Set Your Rules for the Tools of Trading

Over the past 30 years, I have researched and tested many strategies using the seemingly countless tools and indicators available to traders. My goal has always been to understand the logic of each technical tool, as well as to learn the fundamentals that affect any futures market including indexes. Each tool has a purpose, but they all have weaknesses as well.

Generally, the tools of trading are designed to reveal trend strength, change in trend, timing entry, and risk and profit targets. One of my rules for tools is to have one indicator for each type of market condition or situation. There are short-term indicators for timing breakouts or reversals. And, of course, there are 50- and 200-day moving averages, the universal long-term trend indicators that are standard for most equity market traders. 

Base Tools on Trading Preferences

Since I spent most of my career in the commodity exchanges in Chicago, my research has primarily focused on the futures markets. Through much trial and error, I chose a few gauges that suit my style and time frame. Each trader should explore tools that fit their personal preferences, such as trade duration and risk management.

One of the main factors to consider is how often you are available to trade and the time you spend watching the markets. This includes the duration the position is to be held. Trade size needs to be determined by the risk you are willing to take. After a trade has been executed, set risk and profit targets, and apply management techniques like trailing stops. There are indicators for these purposes.

List Your Rules

After a few decades of primarily futures trading, I have devoted more time applying my favorite tools and logical approach to trading stocks, indexes and ETFs, as well as their options. To build on my methodology I chose a few options strategies that fit my time frame and style. I use my technical tools to define which type of trade I need to explore: bullish/bearish/neutral. Since I am new to the equity markets, I want to keep the approach very simple and the option strategies basic. I chose the following trade types to fit my strengths for identifying directional bets; risk is well defined with these strategies:

  • Strong directional bias and a breakout imminent: Purchase a call/put.
    • To time a breakout I refer to 5- and 20-day moving averages. When these converge over a week or so, a breakout often occurs. Try MACD as an indicator for timing the onset of a trend.
  • Moderate bull/bear: Debit spreads-Bull call spread/Bear put spread. Use OTM strikes if more bullish/bearish. Use ITM strikes when less confident on direction.
  • Moderate bull: Credit spread-Bull put spread. Use OTM strikes to take advantage of time decay. ITM is most directional.
  • Moderate bear: Credit spread-Bear call spread. Use OTM strikes to take advantage of time decay. ITM is most directional.

Let Experience Guide Your Strategy

As a beginner I focus on two types of market stages: trend/directional and consolidation phases. Over time I am determined to learn more strategies from MTM options gurus Dan Passarelli and John Kmiecik. My next endeavor is to study neutral strategies to take advantage of time decay when a market is in a consolidation phase.

John Seguin, Market Mentor Mentoring, Inc


Trader Education