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How successfully this technique can be implemented is 100 percent dependent on how well you can determine the trend and the counter-trend. If you are able to exploit this relationship, then all of the other dominoes fall in place. In Winning the Trading Game there is detailed explanation on how to use technical analysis to determine the long-term trend of both the futures market and the forex market. To put it concisely, the 50-day moving average (MA) is a key way to be able to see whether the market is a bullish or bearish market. Once that is determined, then the work of purchasing an option that follows the long-term trend is more than halfway done. That’s when your micro technical analysis tools kick in. They help to determine entries for the counter-trend and when to exit the market once it begins to shift back and follow the trend. That is where your stops or stop limits come in. While there is no love lost between my style of trading and stops, this is one time when I wholeheartedly advocate the use of stops as part of a risk management strategy. The function of the option as a hedge is to operate as a profit catchall. This technique is versatile for futures, spot forex, and stocks. The objective is to actively trade as you normally would, with the intent of focusing primarily on the counter-trend while your option accumulates value on the trend. Stops must therefore be used liberally to exit the counter-trend positions. There is no need to erode any of the profits that your option accumulates through losses in the counter-trend. More than enough of the premium is being eroded because of decreases in time value and intrinsic value. This is the simplest way to exploit the insurance nature of futures and options. By working with this strategy, the everyday trader can become enlightened about the true nature of the markets and how capable they are at limiting risk when used in conjunction with one another. The level of impact that that has, coupled with the right timing, trend, and counter-trend, is both the first step and the last step of comprehending what it means to trade like a pro. In the following examples, the trend and counter-trend are identified for the Emini S&P 500. Multiple active trader time frames are viewed along with their potential optimal returns.
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trend, counter-trend, Emini S&P 500,
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