How do you choose what pond to play in?

[MFJones]

I'm just getting started. I'm trying to specify what markets, time frames, instruments, systems, and strategies will best suit my strengths and where the professional traders won't have as much of an advantage. I'll lay down some thoughts on each, but time frame is specifically on my mind and the reason I'm posting.

Time Frame: It seems that day trading is one of the most popular time frames here. That also seems like the exact time frame where retail prop traders are at an extreme disadvantage. Compared to other time frames, the moves are quick and relatively small. I'd think this would benefit the pros who can take advantage of small moves will their large volumes and low transaction costs, can react quickly because they are full time dedicated to trading and have superior data feeds / systems. Compared to them, we are slow and have high transaction costs. Our advantage is that we have no restrictions on what we can hold over night or over several days (where their risk departments might require them to liquidate and not hold overnight.) That would lead me to believe that trading trends over a weekly/monthly trend would be better for us. What do you think?

Markets: I would think that equities (technology specifically) would be the best market. Maybe throw a little commodity futures in. Forex, interest rate instruments, bonds, etc all depend on macro-economic factors that pros are going to be much better at estimating than me. The same is true for equity valuations, but there is a possibility that I'll have superior assumptions about technology trends (thats what I'm hoping.) FX would be good for someone who thinks they'll have superior assumptions of mass human nature (Hari Seldon style) and will know that Trump gets elected or Brexit goes through and can trade on those assumptions. Why did you choose your market?

Instrument So that means the instrument can be stocks, futures, or options. I'm leaning hard towards options. Stocks don't have enough leverage. When I was younger I tried futures a wee bit. I found that setting stops was one of the hardest parts. If you use enough leverage, there is a very good chance you'll get stopped out and lose money even if you were going the right way. Options allow you to just make your position such that the loss you're willing to take is the total price of the option. You completely eliminate a hard decision and source of stress. Also, there are an extremely diverse mix of strategies to fine-tune your risk/reward and to take advantage of different market scenarios. What do you think?

StrategyThere are a couple dozen option strategies that can be fine tuned in almost an infinite ways. The pros that we are competing against may not influence this aspect as much. Risk/Reward, movement predictions, and transaction costs are bigger factors. Naked calls/puts seem to be the best simply because they have the lowest transaction costs. Buuuut, we must utilize the entire arsenal. Are any best? Should some be avoided? (Other than naked writing)

SystemI think this is what really matters. This is where the abilities of the individual trader really make a difference. I'm not really sure where pros advantage is less here. I'm currently working on. I think I'll be using a mix of fundamental and technical analysis. First, trade with the trend. For the most part, the stock market goes up and technology stocks will capture a disproportionate percent of growth in the future (obv different in a bear market). The fundamental part is really just the backdrop that will hopefully increase my odds. Technical analysis will be the bulk of the decision. I'm working on what criteria I should use. Follow some weekly upward momentum when the underlying is below a several month high? Get in after a low week? Get in when it gets near a short term resistance? Use one of the many other methods? I'm not asking you for specific answers(although I'd love to hear your system.) I'd like to hear your thought process.

Where am I wrong? Where am I missing important factors? Am I at least thinking about it the right way?

 

[tomorton]

Very nicely constructed first post (and welcome to this forum). I think we should be thinking and debating here on a more strategic level like this and the points you have made are key. I'll drop in my first thoughts below, hoping this conversation grows and develops.

Time Frame:
Intra-day is a route to almost guaranteed failure. I look at all intra-day price movements as noise, its the closing price that's important, everyone gets a vote on that one. And the weekly close is even more interesting.

Markets:
They're all equally good for me as I trade purely from the charts. I actually try to NOT ingest information about companies I'm in in in case this biases my decisions.

Instrument:
I trade forex and equities, following whichever are the strongest trends on the charts. I can spread-bet these both long and short which in the UK is a simpler and lower overhead mechanism than traded options. I try to avoid being long some equities and short others - following the major trend from the stocks' index charts will give one favoured direction only. Finding it worth checking also against going long on a currency pair when all the other pairs with the same base are bearish.

