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Relative Strength & Weakness

We trade the S&P 500 with our signals, but we have an added “edge” when we trade stock. Stocks that are strong relative to the market indicate institutional buying and our searches find them. The “smart money” leaves a trail of breadcrumbs for us to follow. Here’s how it works.

1
Market First

More than 75% of all stocks follow the market. This is the most important piece of the trading puzzle. We use our proprietary 1OP indicator and technical analysis to form our market opinion. That bias and our confidence in it drives all of our trading decisions.

2
Select Stocks

If our market bias is bullish we search for stocks that are breaking out on heavy volume. When the market dips, we filter out the fakes and we zero in on stocks that continue to move higher. Institutions are accumulating and we want to follow the smart money.

3
Options Last

When you get the market & stock right, you’ve solved 95% of the puzzle. You can trade almost any options strategy and make money. Before you start leveraging your capital, we suggest you master the first two steps with a win rate of ~75%. We'll teach you how.

Our Trading Methodology

5 min read

This article is part of our Introductory Series. Visit Start Here to learn more.

Introduction

Trading “edges” are very hard to come by and we’ve been exploiting one for more than 20 years. It identifies institutional order flow and the concept is simple…follow the big money!

In the early years, we analyzed our trades and we added steps that helped us eliminate costly errors. In time, we recognized characteristics that were common in our winning trades. If we could quantify them, we could search for them. So that’s exactly what we did. We developed a search engine to find these opportunities quickly and efficiently. Over the last 15 years, we’ve continued to refine our systematic trading approach and our quest for perfection continues.

A systematic trading approach serves many purposes: it prioritizes the steps, it eliminates errors, it removes emotion, it can be refined and most importantly, it can be replicated. Our trading technology, our chat room, and our education all revolve around this specific trading system. It’s a system like no other that you will find anywhere else.

Before you take it for a test drive, you need to learn the system. Put the time into these resources and you will be rewarded. When you get behind the wheel you’ll be ready to hit the gas.

Our edge is founded on these three principles:

  1. Market First
  2. Stocks Second
  3. Options Last

Market First

Novice chess players know the basic moves and they focus on their game plan. They are oblivious to what their opponent is doing and they are quickly mated. The market is your opponent. It doesn’t care about your game plan; it has its own agenda. You need to reveal it and then use that knowledge to your advantage.

More than 75% of all stocks follow the market. This is the most important piece of the trading puzzle. If you get the market right, your probability of success increases dramatically. If you get it wrong, the odds are against you.

We developed a proprietary indicator called 1OP (1OPtion) and it is the only indicator we use for the S&P 500. When the indicator “agrees” across multiple time frames we have a strong signal. We also use trendlines, horizontal support/resistance, major moving averages, and price patterns for technical confirmation. To learn more about our market analysis read the next article in this series: Why Market First?

Our long-term and short-term market opinion drive all of our trading decisions. We could just trade the S&P 500, but we can dramatically increase our probability of success by trading stocks. 

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Stock Second

Analyzing your trade history is critically important. When we reviewed our trades we discovered that our win rate was higher for stocks than it was for the S&P 500. They both had the same directional bias, so we needed to find out why. This analysis revealed a very powerful “edge” and we have been trading it for more than 20 years.

We learned that stocks that move higher when the market is declining have relative strength. This is a sign that institutions are accumulating shares and they are undeterred by market dips. Their bid is so strong that it offsets the selling pressure from profit-taking/sell programs during market dips. Relative strength was providing us with a cushion and we were able to exit stock trades with little or no loss when we got the market wrong. When we got the market right, these stocks shot higher.

We wanted to find as many of these stocks as we could so we quantified relative strength and we built a powerful search engine called Option Stalker. Stocks that were breaking out on heavy volume and that also had relative strength performed the best so we added technical variables to the search engine. 

When our market bias is bullish we trade these stocks as surrogate market positions. Read this article to learn more about how we find stocks with relative strength and weakness.


Options Last

Options are the icing on the cake. If you get the market right and the stock right you can trade almost any option strategy and make money. We understand that traders are excited about the big returns they can make from trading options, but leverage is a double-edged sword that cuts deeply. Consequently, most of our focus is on the first two steps.

Until you have mastered our system and until your win rate is greater than 75% for two straight months, you should only be trading one share of stock. It will take time for you to reach that level and our technology, educational materials and community will help you get there. You will make mistakes and you need to keep the “tuition” small. Once you get to that level you can gradually increase your size and you can start trying some options strategies. We stick to basic options strategies (buying calls/puts, and vertical spreads).

To learn more about getting your win rate up, please read this article.


Conclusion

We provide a systematic trading approach that is designed around a very powerful edge. Our educational resources are included with the membership and they will teach you everything you need to know. Option Stalker is our search engine and it finds these high probability trades. Members in the chat room share their trade ideas and these picks all conform to the system. They are living proof that the system works and this tight-knit community of traders helps new members find their way. Before you take a test drive, please make sure you review these resources. When you’ve finished our free trial, we are confident that you’ll see how all of the pieces fit together.


We are just getting started

Continue reading to learn even more about the system we trade:

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