Hello,

Successful traders learn to follow a set of rules consistently.  These set of rules are called a trading system.  When using stock options, it is very important to use a stock option trading system.  I've backtesting several stock option trading systems and have learned to avoid commonly taught systems that result in a net loss over time.  A new stock option trading system I am still backtesting involves high flying stocks Google, CME, or RTP.

The leverage of stock options can cut both ways.  You can lose faster as well as win faster with stock options.  Therefore, you want to get past the point of trading because of emotions or addiction and trade by your rules.  Of course, your stock option trading system needs to be backtested with lots of samples to ensure you have positive expectancy.

Positive expectancy means that when you trade many times over the long ru, you will have a net profit.  You will be surprised that some stock option trading systems being taught or sold may have a NEGATIVE expectancy in the long run.  That is, you will be trading at a net loss.  They may have worked in a strong trending market a few years ago but they do not work in our current 2005-2006 slightly trending stock market.

That's why I am focusing on stocks that are expensive and that have a high intra-day range - or average true range.  Google, CME, and RTP are in the $200 to $500 range.  In fact, there are not many other stocks over $200 that have options besides those three.

Normally, options two strikes out of the money are relatively expensive for these stocks - except during the expiration week.

Let's look at a stock option trading system I'm still backtesting:

1.. On the Monday before option expiration, buy three strangles on Google, CME, or RTP that are 2 strikes out of the money for that expiration.  For example, on Monday, May 15th, with expiration Friday on May 19th, Google is at 400.  Buy the 420 call and the 380 put.  If it is not earnings month, the strangle should cost around $300 to $350.
2.. You'll have to watch the price quote most of the day for Tuesday, Wednesday, Thursday, and even Friday
3.. Try to estimate based on chart patterns whether a certain time is close to the high or low for the day.  Better than that, if the price of the total strangle is profitable by $100 or more per strangle, sell one.  The normal intra-day range for these three stocks swings enough to cause some profit.
4.. Repeat step 3 on Wednesday and Thursday.  Many times a year, there is a news event that can cause a $10 to $30 move on a single day.  These are the home runs you are looking for that will more than cancel the strike outs of the relatively inactive days.

This stock option trading system has precise definitions for entry and relatively precise definitions for exit.  Trade like a robot one week a month.  I've traded this system a few times and have gained more than 50% twice and lost 50% once.  In future articles I will present the detailed backtesting results of this system.

By Steve Burke, Perazzim Capital Management

Bollinger bands are an integral part of just about every charting system I have ever seen but many traders are unfamiliar with how to use them. In this lesson we will cover the basics of Bollinger bands and one particular technique which I have found to be very reliable.

Bollinger Band History

Bollinger Bands were invented by John Bollinger as a means of determining what could be considered as high or low around a give price.

The bands are plotted at a standard deviation (statistical term for measuring volatility) around a moving average. Typically the standard deviation used is 2.

The bands appear on charts as 3 bands.

A simple moving average in the middle. Most charting software defaults to a 20 period moving average.

An upper band calculated around a simple moving average plus 2 standard deviations.

A lower band calculated around a simple moving average minus 2 standard deviations. 
 

For our examples we will use the most common setting of a 20 period simple moving average. This will give us 3 bands, the middle band of a 20 period simple moving average and the upper and lower bands calculated around the middle band with standard deviation of 2. The closing price is most commonly used to calculate the moving average.
Bollinger bands can be used to generate buy and sell signals but that is not their primary use. The main purpose of the bands are to:

To identify areas of high and low volatility
To identify periods when prices are at an extreme and possibly ready for a reversal.
To identify a trending market.

See Chart Below

The squeeze (tightening) is a period of low volatility and often happens before a big move. It can also help identify potential breakout areas.

Reversal
In conjunction with other indicators you can identify potential reversal points.Trending Following
Although Bollinger bands will not tell you when the trend has started if you combine it with certain indicators they will confirm the trend. It is also easily identifiable visually.My Use Of Bollinger Bands

As I mentioned earlier Bollinger bands are not really meant to be used as a signal generating indicator but in conjunction with another indictors can be very useful.

I like to use Bollinger bands and RSI together to generate possible buy and sell signals or to confirm overbought or oversold areas.
I normally set the RSI at 14 and when it reads over 70 and price is at or pushing through the upper band then I know we are overbought and ready for a reversal. I will either start thinking about shorting the market or if I am already in a long position will start to cover.

When the RSI reads below 30 and price is touching or pushing through the lower band then I know we are oversold and I will either consider buying the market or close existing short positions.

See Chart

Experiment with the settings until you find the right parameters for the market you are trading. I have found the bands to be effective on all time frames from 5 minutes to monthly bars.

Good Trading

Best Regards
Mark McRae

www.traderssecretcode.com

 

This is a reversal signal so you will want the pattern to develop before you decide to take action. I have found it to be quite reliable as a stand-alone method and also just as an additional confirmation signal.

What you are trying to do is find the reversal point of the market you are following. Let's say you can see that there is an uptrend and you are expecting the market to top and want to get short when this happens. By using the 3-stage trend signal it will get you into a position early in the reversal.

For Short Entry

For the first stage of the set up, you draw a trend line (T1) along the bottoms of two recently formed valleys (support areas).

The next stage of the set up is when the market begins to pick up momentum and you draw a second trend line (T2) along the bottom of the last two most recently formed valley's (support areas). You can usually tell when its time to draw a T2 as the market will move away from T1 sharply. As the market pulls back but doesn't reach T1 that is the time to add the next line.

The last stage of the set up is when the market really start to pick up speed and this is often an exhaust move and a third trend line (T3) is drawn. This move should have the same characteristics as T2. We are now ready for a trade.

Once T3 has been broken - enter the market short on the break of the trend line. Your stop can be placed above the most resent resistance high, which if we got our timing right will be the top of the move. Now all we need is a target.

The target should be T 1. You will be amazed just how often support forms at T1. As you exit the market at T1, continue to monitor what happens. If the market finds support and heads back up then you can wait for another opportunity to form. If the market continues to break through T1 then this is a strong indication that the whole trend might be reversing and you may want to consider entering short again.

For The Long Entry.

For the first stage of the set up you draw a trend line (T1) along the top of the two recently formed peaks (resistance areas).

The next stage of the set up is when the market begins to pick up momentum and you draw a second trend line (T2) along the top of the last two most recently formed peaks (resistance areas). You can usually tell when its time to draw a T2 as the market will move away from T1 sharply. As the market rallies back but doesn't reach T1 that is the time to add the next line.

The last stage of the set up is when the market really start to pick up speed and this is often an exhaust move and a third trend line (T3) is drawn. This move should have the same characteristics as T2. We are now ready for a trade.

Once T3 has been broken - enter the market long on a break of the trend line. Your stop can be placed below the most resent support low, which if we got our timing right will be the bottom of the move. Now all we need is a target.

The target should be T 1. You will be amazed just how often resistance forms at T1. As you exit the market at T1, continue to monitor what happens. If the market finds resistance and heads back down then you can wait for another opportunity to form. If the market continues to break through T1 then this is a strong indication that the whole trend might be reversing and you may want to consider entering long again.

As you scan the market for possible set ups you will notice that there are plenty of T1 and T2's that can be drawn, but fewer T3's. This is what makes the set up more reliable- the fact that there is fewer of them. There will be lots of opportunities just keep your eye's open.
Good Trading

Best Regards
Mark McRae

http://www.surefire-forex-trading.com/