The Secret of My success. Part 2. Stick to the Rules.

I can list the number of approaches, rules and strategies I have followed in my over-15 year career in the stock market, but that would only serve the purpose of illustrating my many failures. Over the years, I have learned to rely on a few indicators and recognize a few patterns but I have also learned that any approach invariably result in what I call a “yes-no-maybe-so” forecast of market direction. I like the Elliott wave theory because I used it successfully in the past, but I can also say that “it works until it doesn’t”. But while a system is working for you, there is no real reason why you should not be consistent in exploiting it. Be prepared, however, to recognize when market conditions are changing, and adjust your approach accordingly.

I am constantly looking for new approaches, testing it in my paper trading account, or even in small positions in my real cash account. You never know which approach may turn out to be highly profitable in your hands. I have seen how other traders make good money with systems I would never consider using. I have also discarded approaches which I tested for months and even years. But for as long as I tested each approach I kept consistent rules of engagement. It serves no purpose to discretionally enter trades based on gut feeling, and change the strategy half way through the trading period. I would rather lose 1% of my account (or whatever max risk I decide to incur), instead of making money without knowing why my strategy worked. Keeping records of successful trades, as well as failed ones, would eventually increase my performance.

The PCCRC (Put Call Calendar Ratio Combination) in after earnings have served me well over the last 2 years, but it took me 3 years of learning about options and testing other strategies, before serendipitously ran across this strategy and begun using it with high fliers, then with volatility skew situations, and finally after earnings, which has turned out to be the most consistent approach. Although the triggering factors are different, I keep my rules in mind and don’t try changes to them on the go. Recently, I have discovered that “buyout rumors” might be also a good entry strategy, as long as there is a skew between front month (high IV) and back month (low IV) volatility. However, I admit that finding good candidates has been hard since Aug. when the Volatility in most candidates has been too high. I have been looking into condors, bull put spreads, bear call spreads and even broken wing butterflies in cases when the high IV has prevented me from considering the PCCRC.

No matter what, the power of observation and a scientific approach to trading are essential to gather the information that will give me the peace of mind I need to sleep well at night and to obtain consistent profits. Strategies and trading system, as well as T.A. indicators exist by the dozen. It is your analytical observation of the performance over at least 6 months what will facilitate “consistent” profits, or rather, a regular income.