Keep it simple.
I stated this same sentiment on Monday. Pick a few indicators and
follow them forever. I can't tell you how many traders that I know
that want to follow bull flags, bear flags, candlestick patterns,
Fibonacci retracements - the list goes on and on. They will try and
teach you about their long list of indicators to make themselves
look impressive, but in reality most are horrible traders and
unsuccessful over the long-term.
strategy uses the RSI model plus a few of my proprietary models to
take advantage of sentiment and technical extremes.
Today, I would like to share with you a few of the technical
indicators I use in my proprietary model to give you a head start
on learning how I trade the strategy.
One of the most powerful technical indicators I use in my
proprietary model is RSI Wilder.
The Relative Strength Index (RSI), developed by J. Welles Wilder,
Jr. is an overbought/oversold oscillator that compares an entity's
performance to itself over a period of time. It should not be
confused with the term "relative strength" which is the comparison
of one entity's performance to another.
RSI allows me to gauge the probability of a short to
intermediate-term reversal. It does not tell me the exact entry or
exit point, but it helps me to be aware that a reversal is on the
Knowing that a short-term top/bottom is near I am able to increase
the probability of a potential trade. Conversely, knowing that a
reversal is on the horizon I am able to lock in profits on a trade.
I use the trading guidelines mentioned below and have added my own
Buy when the 5-day RSI closes below 20.0
Sell when the 5-day RSI closes above 85.0.
I am a contrarian at heart and I prefer to fade an index whether
overbought or oversold when the underlying index reaches a "very
overbought/very oversold" state. Fading, just means to place a
short-term trade in the opposite direction of the current
short-term trend. We're leaning into the wind a little with the
expectation that we'll catch the next big gust going the other way.
Of course, other factors must come into play before I decide to
place a trade, but I do know that, in most cases, when an index
reaches an extreme state a short-term reversal is imminent. Again,
I will keep all of you abreast of the overbought/oversold condition
So now that you have the basics of the strategy let me go over a
The following trade is an example of the type of trade that occurs
my High-Probability Strategy.
: The market surged for eight straight days starting at the end of
June. The surge lasted until the July 7th at which time QQQ (the
Nasdaq ETF) had pushed into a short-term overbought extreme.
If you look at the RSI (5) reading below the chart you will see a
short-term overbought extreme had been hit. At that time, I want to
make sure my other proprietary indicators line-up. If so, I will
fade the move.
I discussed what fading means earlier, but for those of you who do
not recall it is basically placing in a trade that opposes the
current trend. In this case the move was higher, therefore I bought
puts. If the market had declined sharply and moved into a
short-term oversold extreme I would have bought calls.
The trade: When entering in the trade I always look for a delta
between .50 and .70. This means that for every $1 in the ETF I will
make $50 to $70 per contract. Moreover, I look for a price around
the $2.50 - $3.00 area. If you are unfamiliar with delta and the
greeks in general please reference my special report on the greeks.
The reason I chose a delta in the .50 - .70 range is for
Choosing an option with a delta of $1 would be way too risky and
potentially fatal if the underlying ETF moves in the opposite
direction of your position. A delta lower than .50, say .30, would
require a large move in the underlying ETF and I do not want to
wait for an extended move.
Remember, the strategy takes advantage of short-term extremes. I do
not want to be in a trade for longer than a week if I have to. My
average trade lasts 4.7 days in the High-Probability strategy so
choosing an option that would require a large move over 5 days is
So, back to the trade.
With QQQ moving into a short-term extreme on 7/7 I bought QQQ puts
for $2.77. Two trading days later I sold the QQQ puts for $3.23.
Again, I keep it simple, very simple. Why would I attempt to create
a complex options strategy when the High-Probability strategy has a
win ratio over 89% with an average return of over 8% per month?
Simple = boring and often that does not entice traders, but I am
not here for excitement, I am here to provide a sound options
strategy that makes people money over the long haul and that is
exactly what the Options Advantage options strategy has succeeded
Editor and Chief Options Strategist
Wyatt Investment Research