Fully Automated Trend Trading w/ Stocks or Options
There’s a lot of research to support the use of trend indicators as simple risk reduction elements that can be layered onto an existing strategy. However, the trouble was that, in the past, investors had to monitor the trend and execute the appropriate trade reversals when the trend changed. With automation, we can now offload this simple portfolio strategy to bots with cleverly defined, multiple potential trend exits, all from one simple automation.
The ‘Macro Trend with Stocks Bot’
- This bot has one position per day and six positions in total. For example, the bot could be given $100,000 with the opportunity to trade as much of that capital as needed within the confines of one position per day. This is all customizable, so if you built a bot, it could have different settings.
- Inside of the bot, Kirk set up a very simple automation. This scanner continuously looks for an opportunity to get into a position. So, if the bot only has four positions open out of the six possible it was given, the bot will look for another opening to get into a position. The bot doesn’t have to be set to continuously scan – you could set yours up to only scan at designated times.
An Overview of the Bot’s Trading Strategy
- The bot wants to buy stocks when they’re in an uptrend and sell them when they’re in a downtrend as judged by some very classic moving average indicators.
How The Bot Works
The Trade Entry Automation
- The first scanner is called ‘strong uptrend for a stock position’. (You can name all of your automations whatever you want, and you can save them so that you can reuse them over and over again).
- Naming your automations is really critical so you can remember what they do.
- Inside of the automation, Kirk’s bot starts with a decision. Your bot could begin with a position instead – everything is customizable. Kirk’s bot starts with a decision for this scanner because he wanted it to check some market data before it would potentially have the opportunity to enter a position.
- The bot makes two decisions or goes through two sets of market data before it continues down the path that could lead to entering a position by buying stock. It checks to see if the 50-day moving average is above the 200-day moving average. But, what happens if some new information comes out and the stock absolutely crashes? Thus, the bot has a second decision built-in. It checks to see if the ticker’s price is above the 200-day moving average.
- The next thing in the decision tree is that if those statements are true, Kirk wants his bot to open a position. When it comes to how much equity you buy, you can define the number of shares by dollars or the number of shares bought.
Defining An Automation That Manages The Position
- Now that we have the automation in place that is constantly looking for a position to enter, we have to create an automation that manages the position moving forward. The auto trading platform gives the ability to create new sets of decisions for when the bot possibly gets out of the position.
- As a side note, what’s really awesome about these bots is that you do not just use them in a trend trading strategy, but they can also be used as a macro-indicator for anything you do in options trading. You could have bots with complex strategies that will never kick in unless, for example, the market is below its 200-day moving average.
- Getting back to our trend trading strategy, Kirk’s bot has an automation that works as a monitor. Monitor automations monitor an existing position. For this monitor action, anytime the bot is long stock, it goes through what Kirk calls the ‘uptrend manager.’ This uptrend manager checks to see if the ticker’s price is above its 200-day moving average. If the answer is yes, it does nothing. It keeps the position open, holding the stock as long equity in your account. If the answer is no, it closes the position right away. Your bot could do more complex things if you wanted to.
- Now, we simply turn this bot on and let it run.
‘Trend Following With Spreads’ Bot
- This bot does the same decision-making as the previous one, except it enters different option positions when the underlying stock is either in an uptrend or in a downtrend.
- Once this goes through the trend decision above, if the stock is in an uptrend, instead of buying long equity in the stock, it enters a short put spread. This is a bullish strategy, and Kirk wants the bot to enter the spread 45 days from expiration. He wants to sell a 30 delta, buy the 10 delta, and the bot to enter one contract. If the stock’s in an uptrend, the bot sells a put spread and takes a slightly bullish position with options instead of stock.
- Your bot can be customized to do more complex actions if you want it to. You don’t always have to just open a position right away. You could add complex filtering for these put spread opportunities that the bot would check before the bot gets into the position.
- On the last bot, if the stock was in a downtrend, it didn’t do anything. In this case, because we’re trading options, we can actually trade the fact that the stock is in a little bit of a downtrend and potentially moving lower–or at least maybe not moving higher. Kirk’s bot makes one additional decision before it gets into a trade. It checks to see if the stock reports earnings in more than 60 days. If not, it doesn’t enter the position.
- If the stock does report earnings in more than 60 days, it will continue down the yes path from that decision, and it would enter a short call spread.
- Not only are we now executing a dynamic strategy where using the decision-making logic inside of the bot to either enter a short put spread or a short call spread, but we can also define this short call spread to have very different sets of expirations.
