by Jason Ng, Founder, Masters ‘O’ Equity

Online trading has its pros and cons. Online trading’s main pro is convenience and speed, giving a trader maximum control of all aspects of trading. Conversely, online trading’s main killer con is in the tons of human error that can happen due to a lack of guidance.

Due to a lack of guidance, most online traders find themselves extremely prone to their emotions when trading online. When they feel the urge to get out of a position simply because their emotions are all fired up, they can at the simple click of a mouse. This has led to a lot of failed trades and a lot of lost money…. The only way anyone can succeed in online trading in the long run is through a disciplined trading regime based on a fix trading system or what we called “System Trading”.

System trading means that you pick stocks based on a fixed criteria, enter on a fix criteria and exit on fixed criteria… all put together nicely like different parts of a car. With system trading and a fixed portfolio management policy can anyone truly attain success in online trading.

System trading aims to take the emotion out of the trader by having objective and specific criteria for every aspect of online trading. With a fixed set of criteria to follow when online trading, the trader have something to fall back on when emotions start to fly, and that is, the proven track record of the system that the online trader is following. The online trader is assured that as long as he follows the rules to the nigh, the odds of winning will always be stacked in his/her favor. Over the long run, with a sound portfolio management policy, anyone can succeed in online trading.

Want To Learn The BEST In System Trading? Check out the secret of Star Trading System

by Jason Ng - Founder, MastersoEquity.com

There are 2 kinds of option trading systems in general; Discretionary and Mechanical. A discretionary option trader follows no specific rules but chooses, enters and exits an option trade using all of his knowledge or gut feeling. A mechanical option trader is one who translates his knowledge of choosing stocks, entry and exit into objective rules. Such a system is commonly translated into a computer program in order to completely automate the option trading system. The advantage of mechanical option trading is obvious; the removal of human emotions in the trading process thereby reducing human errors.

I moved from discretionary to mechanical option trading years ago and only started becoming consistently successful in option trading after I developed my personal mechanical option trading system called the Star Trading System (http://www.mastersoequity.com)

So, what are the steps to be taken in order to develop your personal mechanical trading system for option trading? Here is a guideline…

1. Stock Selection

List down all the criteria you think must be true in order for a stock to qualify as an option trading candidate. Make sure all of these criteria are quantifiable. Example : a. Last close more than $10, b. Last price rising for the past 3 days c. PE must be positive. Finally, program a charting software with these criteria so that you can run a scan of all stocks that qualified within seconds daily. Technological advances have made possible to screen stocks within seconds. Traders used to have to spend hours going through each stock against a spread sheet in order to find trading candidates.

2. Option Selection Procedure

Now that you have chosen your stock, you need to determine which option qualifies for your option trading system. Your personal option trading system may be based on OTM options or ITM options or even based on bullish or bearish spreads.

3. Entry Procedure

Now that you have determined what stock to watch and which option to buy, it is time to determine under what conditions to make that move to buy on. It may be as simple as to enter upon market opening or as complex as to watch the underlying stock movement for a pre-determined period of time before it qualifies for entry. Whatever it is, it must compliment your personal option trading style.

4. Exit Procedure

Now that you have an open position, you need to determine what must be true for you to take profit or to stop loss. There are 2 classes of exit procedure that you must establish; Stop Loss and Profit Taking. Stop loss in option trading can be simply based on a % loss of the option position or based on a % loss on the underlying stock. Profit taking can be based on the stock’s target price or a % gain on the option position. After you have done that, you would want to see how your broker can help to automate that for you. Commonly, people break their own stop loss or profit taking points due to emotional involvement, that is why many brokers have features which allow fairly complex stop loss or profit taking strategies to be automated. If your broker does not support such automation and you are the type who cannot properly enforce your own stop loss or profit taking strategy, then it may be good to consider switching to a broker that does.

Now, give that option trading system a name and paper trade it for at least 6 months. Do not expect to get it right the first time. Developing a profitable option trading system takes time, knowledge and experience and is something which cannot be rushed. My Star Trading System (http://www.mastersoequity.com) took me years of work to arrive at a stage where even complete amateurs can follow easily and make a consistent profit from.

So, have fun translating your option trading philosophy into an option trading system and to watch it in action. I am sure it will be an extremely fulfilling experience whether or not the system turned out to be profitable.

About the Author
Jason Ng is the Founder of Masters ‘O’ Equity international. He is a fund manager specialising in options trading and his Star Trading System has helped thousands. Please visit www.MastersoEquity.com .