Option Trading Developing An Option Trading System
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Developing an Option Trading System
When it comes to option trading systems, there are generally two types: Discretionary and Mechanical. Discretionary traders rely on intuition and experience, making decisions based on gut feelings and insights. On the other hand, Mechanical traders use objective criteria, often automated via computer programs, to make consistent and emotion-free trading decisions. The advantage of a mechanical system is clear: it minimizes emotional errors, leading to potentially more reliable outcomes.
Years ago, I transitioned from discretionary to mechanical trading and saw consistent success after developing my system, the Star Trading System.
Steps to Develop a Mechanical Trading System
1. Stock Selection
Identify the criteria that make a stock a suitable candidate for option trading. Ensure these criteria are quantifiable. For example:
- The last close is above $10.
- The price has been rising for the past 3 days.
- The PE ratio must be positive.
Using advanced charting software, you can scan for stocks meeting these requirements in seconds, a task that once took hours of manual screening.
2. Option Selection Procedure
After selecting a stock, determine which options to pursue. Your system may focus on out-of-the-money (OTM) or in-the-money (ITM) options, or involve bullish or bearish spreads.
3. Entry Procedure
Determine the conditions for entering a trade:
- It could be as simple as entering at market opening.
- Or, it might involve watching the stock for a period before entry.
Ensure this aligns with your trading style.
4. Exit Procedure
Decide how to manage exits, including both stop loss and profit taking:
- Stop Loss: Could be a percentage loss on the option or the underlying stock.
- Profit Taking: Could be based on a target stock price or a percentage gain on the option.
Look into broker options for automating these strategies, as manual enforcement can be compromised by emotions.
Testing and Adjustment
Once your system is established, give it a name and test it through paper trading for at least six months. Don’t expect immediate perfection; refining a profitable system requires time and experience. My Star Trading System, for instance, took years of development to ensure it's user-friendly and consistently profitable.
In conclusion, translating your option trading philosophy into a robust system can be immensely rewarding. Whether or not the system turns out profitable initially, the learning experience is invaluable.
Have fun developing your system and observing it in action!
You can find the original non-AI version of this article here: Option Trading Developing An Option Trading System.
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