Deaner's TRAILING INDICATOR
One of the riskiest investments I know is buying options. If any of you have ever tried to consistantly make good trades, you eventually end up being in the wrong trade at the wrong time and the rest is history.
The "Trailing Indicator" was designed to categorize the OEX's market condition at any given point in time. Once a trader knows the "condition" of the index, he (or she) can "prudently" trade following the discipline I have outlined for each condition. This prevents even the most experienced trader from venturing into problem trades- you know, the ones where we were SO SURE we could anticipate the change in a markets trend!
Just so you know, I use end of day data to calculate the Trailing Indicator because the market tends to tip it's hat during the last hour of the trading day. If you decide to follow the Trailing Indicator to execute trades there will be plenty of time to make money because you are following a trend that should have at least a couple of days in duration. This is alot easier to "live with" because using realtime data is a minute by minute proposition. Frankly, I'm not into that.
So here are the 5 conditions of the market that the Trailing Indicator indentifies:
1. FULL BUY territory: This is the ONLY time that long positions (such as a call purchase) should be initiated. Entering a long position during any other market condition is not trading prudently. The only time that you would ever consider entering a short position during this condition is if the "Deaner Indicator" went into effect.
2. BUY territory: By my definition this market condition can only exist AFTER a Full Buy signal has been generated. During this condition, long positions should be exited to preserve any profits or to limit a loss due to poor time of entry during the full buy signal. Short positions are NEVER entered during this condition because the market most often is digesting gains and the trend is still up.
3. NEUTRALITY: This condition is synonomous with tranquility. During this condition you are out of the market and free to live as a normal human being. When this condition is generated you relax. You go to bed at night knowing that you have no intensions of doing anything the following day. It's a great condition. The Mrs. will love it too.
4. FULL SELL territory: You guessed it. This is the ONLY time that a short position (ie. a put purchase) is entered into. Entering a long position is not recomended except for certain circumstances that are considered pure day trades.
5. SELL territory: Again, by my definition, this condition can only exist AFTER a Full Sell signal has been generated.Historically, even though the market spends less time in a Sell condition than a Buy condition, long positions are never entered into during this time period.
Those are the definitions-pretty simple, easy to follow and you won't get hemmorhoids sitting in front of a computer terminal all day!
The PRUDENT TRADER who uses the Trailing Indicator has as his primary goal "relative safety at all times". Being safe is more important than being profitable. Let me explain by example. If you enter a long position during a Full Buy condition and that evening the end-of-day data were to determine another condition, it is then REQUIRED that you exit the position the following day in the interest of safety. Small losses are preferable to larger losses. This is hard to accept but when someone else is calling the shots it's alot easier to swallow.
Following the signals generated by the Trailing Indicator sacrifices many trades. Consider them "offerrings" to the trading gods. But remember this, the majority of trades are losers. Most options expire worthless or at a lesser value than their original offering. So sacrificing trades is not such a bad thing.
Finally, but perhaps most importantly there is the issue of exiting trades early, BEFORE a market condition changes. This is the best practice because when a market condition changes, often times it is too late to exit profitably. These calls require experience. This is not a sales pitch, but it's best if you know in advance what price point you should exit at and IF SOMEONE OTHER THAN YOUSELF
tells you what to do. Why? Because like it or not you are a human being and your emotions controlling your option position is the option SELLERS best friend. In other words, your emotions are your greatest enemy. That's where this homepage comes in. I invite you to visit it regularly.