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Rick
primarily trades equity options and index options. He's
been trading about 10 years. Rick's approach works just
as well with stocks as options in that he identifies
the stock and then finds the associated option, saying
that his stock hit rate is 90% which is more that impressive.
Here is what he had to say.
What
attracted you to OmniTrader?
The
way it systematizes the analysis, its trading systems
and its effectiveness. I had used a manual process and
it was very time consuming and frustrating. I had found
some systems to use on some stocks but not on others.
OmniTrader solved my problem by creating the Focus List.
I also like OmniTrader's ability to optimize and update
itself.
What
has your success rate been and how has OmniTrader influenced
that success rate?
OmniTrader
improved my confidence - it gives me a system I can
stick to. I get more trades than if I were doing this
manually. If I trade it right, it works. If I trade
it emotionally, I invariably lose money. If I used it
right, it has improved my success ratio. The tricky
part is finding the right option. I guess I have a 90%
success rate on a stock basis... and that is not an
exaggeration. The option part needs more work. The stock
success rate improved from about 70% before I used OmniTrader,
and I get more trades with OmniTrader.
Did
you change OmniTrader's settings much or do you primarily
use the defaults?
I
changed the optimization (in Test/Advanced) to 50% hit
rate and upgraded the APR to 30%. The seamless integration
with TC2000 was a big plus. TC2000 has clean data that
comes down easy. I weed out marginal trades. I only
go for 3-4 a week. Since I have been doing well, I have
not wanted to change it any more.
What
is your personal screening process?
I set the chart to 12 months and I look at the bottom
left hand corner of the screen. If price there is lower
than the upper right hand corner of the screen, then
I have a long term up trend (I used the same approach
for a long term down trend). I trade only in the direction
of the long term trend. That's another thing I like
about OmniTrader is the automatic generation of the
trend lines. I use the long term trend lines. Then I
have two rules:
- If
the back test hit rate is less than 75%, I will not
even look at the signal. 85% is usually my minimum.
- APR
in the back test for the stock must be relatively
high.
I will go against the long term trend from time to time,
but I usually pay for it. Most importantly I trade AT
the long term trend line. I have found that the farther
the stock is from the trend line, the more likely the
trade is not to work out.
How
many candidates do you have per week?
I
have 12 open positions now, which is more than usual.
Because I use long term trend lines, I can use relatively
tight stops. Once I find a stock I like, I want to buy
a cheap option. I want the strike price of the option
I purchase to be very close to the stock price.
I
screen the stocks using TC2000. The stock must be greater
than $10 and enough volume to be liquid. That leaves
me with about 4400 stocks that I look at. I make 1-2
trades from Tuesday - Friday, but have 10 -15 candidates
on Monday after the new weekly confirmation.
Back
to options, I want to be near expiration so that the
time premium is low. I only buy underpriced options.
Low priced options are important because I look for
a minimum 3-to-1 risk reward ratio.
Underpriced
based on Black-Scholes?
Based
on OptionVue and primarily on AIQ's option model, using
a 30 day volatility.
The
floor will take advantage of you when you trade options.
How do you protect yourself?
I
traded with a lot of brokers who did not know options.
Then I found a broker that will take the kinds of orders
you need for options - most of the order types you used
in futures. They will take contingent orders. Say I
want to trade an IBM option based on some movement in
S&P. I use limit orders only and will not get into
options having spreads greater that 1/8 - 1/4 between
the bid and the asked. If the limit order does not come
through, then I just set. I place my stop based on the
stock price.
How
long do you hold a trade?
Until
an exit is triggered by a stop or a target. Targets
are based on trend lines, which are usually the long
term upper trend line. I only hold for a short period
because I do not want to incur much time premium decay.
Ideally I will buy an option 1 1/2 months out to hold
for 2 weeks to minimize time decay.
What
advice would you have for new users of OmniTrader?
I
have never used the Trading Game, but it seems it would
be a great way to gain confidence. Don't try to out-think
OmniTrader; it does well on its own. Watch it awhile
and build your confidence. There is no guarantee of
making money because managing the trade is the hard
part. You have to stick to your system. OmniTrader is
a very smart system.
Rick's
strategy in a nutshell:
- Trade
with the trend
- Be
patient and get the trade you want
- Stick
with your methodology
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