SCOTT WELSH TRADING BLOG

Overcoming Obstacles With A Keltner System

Overcoming Obstacles With A Keltner System

December 19, 2018

Options trading is hard (so they say).

And risky.

No person in their right mind should trade options.

The only true, safe way to invest is to suffer 50% drawdowns and lose over 3% year-to-date by buying the market via Index Funds or ETFs.

For a moment, though, let’s foolishly assume we can do better than that and want to try options anyway.

How do we do it?

First, the allure of options is the Big Win. That’s why we’d be interested in the first place.

If we can time our entry, pick the direction, and put enough on the line, we can make an extraordinary amount of money in a very short period of time by buying a call.

The problem is picking the entry.

Of course, timing the market is impossible. There are prize-winning academic studies that can prove it.

Just for fun, though, let’s humbly assume that maybe those academic market studies aren’t quite what they’re cracked up to be.

So, back to timing the entry.

This week we’re going to discuss a system I adapted from a famous options trader. This trader used our old friend, Keltner Channels, to time his entry and give himself the best chance of getting a winning trade before time runs out (expiration).

Here are the details:

  • System: The Keltner Channel Timing System
  • Philosophy Behind It: If the trend is up, we can time our Long entries when price pulls back farther than normal.
  • Need Special Indicators? No.
  • Chart: Daily
  • Instrument: SPY
  • Long or Short? Long
  • Long Entry parameters: 1) Price must close above the 170 SMA; 2) Price must close below the Keltner Channel (set to 16 Length/1.5 ATR); 3) Enter at Open of next bar
  • Long Exit: For options, exit when profit is acceptable; for chart trading, use a timed exit
  • Timed Exit: Exit after 32 bars (or sometime before options expiration)
  • Hypothetical Profit: $15,865
  • Hypothetical Max drawdown: -$2,588
  • Trade size: 100 shares each time
  • Test Period: 1999-2018
  • Number of Trades: 51

Here’s the Performance Report:

The profit looks good (way better than buy-and-hold), and the drawdown looks manageable. We could trade this system just the way it is.

And, theoretically, a trader using options could do a lot better than these numbers (which is why this options trader uses a system like this). Some of the wins might be exponentially higher than just trading the underlying SPY and the losses would be capped on the downside.

A problem might be the number of trades. It only trades about 3 times a year. But we could possibly add more ETFs to our trading basket and get more trades that way.

In fact, we’ll do just that in our emails coming up later this week.

Trading options or straight ETFs isn’t easy, but it looks like it’s possible.

All we need is a system to help us get in at the right time.

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To see the weekly YouTube video on this system, go here.

Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.