Today I'd like to welcome Allan Harris from AllAllan.com. Over the past few months Allan's blog has become a daily reader for myself, along with many others in the office. His analysis and ability to read the markets is uncanny. Allan decided to do an experiment, on his own, following the Q's...I think you'll find the results VERY interesting. But be sure and visit Allan's website for more details.
There is no greater feeling as a trader then the feeling you get having successfully navigated an options trade in the QQQQ. This is how I do it, using Market Club Triangles.
I consider Market Club triangles as serving to alert me to breakouts in the underlying tradable, a 3-day breakout for daily charts, a 3-week breakout on the weekly charts. I only use weekly charts because there are less whipsaws and signals generated on weekly charts also serve to confirm an intermediate term trend is in place. Market Club does a great job of monitoring my portfolio as well as market indexes, etf’s and individual stocks for these 3-week breakouts.
Here is a Market Club chart for the QQQQ with the weekly Triangles going back about one year. Notice that there are whipsaws, but more importantly, note how many tradable trends are caught using the automated triangles:
Below is my Excel worktable analyzing these signals. I stated with the Buy generated in September 2007 and finished with the Sell generated on September 2, 2008.
Note that there were a total of eight signals for this 12-month period, about one signal every six weeks. There were 5 net winners and 3 net losing signals.
A Buy & Hold strategy generated a loss of about 12 QQQQ points, or about 24%. A Sell & Hold strategy gained those 12 points, or 24%.
Using the Triangles returned about double the Sell & Hold strategy.
Using the Options made this whole exercise worthwhile, generating over 500% for those eight trades.
Winning 5 out of 8 trades is only a sampling error away from four out of eight wins, or a 50% win ratio. How does something so close to a 50% win/loss generate 500%?
This is an observation that a lot of wannabe traders miss: The magic here isn’t so much pinpoint market timing, it’s that age old trading rule of letting profits run and cutting losses combined with a decent market timing model.
In the case of the Q signals and returns, I’ve used a 50% stop loss rule, meaning all trades that fall 50% based on the underlying options are closed out. All trades that do not fall 50% are held until the next signal. That is why all of the losers are 50% (worst case basis) in the table of trades.
As for the winning trades, the returns above are based on a conservative assumption of losing one month of time premium for each trade and a beta of 60% for just-out-of-the-money calls and puts. Actual real money returns may be a little better or a little worse, but these assumptions capture a fair value for the strategy over the course of the past 12 months.
Finally, considering all of the angst in the market the past few months, look at how beautifully this strategy has bypassed all the fundamental and technical analysis out there and simply went short on September 2 and held short for the entire decline since then.
Consider the ease of trading like this, following the weekly triangles in and out of the Q’s and ask yourself, what other methodology would have navigated this market with as much success and as little sweat equity as the weekly Triangles?
Trading doesn’t have to be complicated, losing proposition. As I have shown, it can be both simple and rewarding.
5 thoughts on “Navigating the Q's”
Allan, thanks for the heads-up! I am new at this and am grateful for sharing your success with us. I had been thinking about asking these questions, but your timely input saved the day. At least now I have a starting point from your ideas that can be modified to my taste.
Re: Option Months: 6 weeks minimum, 10 weeks maximum
Re: Money Management: on above tables, no pyramiding and when trading options strict 50% stop-loss
Re: Money management: in Triangle trading in general: outside of options, none needed as Triangles are self-regulated with reversing Triangles But an intriguing characteristic of Weekly Triangles is that they almost always provide immediate gains, even on trades that end up as losing trades. This sets up ideal "scalping" methodologies, which I will describe in a future blog.
The money management question is a great one. Ror those of us who perfer to jus tbuy and sell the ETF where are you putting your stop or suggest putting the stop? Since we don't really know what the exeit triger price would be I guess you could run a looser stop and act on the trinagle when it shows up.
What sort of money management models work best with the triangles? I like the ideas of pyramiding but you need to be very careful there because pyramiding a reversal can canabalize your gains. O'Niel's and Guppy's concepts of reduced pyramids for a finite number of additions make allot of sense but how to structure it to compliment the trade triangles.
That is one reason I've hesitated to switch to the trade triangels....i prefer to know my exits at all times. buying blind to me means a whipsaw... which Triangels produce lots of like anything else means that I need to either subjectively reject trades, arbitrarily place stops that could ge twhipsawed or Take the whipsaws as they come and try to minimalize theri impact in other ways... reduced position size or pyramiding up to give winning traded a heavier weight than loosing trades.
How did you get 505%?
I multiplied the returns out and got 284%.
What is the money management strategy you assume?
Is the 505% using 100% of capital allocated to this strategy on each trade?
Impressive results! How far out would you suggest purchasing these options?
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