Let’s talk about the importance of time and trends, Gang.
Now trends are the foundation of everything that we do in terms of trend following. I like to extend this conversation out to trend compounding as well. That’s when we’re taking a look at the bigger picture at the index level, the sector level, and then the individual stock level.
We always want to start at that larger index level or sector level but preferably, the index.
Now the DIA is what we’re going to focus on here…
Remember the DIA can then open up individual sectors that are heavily weighted within it from tech to transports. Then you can open it up even further into individual stocks, so always keep that mindset.
The white line that’s marked on the 14th of December (along with the red circle on the chart below) is an alert that was sent out on a trade setup. This idea would begin to look interesting if (and when) the market traded down to a support level.
Time Is Crucial:
So notice, first of all, the way in which you set your trades up should give you time to process the risk, the cost, how much you’re willing to then put into the position, and in this case, about four days from when the setup looked interesting to the setup actually triggering.
That setup triggered on the 21st and on the 21st we bought DIA options.
The first component of time is how much you give yourself to identify a potential setup to the potential setup triggering. This aspect of time is crucial. The next component is how much time you’re willing to give the option.
Now the neat thing about this particular trade and entry is we bought the February 19th expiration. This gave us plenty of time to take advantage of the trend.
Taking Advantage of the Trend:
When you have a trend, you want to give yourself time because what that then means is if the trend continues, which is usually the highest probability scenario, you can continue to ride that trend. If you don’t give yourself a lot of time you cannot take advantage of the full strength on the path of least resistance. So again, the first thing is how much time are you giving yourself from the trade idea to the trigger, and how much time are you giving yourself once you enter to let the trade work.
In this case, these options were bought for I believe $10.60 and these are trading just under $17 with, and here’s the important part… another 25 days to expiration to see how much higher is high.
That’s how we want to combine time and trends in our trading, Gang.