This is My Floor


Date: 9/6/2022
Author: Chris Hood



Algorithmic trading fascinates me.

The unemotional consistency with which the robots trade the rules makes them far superior to human traders over the long term.

Computer code never celebrates a win or mourns a loss.

Its judgment is never clouded by mental or physical stress. On the contrary, it makes purely rational choices based on the criteria for entry and exit.

Recently, I’ve been developing my own trading robots, which has taught me a lot about my own trading.

And as usual, I find that where I need improvement, so do many others that I coach.

Insights I gain from troubleshooting my performance get passed on to you. It’s a win-win situation for both of us.

If you have a robust ruleset and follow the trade signals, entering a position is simple.

You place the trade when your indicators tell you.

However, when will you get out once you’re in it?

In a bullish trade, how much downside will you tolerate on your losers, and when will you take profits on your winners?

If you haven’t developed a consistently profitable system – make the changes necessary to keep your profit factor above 1.00.

A 1.00 profit factor is necessary to break even.

It means your winning one dollar for every dollar you lose. And this breakeven point is just theoretical because you have to count commissions and fees into your losses.

Push your profit factor as high as possible – ideally to 2.00 or greater.

The only way to accomplish this is by strictly following your exit rules. The rules you had WRITTEN DOWN and PLANNED before you ever entered the trade.

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If your rules are just vague ideas in your head, then you have no rules.

There are so many different methods that it’s impossible to list them all here, but I’ll give you a few guidelines.

Emphasize exit strategies based on the underlying stock price rather than the option price.

With few exceptions, if the stock moves in your predicted direction, you’ll profit; if it doesn’t, you’ll lose.

Exit levels can be tight or loose depending on your tolerance for volatility and the ticker you’re trading.

Some prefer a tight stop, such as a close below the previous candle’s low.

Though you may be forced to exit many trades just before they run upwards, you’ll likely lose very little.

Others might choose a percentage drop in the equity price. Usually somewhere between 10-15%. This gives you more room to accommodate any dips before an upward run.

The key to profitability is ensuring you earn enough to profit despite all your inevitable losses.

Select the point where you’ll take profits BEFORE you enter the trade.

Using levels defined by support/resistance, Fibonacci extensions, or percentage gains are all workable.

The first two are conceptually similar.

When the underlying price reaches the intended level, close the trade regardless of the gain on the option price.

Suppose you have multiple contracts, and the signals dictate continued momentum. In that case, you might sell half your position and add a trailing stop for the other half.

I only use percentage-based profit taking on credit and debit spreads. However, other traders use it on calls and puts as well.

Just set your autoclose order to sell when the option reaches a particular value increase.

For example, at 50-80% gain.

Again, just make sure that if you use this method, you aren’t capping your gains so much that you can’t absorb your losses.

Keep refining your exits.

No matter how well you’re doing, you can always get better.

Chris Hood

The Early Bird Gets the Worm

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