-Bar setting. Scale was 0 to -100. Oversold Level: - 80. Overbought Level: -20. Extreme levels of -80 & -20 used to signal reversal points. Stocks can t stay oversold or overbought for an extended period of time. BigTrends Adapted Percent R to improve efficiency. Use 30-Bar setting. New Scale: 0 to +100. New Oversold Level: 20. New Overbought Level: 80. New Extreme levels of 80 & 20 are used to signal a trending security. Mid-Line 50 Level is KEY! Stocks often remain oversold or overbought for extended periods of time. Page 14
The Concept of Efficiency On which of these trends would you rather buy a call position? Page 15
%R + Efficiency Ratio: Apple (AAPL) BULLISH Page 16
%R + Efficiency Ratio: Gold ETF (GLD) was BULLISH Page 17
Find the NEXT Surprise: CBOE Volatility Index (VIX) 2007-2010 Page 18
Options Shark: Bull Portfolio Zion Bank (ZION) Page 19
Key Growth Areas 1) Technical Analysis Mastery 2) Money Management Mastery 3) Planning & Goal Setting Processes 4) Following Your System Real-Time Application 5) Options Strategies for Different Markets 6) Self Mastery Page 20