I am an options trader. I am not a finacial advisor and this site is not not investment advice. Before you even think about trading you must learn money management skills, educate yourself on exactly what you are trading, and be able to control your emotions.
- 1) The Markets
- 2) Charting to Make Trading Decisions
- 3) Indicators and Settings I Apply to My Charts
- 4) Mechanics of The Trade and Money Management
- 5) Entry Rules
- 6) Exit Rules
- 7) Keeping a Journal
In order to trade successfully, I have learned I need to have the right tools to trade with, the right temperament, and good money management skills. At a minimum, I need a brokerage account with a live data feed. The steps below are how I trade and I come back to this page almost weekly in order to stick to my plan. If you are reading this, you need to find your own style of trading and what works for you. This is what works for me and I will tweak this as I go and as the market dictates.
I consider myself an opportunist trader and not tied to any one particular way of trading. I will trade in up, down, and sideways markets. I am primarily an options trader but will swing trade stocks as well. I have yet to dabble in the futures market.
I look for setups and trade accordingly, be it swing trading, scalping, value investing, or dividend reinvestments and compounding as I have in my retirement account. As long as the trade has a high probability of winning as well as good price action.
I always ignore the news and what most people are doing when I am trading except for global issues that fuel fear and greed. I am too focused on taking other trader’s money and managing my own to be tied down to “fake news” that much of the market news outlets regurgitate. The news is usually after the fact when the market has already moved.
I tried using chat rooms to trade but found it can become too emotional and overbearing. Go to Stocktwits and you will see what I mean. A good sight for entertainment, but that’s about it. When I was in a private chatroom, I became reliant on others to spoon-feed me with ideas instead of coming up with my own ideas and draw my ow line in the sand when it came to trading.
. I found I would ask people if they were in agreement with what I was thinking about a certain trade. This brought in too many opinions, made me second guess myself, and was just too much noise. Some people like the hand holding, I do not. This handholding is not congruent with my personality, I am a very independent person and very focused when it comes to trading.
I do not listen to self-proclaimed gurus. Most of them suck at trading and are not transparent with their trades. Many cherry-pick their trades. They are not in it for your best interest. Not all, but most. I consider being snake oil salesmen. There is a reason stock billionaires do not sell trading systems. They spend their time trading and enjoying their system and their money. They have no reason to sell trading systems. I found you have to come up with your own way of trading that fits your personality. There is no one size fits all when it comes to trading.
With that in mind, education is crucial to what instruments and markets you are trading. There are many smart people trading against me and I always and am in learning mode when it comes to trading.
The best education platform, that I have found, is Tastyrade. They offer, for free, what many people charge you for. The reason they do this is that they want you to use their trading platform. Their education videos and modules are second to none. I do use their trading platform. The only thing I do not like about their platform is that the fills are slow because they use Apex as their clearinghouse.
I am not trying to get rich quick. I did when I was younger and basically blew up a couple of accounts. I lost money because I was too focused on dreams and aspirations of becoming insanely rich. I found out later unless you are born into wealth, it takes knowledge and hard work to create wealth. It also depends on how you define what wealth is.
Early on, I paid for trading systems and they just did not work for me. I lost money. I blame no one but myself and my lack of knowledge. Now I trade slow and steady and learn the craft by reading the psychology and mechanics behind trading and then testing those hypotheses. My win rate is currently 75% and I keep a running log of my trades.
Nowadays, I only trade for income. I am happy to spend just a couple of hours on the weekend looking for trade setups that typically make me $500 to $3000 a week, even in down markets. I do not want to spend all day, every day, chasing some dream of being rich. Why would I? I do sometimes trade all day, just because I enjoy it and find it challenging.
I live comfortably and live simply. It is less hassle that way. I have paid off my house and make enough to eat. My child is taken care of and has an education and a leg up on life. I have enough saved to retire and live comfortably on.
In the end, I figure, we all die and can’t take it with us, so I am not going to kill myself or make myself miserable in this life chasing the idea of being insanely rich. When I started thinking that way, I became comfortable with trading and started making money. I also learned you get out of it the amount of time and energy you put into it.
When I was younger, I used to spend a few hundred dollars a month on charting programs, chat rooms, stock recommendation lists, and the next best thing. This was a waste of money and time. Basically all the tools I need to successfully trade are a live data feed and a charting program. My broker provides this.
I finally figured out later I did not need to pay for chat rooms nor stock recommendations subscriptions. The only people who were getting rich were the ones selling that snake oil medicine. There are a lot of scammers in the business and the SEC has no manpower or teeth to police the business. I wasted a lot of time on money on such things. I found that you really don’t need these things if you just read, trade with real money, and work on your money management skills. If you stop learning and become complacent in your stock trading, or life in general, you become lazy and it will bite you in the ass.
The purest and cheapest way to trade stock is ticker tape trading. This is nothing more than reading data feeds of stock prices. I can trade this way, but I do like the visual representation of using a chart to look at price action, fear, and greed.