Strategy:
Think you're focusing here on options strategies so I'm going to leave this blank for now.

System:
If something is in a really steady trend, the only entry rule I follow these days is to get in after a pull-back. But this could be as short as one counter-trend day followed by a resumption of trend. Exit is when the resumed trend makes a more significant pull-back. Initial stops at major swing highs/lows.

Looking forward to reading more. And maybe some strong contrary views.

 

[NVP]

I'm just getting started. I'm trying to specify what markets, time frames, instruments, systems, and strategies will best suit my strengths and where the professional traders won't have as much of an advantage. I'll lay down some thoughts on each, but time frame is specifically on my mind and the reason I'm posting.

Time Frame: It seems that day trading is one of the most popular time frames here. That also seems like the exact time frame where retail prop traders are at an extreme disadvantage. Compared to other time frames, the moves are quick and relatively small. I'd think this would benefit the pros who can take advantage of small moves will their large volumes and low transaction costs, can react quickly because they are full time dedicated to trading and have superior data feeds / systems. Compared to them, we are slow and have high transaction costs. Our advantage is that we have no restrictions on what we can hold over night or over several days (where their risk departments might require them to liquidate and not hold overnight.) That would lead me to believe that trading trends over a weekly/monthly trend would be better for us. What do you think?

Markets: I would think that equities (technology specifically) would be the best market. Maybe throw a little commodity futures in. Forex, interest rate instruments, bonds, etc all depend on macro-economic factors that pros are going to be much better at estimating than me. The same is true for equity valuations, but there is a possibility that I'll have superior assumptions about technology trends (thats what I'm hoping.) FX would be good for someone who thinks they'll have superior assumptions of mass human nature (Hari Seldon style) and will know that Trump gets elected or Brexit goes through and can trade on those assumptions. Why did you choose your market?

Instrument So that means the instrument can be stocks, futures, or options. I'm leaning hard towards options. Stocks don't have enough leverage. When I was younger I tried futures a wee bit. I found that setting stops was one of the hardest parts. If you use enough leverage, there is a very good chance you'll get stopped out and lose money even if you were going the right way. Options allow you to just make your position such that the loss you're willing to take is the total price of the option. You completely eliminate a hard decision and source of stress. Also, there are an extremely diverse mix of strategies to fine-tune your risk/reward and to take advantage of different market scenarios. What do you think?

StrategyThere are a couple dozen option strategies that can be fine tuned in almost an infinite ways. The pros that we are competing against may not influence this aspect as much. Risk/Reward, movement predictions, and transaction costs are bigger factors. Naked calls/puts seem to be the best simply because they have the lowest transaction costs. Buuuut, we must utilize the entire arsenal. Are any best? Should some be avoided? (Other than naked writing)

SystemI think this is what really matters. This is where the abilities of the individual trader really make a difference. I'm not really sure where pros advantage is less here. I'm currently working on. I think I'll be using a mix of fundamental and technical analysis. First, trade with the trend. For the most part, the stock market goes up and technology stocks will capture a disproportionate percent of growth in the future (obv different in a bear market). The fundamental part is really just the backdrop that will hopefully increase my odds. Technical analysis will be the bulk of the decision. I'm working on what criteria I should use. Follow some weekly upward momentum when the underlying is below a several month high? Get in after a low week? Get in when it gets near a short term resistance? Use one of the many other methods? I'm not asking you for specific answers(although I'd love to hear your system.) I'd like to hear your thought process.

Where am I wrong? Where am I missing important factors? Am I at least thinking about it the right way?

jees - an excelent appreciation of what you need to think about regarding your training and approach to trading - 10/10

now yo just got to answer these questions from experimentation , trial and error ...........you will find your fit over time ..........just dont get too submerged in complex rules and strategies .....simpler the better if possible

N

 

[MFJones]

Update

@tomorton Thanks for the compliment. I agree that the strategic level is really important and I would venture to guess that many traders don't do a very good analysis at this level. It is the level where we find our edge.

