HomeFreeTrading Plan

Mission Statement

By using our automated mathematical algorithms, find in real-time, the select few trades  that return the largest possible return in the shortest possible timeframe, together with a disciplined money management strategy, that cuts losses to a minimum, and takes advantage of winning trades to the fullest.

The goal of using an objective trading strategy, and strictly adhering to its rules, is to reduce as much as possible the affect of our emotions on making trade decision.

Trading Strategy

It is our believe that success in trading depends on three factors:

  • Trading strategy, method, or system
  • Mind set (emotions, biases, psychological)
  • Discipline

Our objective is to eliminate “mind set”, from making trading decisions as much as possible. Only when biases, and emotions are eliminated can the trader be disciplined, and follow through on alerts generated by the trading system.

What to trade?

Our trading system is geared towards finding repeating patterns in price of an underlying stock, and anticipates a significant price move, or price reversal on a short time frame. Usually in  a matter of hours. We prefer to trade the options, of the underlying stock versus the shares for the following reasons:

  • Less capital required
  • Leverage
  • Quick execution

What are “options”?

Definition:

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.

Conventionally options are used to “lock in” a price on shares of a specific company some time in advance.

For example:

IBM trades at $192 a share. You expect IBM to rise in price and trade above $200 in two months from now.

Buying “Call” options will allow you the right to buy IBM shares at a specific “strike” price, at or before the expiration of the call option. Strike prices on IBM, increment in $5 intervals. One option controls 100 shares.

While IBM is trading at $192 a share, you buy a 195 strike call option for $360. At time of expiration of the call option (in this example 2 months) IBM trades at $205 a share. Your option contract gets executed, and you get filled 100 IBM shares at $195. You now can immediately turn around and sell the shares for $10/share profit, if you so desire. Total profit would be the $1000 profit on the shares, minus the $360 cost of the call option.

If however IBM fails to rise above the strike price of the call contract ($195) the contract expires worthless, and you lose your $360 initial investment.

While “call” contracts are used to anticipate a rise in price of the underlying, “put” contracts are used to anticipate a fall in price.

Over the years, volume on option trades have significantly increased, and while initially option contracts could only be purchased with a monthly expiration (3rd Friday of every month), a whole new market has been created recently with the availability of option contracts that expire each and every week at 4PM market close on each Friday, the so-called “weeklies”.

Due to the high volatility/high leverage and quick execution, option trading has become popular among short term- and day- traders.

The following chart of the weekly SPY 185 call, with expiration of 3/28/’14 shows just the amazing opportunities in trading “weeklies”.

SPY185Calls

SPY 185 calls

This chart shows price of the 180 SPY call during one week of trading. Each candle on the chart represents 5minutes of trading. The tails on the body of the candle represents the high and low. The top and bottom of the body represents the open and close price of the option during the 5minutes of trading. A Green candle signifies a higher close above the open, and a red candle represents a lower close, below the open.

The SPY 185 call traded at a low of around $1.10 on Monday, to a high of $2.2 on Tuesday, and $2.47 on Wednesday. And closing at expiration at $0.50 per contract.

Since one contract controls a 100 shares, the cost of one call at Monday at $1.10 would be 100 * $1.10 = $110.00

SPY option contracts are very liquid, and one can easily purchase a large quantity and expect immediate execution of the trade.

We have developed our trading system to find high probably trading setups in the weekly options of the highest liquid stocks with the highest volatility in the market. The symbols we currently trade the most active are:

AAPL, AMBA, AMZN, BIDU, FB, GOOGL, GPRO, IWM, LNKD, NFLX, PCLN, SPY, TSLA, TWTR

Trading System

We have determined that we want to find opportunities on a short term bases, trading weeklies on high liquid, high beta stocks, while eliminating bias, and emotions, with a semi-automatic un-ambiguous approach, based on Technical Analysis of price charts.

To find high probability trades, through several years of research we have determined the following:

  • Just like “Mandelbroth’s fractals”, patterns exists in stock price charts, which repeat themselves again and again in every possible timeframe.
  • Fibonacci numbering, Pi and Golden ratio, can be used with high accuracy to depict relations between price levels on a price chart.

One of the most common patterns in high liquid stocks is a simple “AB=CD” pattern: Whereby the target “D” is determined by the reciprocal Fibonacci extension of the BC retrace.

Looking at the chart of SPY, with the same timeframe and period, as the previous depicted chart of its 185 Call contract, we can now easily detect three of these AB=CD patterns.

SPY with AB=CD patterns

SPY with AB=CD patterns

The algorithms we have programmed will scan in realtime, and alert as soon as a pattern develops. An entry signal will be generated at the start of a CD leg of the AB=CD pattern, together with a target “D”, where most likely the pattern is about to finish.

In the chart above you can see in the 1st pattern, that “D” was accurately predicted to be at 127% of the BC leg. And successively a reversal occurred.

In the 2nd pattern, the target “D”, calculated at 261.8% of the BC leg was achieved, slightly overshot, but stabilized at this level before yet again a reversal occurred.

The 3rd pattern as well reached its predicted “D” target.

Besides the basic AB=CD pattern, our software will depict and calculate targets for more complex patterns, which includes more legs, but with the AB=CD at its root:

 

Trading Rules

 No more than 10 to 15% of total capital allotted to each trade

  • No more than 4 simultaneous active positions
  • 25% initial stop loss at opening new position
  • Always close at least 30% of position when a 50% profit is achieved. And raise stop to entry. locking in gains!
  • Close up to 50% of position when 100% profit achieved, raise the stop on remainder of position to the +30% profit level; locking in gains!
  • Above 100% profit then turn stop, into a trailing stop.
  • Never take a full position overnight, in case a position is taken overnight always take enough profit at end of day to warrant a break even on total trade.

 

 

 


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