For long term trades and to be a bit more precise with my trading assumptions, I prefer to have a program that plots historical price action on a chart so I can look at patterns of trading behavior and gauge which direction the market is trending before I make my trade.
1) The Markets
– What I trade –
I am most comfortable Trend Trading stocks and stock options. I want to follow the crowd instead of going against it. My personality is contrarian, so I have to curb my urge to go against the crowd by thinking I know market bottoms or tops. This always bites me and it is critical that I must document my trades so I don’t keep making the same mistakes.
I do not like trading Indexes and their options as short term trades because they move too fast for my trading style and I usually lose money. I may trade them though for daily scalps. I like steady swings, up or down, over a period of 2-5 days for the most part depending on the type of trade I am doing. Option spreads or complex options I like to trade 30-60 days out.
I will not trade penny stocks. It is an extremely corrupt industry with no transparency. Very few people do well and the ones that do are outliers or anomalies. I do not know why the SEC even allows it. I jumped on the bandwagon one time because people are worked with were trading them. They all lost money as did I. Many penny stock companies (people) pump and dump these bogus companies just to take your money and simply disappear. For every winner, there is a loser and usually, the losers are those who think they are investing in these junk companies.
Swing Trading is a style of trading that attempts to capture gains in a stock (or any financial instrument) over a period of a few days to several weeks. Swing traders primarily use technical analysis to look for trading opportunities.
– Identifying Stocks to Trade –
One of the best sites available to screen for stocks is FINVIZ. Yahoo used to be my go-to, but they became nothing but ads and locked up my browser.
For my standard go-to swing trades regarding, I run screens in Finviz for Mega Cap Companies and Large Cap Companies. If you hover over the stock link it will show a preview of the stock’s chart. This makes it quick and easy to choose stock patterns that look promising, to me, for swing trades. I choose stocks that show wide swing patterns over a few days or weeks. I write these stocks down then add them into a list within my charting software.
I filter to trade stock options on stocks that are over $100a and are well-known companies that are on everybody’s radar. They must be liquid, which means they have high volume.
2) Charting to Make Trading Decisions
– Primary Chart Intervals –
The primary chart intervals I typically use are 4 hours, 1 day, and 1 week. The time frames must all be in agreement with the trend of the stock’s price action. I use a charting program and technical analysis to help me with my trading decisions.
Price action is the movement of a security’s price plotted over time. Price action forms the basis for all technical analysis of a stock, commodity or other asset charts. Many short-term traders rely exclusively on price action and the formations and trends extrapolated from it to make trading decisions.
Technical analysis is a methodology that makes buy and sell decisions using market statistics. It primarily involves studying charts showing the trading history and statistics for whatever security is being analyzed.
– Charting program I use –
My Charting Program
I add the stocks I find on Finviz into my charting software. I use tradingview.com. This is free to use but has limitations to how many stock lists, indicators, and templates you can save. with the free version. I purchased a pro subscription that has a few more bells and whistles.
Tradingview will run specials throughout the year. I think I got 50% off when I signed up for the free trial then canceled within the 30 days.
One pitfall of tradingview is that they will want to charge you, on top of your subscription with them, for live data. I do not need this since I typically look at my charts after hours and I do not day trade. The data is 15 minutes behind. This is good enough for my needs.
I am finding that I really do not need indicators to trade. I become too reliant upon them and they give me false hope and breakouts. I am typically using just moving averages to see where the price action is trending or any patterns that seem interesting to test. I will switch back and forth from candlestick plots to bar plots. After I am comfortable with my set up then I just scroll down my watchlists to see what looks promising to me for trade setups. I spend no more than 10 minutes on this.
I start with a 4hr chart and look for various patterns and trends in a stock’s price action. StockCharts.com is a good reference for the explanation of various chart patterns. Once Something spikes my interest, I then move out to the one day chart and then the weekly chart to see if my indicators and perceived patterns are congruent.
I love the drawing tools that tradingview provides in order to draw patterns on my charts. It makes me feel like I’m the John Madden of stock plays (Football reference). After I draw patterns and trends I narrow down the potential trade on a stock by looking at the price action/movement to give me confirmation of getting into or out of a trade or if I missed the chance.
I like to use time frames of 4 hrs, daily, and weekly. If all my indicators match up within those time frames then the trade is a go.
3) Indicators and Settings I Apply to My Charts
By analyzing historical data, technical analysts use indicators to attempt to predict future price movements. Examples of common technical indicators include the Relative Strength Index (RSI), Money Flow Index (MFI), Stochastics, MACD and Bollinger Bands
I am getting to the point that I am not using indicators to trade as it just creates too much noise on the chart for me and really all I need to look at is the price action.
I advise coming up with what works for you. I am not a professional and would never recommend you trade as I do. I am only showing how I trade for educational purposes and for me to hold myself accountable and to adjust what I am doing wrong and/or how I can become a better trader.
. Keep in mind what you see here, I will tweak and adjust since the price action of stocks changes as I find I may be using something that no longer works. I have to stay dynamic in this game while at the same time stay static with adhering to my rules which can also change as I learn and adapt to the market.
