Why rely on the barometric pressure, Gulf Stream speed, humidity, ocean temperature and astrological temperament to tell the weather when you can just look out your window?
The High-Probability Strategy uses a few basic RSI models plus my proprietary model to take advantage of sentiment and technical extremes.
Highly liquid ETFs are my underlying instrument of choice when trading options. Basically, I only want to trade ETFs that have a large enough volume to create tight bid/ask spreads. Moreover trading options on ETFs offers huge tax advantages (tax code Section 1256).
Unfortunately, this strategy is partly proprietary so I am unable to give you all the details, but the ones I will mention below are the key facets to the strategy. Again, I keep it very simple … although I am certain if you follow my commentary and any subsequent trades you should gain a firm grasp of the strategy essentials.
So, with that being said, I would like to share with you a few of the technical indicators I use in my proprietary model to give you a head start on learning how I trade the strategy.
One of the most powerful technical indicators I use in my proprietary model is RSI Wilder (2), (3), (5), and (14).
The Relative Strength Index (RSI), developed by J. Welles Wilder, Jr. is an overbought/oversold oscillator that compares an entity’s performance to itself over a period of time. It should not be confused with the term “relative strength” which is the comparison of one entity’s performance to another.
I prefer to set my time frame at 1 year.
RSI allows me to gauge the probability of a short to intermediate-term reversal. It does not tell me the exact entry or exit point, but it helps me to be aware that a reversal is on the horizon. Knowing that a short-term top/bottom is near I am able to increase the probability of a potential trade. Conversely, knowing that a reversal is on the horizon I am able to lock in profits on a trade.
Again, I am a contrarian at heart and I prefer to fade an index whether overbought or oversold when the underlying index reaches a “very overbought/very oversold” state. Fading just means to place a short-term trade in the opposite direction of the current short-term trend. We’re leaning into the wind a little with the expectation that we’ll catch the next big gust going the other way.
Of course, other factors must come into play before I decide to place a trade, but I do know that, in most cases, when an index reaches an extreme state, a short-term reversal is imminent. Again, I will keep all of you abreast of the overbought/oversold condition in the Weekly Report and on the Wyatt Investment Research website.
The following is the baseline for my High-Probability Trades:
- Very overbought - greater than or equal to 85.0
- Overbought - greater than or equal to 75.0
- Neutral - between 30.0 and 75.0
- Oversold - less than or equal to 30.0
- Very oversold - less than or equal to 20.0
I use the RSI over various time frames and the shorter the duration of the RSI the more I want to see an extreme reading.
Again, I keep it simple, very simple. Why would I attempt to create a complex options strategy when the High-Probability Strategy has a win ratio over 85% with an average return of over 8% per month?
Simple often equals boring, and that often does not entice traders. But I am not here for excitement, I am here to provide a sound options strategy that makes people money over the long haul. That is exactly what the High-Probability Strategy has succeeded in doing.
So let’s review the benefits of the Options Advantage High-Probability Strategy:
1. Short-term strategy that holds a position 7-56 days on average
2. Can make 5% to 15% a month
3. Uses a diverse group of highly liquid ETFs
4. Only exposed to the market for a limited number of days
5. Section 1256 tax advantage
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