- In contrast to the last bot, this bot can enter two different types of strategies, either a put spread or a call spread, and then manage each of these types of strategies completely differently if we want to.
Call Spread Manager
- For this bot, Kirk spun up two monitor automations. The first monitor automation checks to see if there’s a position type that is a short call spread in the bot. When it encounters a short call spread that’s been opened, it runs it through a series of decisions to manage the position. The first thing it does is check to see if it has a 25% profit and, if so, it executes a closing order. If not, it checks if the position expires in five days. If it does, it closes the position. If the position doesn’t expire in five days, it keeps the position open until it expires in five days.
Put Spread Manager
- Now, what happens with the put spreads? We build up a different monitor automation that is looking for short put spread positions. This set of logic is called the ‘put spread manager.’
- This put spread manager starts very similarly to how the call spread manager started. It checks to first see if we have a profit. It checks if the premium on the put spread decreased by 50% since the position was opened (i.e., if we have a 50% profit). If so, it closes the position.
- If we don’t have a profit, it checks to see if the position expires in 15 days. Because at 15 days from expiration, essentially three trading weeks, we might be willing to see if we have a different set of criteria in place to take a profit. If the position expires in 15 days, which means it is semi-running short on time, we want it to recheck the position and see if the premium has gone down by 25% since it was opened. It checks for a 25% profit. If it has a 25% profit and less than 15 days to expiration, it closes the position.
- The bot also checks if the underlying price of the security it is trading is below its long put strike. Now you can check strikes and legs of options anytime you want inside of these managers. In this case, we are checking to see if the underlying price is below our long put strike. If it’s below our long put strike, which means that we’re being challenged on this position. Remember, we sold a put spread, sold the 30 delta put, bought the 10 delta put. Now, the underlying price is below our long 10 delta put strike, which means we’re really being challenged on this position. If the answer to that question is yes, we can decide to close the position. We could choose to close the position and re-open another position, essentially, roll the contracts to the next month. We could close the existing position and open another put spread 60 days out from today. That would essentially execute a rolling strategy. We could choose to open a call spread position and convert the contracts into an iron butterfly or iron condor. We could open a SPY long put. I could hedge the position with some other product not associated with the ticker. What’s amazing about the ability to check this stuff and build the logic into it is to determine what happens if you get challenged–however you define being challenged on a position. In our case, we just say, “Look, you could open a SPY long put. You could hedge the position temporarily.” Because now maybe the market is moving down and we never had a profit, we’re not 15 days before expiration; clearly, we don’t have a 25% profit because we’re not 15 days from expiration. So, maybe open a long put or open a short call spread – do something to hedge the position.
- If the answer is no, and we get down to two days, we close the position.
- In this particular example, with this put spread manager, we have defined multiple ways to close the position for different profits and watch and monitor for triggers on adjusting, exiting, or hedging the position, all wrapped up into one automation.
- There is no limit for your bots as far as flexibility and scale of what you could do. It’s up to your own creative imagination.
- It allows you to focus on the strategy component versus the clunky process of monitoring and letting your emotions get the best of you.
- You can reuse automations and templates, and you can tweak them.
- ‘This is going to be the new standard for retail trading. To use automation to make smarter decisions, to improve the accuracy and the execution of all the strategies that you want to trade, and to free up your time so that you can focus your attention on the things about trading that require your intervention as a human.’
Option Trader Q&A w/ Tristan
Trader Q&A is our favorite segment of the show because we get to hear from one of our community members and help answer their questions live on the air. Today’s question comes from Tristan:
Hi, this question is coming from Tristan from Canada. I just started trading recently and have been having some success. I’ve watched a lot of your videos and read a lot of your PDF guides and I really like the methodology behind it. It makes a lot of sense to me. I’m a huge numbers person. One thing that I have a question about though is for pricing options. It’s to do with plot odds. If I’m going to win a stock nine out of 10 times, but on that 10th time, the lose is huge, then even though I win nine times, is it enough to make up for that one loss? How do I make sure that the positions that I’m getting into aren’t setting me up for a loss, even though they have a high probability of winning?
I mean, if my position has a 75% chance of winning and when I win, it’s $10, but when I lose it’s $100, then in the long scheme, I lose money over an extended period of time, even though my win rate was high. In theory in a fair and efficient market, this shouldn’t happen, where really, the percent chance of winning should always be fairly close to the risk-reward payoff for it. I get that there’s an edge from implied volatility overstating historical volatility, but how can you make sure as a trader that when you’re going into these, you’re not setting yourself up for a loss off the start? Thanks.
Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.