In the spirt of, Find Something That Works...Then Trade It, this special edition of All Allan highlights a new market timing trading system that works. Below is a 2-Day chart of SPY, populated with Buy and Sell Signals (arrows that are Blue for Buys and Red for Sells).
SPY 2-Day
If you read the above referenced e-Book (by yours truly) than you know my trading maxim, "Find something that works...Then trade it, is based on two key elements to trading success, the first of which is to find something that works. You should be able to garner from that chart that this particular system works. If in doubt, the exact numbers are from Jan 1, 2016 to date there have been 38 trades, 55.26% winners and the average win has been 2.02 times the average loss. When translated into option gains, those are kick-ass numbers, especially if you had the discipline to adhere to a trailing stop as outlined last weekend (see: On Trading Options.)
What got me thinking about this system was a poster on Twitter last week writing about how he uses two-week candles in trading commodities. It reminded me that on occasion I have used 2-Day charts for clarification of Elliott Wave counts, i.e., it clears up some of the day-to-day noise in choppy markets. In this case, I ran my SPY Trend Model using 2-Day charts against the last four years of data and got excellent results. I then ran it against another four years of data, "out of sample" so to speak, for about eight years total, and got even better results.
For subscribers to Blue Line Trading System, we will be following this model in real time going forward. The first few months we'll call it a "beta test" but most of you know me by now and should guess correctly that "beta" is not in my trading arsenal. You succeed in trading by trading and not on paper, with dollars, whether backed by gold or not (but that's another Sunday sermon), because there is no fear or greed involved in paper trades, only when cold hard cash is on the line and trading options without accounting for the fear and greed factor is delusional (once again, see On Trading Options).
A closer look, basis the most recent year of system performance:
Trades past 12 months
Buy Aug 13 545.73 Best Level 564.20 Aug 30 Best Points +18.47 = +3.38%
Sell Jul 18 548.99 Best Level 510.27 Aug 5 Best Points +38.72 = +7.05%
Buy May 02 511.29 Best Level 565.16 Jul 16 Best Points +53.87 = +10.53%
Sell Apr 10 518.00. Best Level 493.86 Apr 18 Best Points +24.18 = +4.67%
Buy Nov 02 434.69. Best Level 524.11 Mar 20 Best Points +89.42 = +20.57%
Sell Aug 9 445.91 Best Level 409.21 Oct 27 Best Points +36.70 = +8.23%
Average Best Percentage Gain per signal = +9.15%
For an example of how the above average gains could translate into option gains, let take a closer look at the most recent signal, a Buy on Aug 13th @ SPY 545.73. It's best return is 3.38% to date. Buying the "next month" & "just out-of-the-money" call would mean buying on Aug 13th the SPY Sep 20th $550C.
As is shown on this option chart, on Aug 13th the call closed at 7.82 and has risen to 17.20 as of the close on Aug 30th. That is a gain to date of 120% versus the underlying SPY gain on this signal of about 3.4%. Worst case, i.e., the market drops next week, this option declines 50% and the call position is closed out for a 60% gain. That's worst case.
What should be standing out from the past 12 months of trading this system is that two of the trades had huge Best Gains, 20% and 10%, respectively Those should have returned anywhere from 300% to 500% using the same kind of analysis. In other words, about 1/3 of the trades generated by this directional trading system generate huge option returns subsequent to entry.
Let's look at one more, this time capturing that Aug 5th mini-crash via the July 18th Sell Signal @ SPY 548.99. In this case, we would buy the SPY Sep 20th $540P @ 7.69:
This put traded as high as 33.95 on Aug 5th, generating a Best Return of 341%, meaning a "worst case" trailing stop out at +171%.
Those two option examples above are hypothetical, but we also have a real time example, i.e., not hypothetical, of buying index puts right around that Jul 18th Sell Signal. Here it is, basis a real time trade in the Blue Line Premium Service:
*I discuss this particular trade in sordid detail in last week's Sunday missive: On Trading Options
Note that this real time trade was only one day earlier than the SPY 2-Day System system trade first described above, July 17th instead of July 18th, and that this trade was in QQQ and not SPY. Nonetheless, the returns are what I want to emphasize and in this case the Best Return was +785.85%, meaning applying the 50% trailing stop rule to exit the trade it should have generated just under a 400% return. A real time example of how powerful option leverage can be even in a 55% accurate trading system.
In Summary
The trading system described above has been on a Buy Signal since Aug 13th @ SPY 543.75. It may have seen top tick, or, it may have days to weeks to run higher. Whatever the case, its next signal will be a Sell Signal. I've seen enough of this system this weekend to assure all Blue Line Trading subscribers, Premium and PRO alike, that we will be taking that next Sell Signal is real time. Consider the countdown as having begun.
Coming soon....VIX Spike
Past Performance Does Not Guarantee Future Results