A look inside my process

So as we transition from one month to the next, I thought it’d be a good time to give you guys a rundown of how I do things.

First and foremost the days of risking a large percentage of my capital per trade are OVER! There for a while I was getting lucky, but that all ended in the 4th quarter of 2014

These days I keep it small... never risking anymore than $100 per trade (1% of my current account value). In fact, the risk I have on the table today for each position ranges from $25 to $56. So as you can see I’m keeping my risk VERY low.

Now when I sell credit spreads I’ll ratchet that risk up a bit, but still no more than about $150 per play. 

Alright, so how do I even decide what trades to get in?

I’ve got two main sources... WallStJe$us and Mr. Breakout’s website SharpTraders.com.

This website is a GREAT tool! A few times a week I’ll check out several of his links, like cups with handles, all-time highs, 50 day bouncers, and high tight flags! He’s constantly updating these scans... and it’s all FREE! You REALLY need to check out Mr. Breakout’s website if you haven’t.   

Here are some real-life winners found on his website - AGEN, CLDX, RDWR, and KING. I’ve had the most success using the “cups with handles” scans.

Now to WallStJe$us... this guy is THE MAN! He tweets out BIG option bets on stocks. He calls 'em “sweeps”. If you get multiple sweeps you get #STEAM and that’s #WG (Wise Guy) activity! For an explanation of these terms check out his website

The bottom line is this, he’s looking for a specific type of option activity... the kind that tells you the “smart money” is making a big bet. I don’t know about you guys, but I want to follow the smart money. I’ve had A LOT of success trading his tweets. I know many of the traders who follow him play options off his alerts. I just play common though... it’s what I’m comfortable doing for now.

When I see an alert come through on WSJ’s feed - I usually jump on it right away. Now, that may sound crazy or irresponsible, but I already know how much capital I’m going to put in play and how much I’ll risk. So when I see his alert all I have to do is simply adjust the numbers.

Take for example WBA... WallStJe$us alerted us to some big March 6 call buys on February 23rd. I went to the chart, took a look at the daily candle - it’s important it hasn’t taken off yet, I try not to chase. Anyway, if I like the chart I check for the low of the day. WBA was trading around 78.40 with a LOD at 77.28. So I knew I was looking for a stop around 77.25. And since I’m only putting about $2,000 in play I knew I’d buy around 25 shares, which is what I did. I bought 25 shares at 78.40 with a stop at 77.25, meaning my total risk was $28.75 plus $8 for round-trip commissions. So I’m risking roughly $37 to see if this thing takes off... and it did. Five days later I sold at $82.92 and $83.29.

I do the same thing with Mr. Breakout’s information. The day I buy I set my stop at that day’s low. Sometimes I place the stop at a recent low that was made a few days before, but it's usually very close to the current LOD. 

Stop placement is KEY people! If the stock continues sideways, or drifts a bit, I’ll keep the stop in place. However, once it gets moving I’ll then take my stop up to each day’s low. So as long as the stock makes HIGHER lows each day I’m in the trade! 

I’ll stay in until I reach my price target, or get stopped out. This is the tough part though... knowing where to take profit and when to let it ride for a bigger move. It’s managing THIS part of the trade that separates the best from the rest! 

So far in 2 months I’ve put on 41 trades... 22 winners, 16 losers and 3 pushes. That’s a 58% win rate. I’ve made $572.56 in that time. I’ve also been back-testing my risk/reward ratio and how it works with my win rate. I tell you, it’s been very interesting to see the results. Maybe I’ll break that down for you in a future post.

For now, if y’all have any questions or suggestions - hit me up sometime at theoptionrider@gmail.com