I'm sticking with the 7-30 day time frame and technology stock options for the reasons in the original post.

I've moved further in strategy and system refinement since posting the original. My information in the past few days has been coming from the Option Alpha podcast. His spiel is...

Selecting strategies is a process of elimination.

Figure out your directional assumption. This will narrow the possible strategies to a half dozen or less.

Then consider what he says is the most important factor in selecting a strategy: IV percentile. If current IV is high compared to last year's range, it is a good time to utilize strategies where you are a net seller of options to gain from the high premiums. If IV is low, lean more towards strategies that are net buyers. However, he shows that IV has a tendency to overestimate compared to actual volatility. Due to this, you should overall be a net seller.

I haven't yet place any trades with this new framework. I plan on starting within a few day, but I need to find a good way to screen by IV percentile. I'm using schwab and it doesn't seem to have historical IV data.

 

[tomorton]

Well, I don't know that much about IV, not enough to use it to assess my strategies / trade management, I don't trade via options anyway. But surely like many indicators, when you see it as high, it can just go higher and higher and higher? Is there a way to guard against this? Maybe specific to options?

 

[MFJones]

Yeah, the past range is no guarantee of a hard ceiling on IV. It's just a strong guideline. Think of this analogy: Interest rates at historic lows can go even lower. Hell, they can go negative. But without a specific narrative pushing them that way, its more likely that they'll begin to revert to a mean. IV affects option value much more dynamically than interest rates affect stocks. So it makes sense to use option strategies that won't get hurt by that IV reversion. This is especially helpful when IV is at historic lows because it can't go below 0%.

 

[WklyOptions]

Options IV %ile vs Strategies

MFJones,

Nice opening thinking on your Trading Plan (s). It's nice to see some critical thinking applied to the Trading Game!

Just a few basic guidelines for you to consider in your Options Strategies:

A. Keep it simple. Trend following = proven approach esp if you are adept at Adjustments and Rolls.
B. Always try to exploit Extrinsic Time Value going to zero 100% of the time at Expiry. Look to Sell ATM Options (but hedged also).
C. If duration to Exit < 2 wks, you'll be exposed to gamma - dangerous if hold short Options - short Options Extrinsic Time Value v small in final 1-2 wks. More efficient to harvest 10-30 days out, and then Exit or Roll once ETV down to 25% of original ETV.
D. If IV is in low mode with < 25%ile ranking, try have more long Options > short Options.
E. If IV in med, high mode > 25%ile ranking, can have equal # long vs short Options.
F. Know your Adjustment & Rollover contingencies.
G. Know your price Targets and Proven Wrong price Action. Then Exit w intentionality.
H. Don't risk > (-5%) bankroll - until your Results show positive evidence of profitable Options Trading SKILL.
I. Be patient - take ONLY pullbacks in best trends. Often I prefer trends w powerful monthly or weekly trend momentum (as the T1 highest time frame).
J. Have FUN and breathe often. Stay centered. Don't expect perfection. But expect and enjoy Challenge of managing the "right edge" of your price charts!

You're off to a strong start w your thinking process! Continue to focus and concentrate - really learn the multiple possibilities of the Options (via Greeks).

Ask your questions here at T2W. Lots of experienced Options Traders here willing to give solid non-offensive guidance.

Good trading to you.

WklyOptions

 

[seekingTruth16]

In terms of markets and instruments, you want something that has low transaction costs, is liquid, transparent, reliable and has sufficient movement to outweigh the transaction costs. It also needs to be something you can understand.

If you go for high transaction costs and day trade, you will be making it very hard for yourself.

Options seem to be high transaction cost, and the nuances of them can be difficult to understand.

Selling options is dangerous unless you have big pockets and know what you're doing.