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 .

by Jason Ng, Founder, Master ‘O’ Equity

The Star Trading System ran out of breath along with the bulls today as it produces only 2 signals… both of which are not qualified… looks like we are going to have a long weekend here.

FUNDAMENTAL ANALYSIS
Ever since the China stock market dip, causing the one day 416.02 points dive in the Dow on 27 Feb, the world suddenly changed. Suddenly big changes in the China stock market seems to affect every markets in the world in a big way. Today, the US market opened decidedly lower as the China market dips. All kinds of speculations filled the air about the China market dipping due to inflation worries and all that nonsense, but they are all wrong. After being here in China for the last 2 years, I can say that it is a hysteria and public money driven market with no fear nor concern for inflation. As long as the great prospects that lie before them continues, inflation is the least of their concerns. The reason why the China market dipped today was because of huge mutual funds exiting the market in order to seal in a 50 to 70% profit on their portfolio so far in just one quarter. However, public money is still pouring in at record rates daily and it won’t be long before the public pushes it all the way higher again. In the US markets today, it took a full barrage of great earnings to push it back up to close mixed. Breadth readings continue to deteriorate as 6 of the eight major indices are down. Looks like the raging bull is out of “breadth” and needs just a short break.

TECHNICAL ANALYSIS
Looks like it is happening as expected again. The Dow spent the bulk of the day negative or lingering at the zero point as short term bullish momentum backs off on our short term MACD and the incredibly steady volume fails to make much difference. When volume is rising but prices are not, it signifies that prices are coming up against a strong resistance level and I see that as the 12800 level. The thing about resistance levels is that it is not a thin, precise line. In fact, resistance and support levels are a bold, thick line, which covers a slight range around the resistance/support level instead of just a single point. In this case, the Dow seems to be still under the influence of that resistance level range. With the Dow already in short term overbought and sure signs of weakness as daily gains decline, it is normal and healthy for the market to back off for a few days slightly like what the Nasdaq composite has done, bring stochastics back down to short term oversold before rising to new heights.

Thought For The Day : “Successful traders need to take their minds off the market during weekends.”