Most of what I use are known chart patterns that are freely available on the web.
Another thought on indicators is that the price action for every stock is different and one indicator does not work for all stocks. You have to figure out the best indicators for the stock you are trading and what fits your trading style. Only do what works for you. This is more an art than it is a science.
4) Mechanics of The Trade and Money Management
– Rules for Position Sizing –
Position sizing refers to the dollar value of your trade and can also be used to define the number of shares or contracts that you’ll trade.
I am only willing to risk 1-5% of my total account on an option trade. Five percent being aggressive and one percent being conservative. So basically, If I have $100,000 in my account then I am only going to buy options contracts for one trade that equals not more than $5,000.
This is all I am willing to lose on any one trade.
With that in mind, I will trade at up to 30% of my total account. So If I had 6 trades of $5,000 at the same time happening, this is a total of $30,000 in the market on trades and therefore 30% of my account is trading.
This is the key to money management. The odds are more in your favor if you follow this and you will be less likely to blow up your account if you are on a losing streak. Slow and steady.
My current win percentage is 75%. This means I am only losing 1 in every 4 trades.
I may not make a killing, but over time this scales up and you will exponentially make more money unless you are on a losing streak.
If I start losing more than I am winning then I take a break from trading for the rest of the month. Sometimes I took off years when I had a personal tragedy in my life.
Trading in the markets is a Zero-Sum Game. It takes focus and clarity. You either win or lose. You are betting against other very intelligent traders and high-speed computers who are either going to give you their money or take yours. If you are not thinking clearly and are not focused you will lose your money.
– Tools For trading size, profits, and loses –
I typically trade option spreads on stocks that are between $30 and $100 because the premiums are what I am willing to pay. Yes, this limits what I can make, but it also limits what I can lose. These must be liquid. in other words, they must have a high volume so I can get in and out of a trade when I need to. Also, I want to find the spreads are not that large.
Once I narrow down the stocks that meet my trading criteria, I run them through an option strategy builder or analyzer to determine what my probabilities are in terms of profits versus losses.
Most brokers have these tools built-in. I can set the size of my trade in terms of dollars. Both my Etrade and Tastyworks accounts have these tools. It really is a time saver. You can also find free option analysis tools online.
UPDATE: As of February 2020 I have closed my Interactive Broker’s account and opened a Tastyworks account. Tastyworks has a great platform that makes me a better trader as well as low commissions. See my goodby here. I like the Tastyworks tools better than my Etrade brokerage. Since Etrade bought Optionshouse, who made the options tools, to begin with, Etrade has been slack on updating bugs and I am finding broken links on their website to use these tools. Tastyworks is primarily set up for options. I will still keep Etrade since my retirement account is there.
It is not necessary you use these tools, but they will also give you a fair idea of your profit/loss potential. You can just skip this step and go to the next step or skip them altogether. The main reason I use my broker’s tool is that it automatically and quickly calculates the best strategies that have the highest probability to win.
I am a visual person and optionsprofitcalculator.com is one of the best tools if you want to visualize your potential profit or loss. This is not perfect since it uses the Black-Scholes model which pertains to European Options, but it gives a reasonable representation of what my outcome may look like. The model also does not take into account volatility. It does, however, give an idea of the time decay of options. At the moment this is a free service.
5) Entry Rules
Entering a trade is usually on my assumption of the direction of the underlying stock price. I usually look for chart patterns. For example, if I have a chart that has formed a Bull Flag or Bear Flag I will wait for the price action to break out of the formation and go either long or short based on the breakout direction. It also depends on the type of trade I initiate.Some trades take advantage of sideway stock movement.
6) Exit Rules
This can be hard because emotions get in the way. If I am in a winning trade, I will sometimes end up jumping the gun and get out early instead of letting it run. If I am in a losing trade, it is easy to tell myself that the price action will turn around and go in my favor. I have learned the hard way, numerous times, this is not the case. I usually take profits at 25% and if I am confident the stock is moving in the direction I anticipated will go all the way up to 50% profit. This really is dependent upon price action and volume.
There is more on this on my strategies page.
I try to stay in a trade longer than 5 -10 trading days fir stocks. Regarding options I want to close out a trade a week before expiration. If I do stay in longer, then I watch the stock’s price action on the chart closely to make sure there is not a trend reversal or the options strategy is not moving against me.
7) Keeping a Journal
My Journal is this blog.
All my trades are posted on Profitly
It is important for me to keep a journal and a running tally of my trades. This is so I can look at my own trading psychology, to determine if I have been sticking to my plan and if I followed good money management.
This does not mean to beat myself up or to second guess myself when I lost a trade. I used to do that and became scared to trade and lose money. I learned it is normal to lose trades and if you use good money management you will typically come out ahead.
Looking back at the history of my trades, I focus on how I could have timed my entries and exits better, whether I followed my plan or not, and to reassess if I need to tweak the way I think or take a break for a bit.