Welcome, ladies and gentlemen, to The Stock Market Millionaire. My name is Robert. Roy, I will be your host and I’m the founder of WealthBuildersHQ.com. Welcome to episode number eight, which is called “Creating A Winning Trading System,” utilizing my Strategy Creation System – S.C.S. So the very first thing we have to talk about is, what is an options trading system? See, some will look at it and say, “well, if I buy a call option, that’s a system.” It’s not. “Well, what if I, if I traded a strangle, is that a system?” Well, you may use that as the vehicle to trade, but it’s not necessarily what an options trading system is. A system is where we build the components out to that trade so we can identify all the various pieces of the puzzle, know what we’re looking to do, and generate a strategy – hopefully a winning strategy, a winning system – from that.
So, now, why do some option strategies work where others don’t? It’s a great question. Why does some option strategies work where others don’t? And again, if you’re just looking at the strategy, you have to be careful. Do, does buying calls work? Yes. All the time? No. For everybody? No, they work because they’re part of a system. They don’t work because they’re not part of a system. Now, can somebody get lucky and not have a system? Yes.
Can somebody be that good that they get away with it and not have a system? You know, I guess you can, but I want you to think about how many McDonald’s restaurants – yes, they’re all restaurants, whether you like the food or not the restaurants – how many McDonald’s have no business plan? “Yeah. We’re just going to wing it. I have no idea what it cost me to make a fry, but we’re going to sell it for 99 cents.”
Of course they know how much it cost them; it’s part of their business plan. This is part of your business plan. “Oh, Rob, I do this on the side, man. I work a full-time job. I’m not looking at…” Hold on a second. If you’re looking to generate wealth, you certainly don’t want to do this from the standpoint of, “I have no idea what I’m doing and I’m not going to plan for anything. I’m just going to wing it. I’m going to see how it feels inside. Should I take this trade or, get out of this trade or not?”
All the wrong reasons for it. If you want a winning options trading system, then you need to build out the strategy…is a piece of it…but you need to build that system out, including strategy and the other components, which I’ll share with you in a few moments here.
So what goes into building a winning trading system? Think about it. You know, if it was that easy, everybody would do it, right? So, it’s not a simple process, a simple task. I have built trading systems that I have spent 18 months on and scrapped because I couldn’t get them to work no matter what I did. I thought I was onto something, couldn’t figure it out, tossed it away. Some I may have spent less time on, come back a few months, few years later, figured something else out, made an adjustment to change, and was able to trade those. But, they’re not normally something that happens overnight. It’s something that requires some testing.
So, the first thing you have to ask yourself is what timeframe are you going to trade? In other words, are you looking for day trading options, strategies, or are you looking for swing trading, option strategies?
What one do you want? See that will make a huge difference. Are you in and out the same day, or are you carrying overnight? And there are goods and bads to both. In and out every day, I don’t have to worry about the market whipsawing one day to the next up 400 down 200, the day after all that goesaway. All my fear and concern of that goes away. But now I run into an issue where I’m only allowed to do a certain amount of trades unless I have an account over $25,000.
“Well, okay. But Rob, if I removed the margin component and before we get too crazy into pattern day trading rules, right? And I start having your head spin on you, let me go through briefly what that means, what it represents. Pattern day trader rule says, if you have an account with under $25,000 in it, you can only do three intraday trades in a five day period, five business days. So, Wednesday, Thursday, Friday, Monday, Tuesday – five business days. If you do more than that, you’re going to get your hand slapped from the broker. And it is the broker. It’s not a regulatory agency.
You don’t get a ticket, but the ticket, I guess you – maybe you do get one – the ticket you could consider as they’re going to lock you out of trading for 30, 60, 90 days, whatever it is. They’re going to penalize you for stepping over or making a mistake by going into that fourth trade. “But Rob, I’ve heard that I can get around that if I don’t have a margin account.” You can.So let’s say that you have $2,000 to your name and you have a margin account and you buy an option today and you sell it today. Well, that $2,000 is instantly back in your account to use, even though options don’t settle until the next day. But, because it’s margin, they’re lending you that money back again, no fees for it, so you’re not paying anything for that. It’s a benefit of having the margin account. Take the margin account away. And now when you spend your $2,000, that’s it, you’re done baby for the day, you’re done no more trading.
So I’m not saying that one is better or worse than the other. You’ve got to decide, but I want you to start where you’re at. Don’t look this and say, “well, I can’t trade before I have $25,000.” It doesn’t work that way. If you had 500 bucks to name and you’re ready, then you trade with $500. Now I’m going to tell you go out and bust your buns to save up whatever you can – go work in Domino’s, shovel, snow, mow lawns whatever you have to do to get out there to try to go sell stuff, go sell something. Go on eBay, go on Craigslist, go on, LetGo or whatever other apps are out there these days, and sell things that maybe you don’t need.
Is there a service that you can do? Are you an electrician? If you are. You’re probably doing it anyway already, right? But do side work, right? Or you handyman?, Listen, I’m not tell you to go find more jobs; I’m trying to tell you if you’re the reasoning of not having enough cash to be able to trade is not a good reason. Either start with where you’re at or go figure out a way that you could generate some more cash. Go work in Home Depot, go work in a department store at Christmas time, wrapping gifts. I don’t care what it is. Right? Figure out a way to do that and build your account up and get above the $25,000 and never have to worry about that again.
Now with that being said, you may not be there today and that’s okay. Don’t ever take it that it’s bad if you’re not there. You are where you are, and that’s where you’ll start. All right? But day trading gets you out out of the whipsaws. A swing trader, as a swing trader, which I would much prefer is a swing trader, but there are times in the market, like at the time of this recording, where a day trading is a more common trade because we’re seeing, you know, couple of days up, couple of days down and we get our runs four or five, eight days in a direction. It flops the other way, But then there’s not a lot of consistency in the market. And we’re hitting all time highs at this point in our markets right now, so markets are definitely rocking, but rocking is the word. The boat is rocking along the way. A lot of people falling off the boat and drowning in the ocean because of the way the markets are moving on us at this point.
Swing trading, you have to carry overnight, right? I do less swing trades than I do day trades. I look for bigger profits, bigger rates of return because I’m looking to hold over a longer period of time. I’m not trying to make 10, 20, 30 cents, a dollar on my option. I may be trying to make three, five, eight, 15, $20 per share on my option. Right? So huge difference. But I like swing trading option strategies better than day trading options strategies, but I trade both, both, to do both. Why? Because that’s part of my system. Part of my system, I am an options trader through and through everything I do for the most part is options trading in the equities markets, it’s options trading. I just want to make sure that I’ve got the right strategy built into my system for my trade, right?
So what about cash required to trade? We talked about that. There is about getting more, but there’s not a minimum with the exception of what the broker requires. And, there are some brokers that do have a $2000 or $5,000 minimum. Many of them have waived that. Now go look at, you know, search for the top options brokers out there, and you’ll find lists of the best options and search for you a year, right? So if it was 1999, you would search “best options brokers 1999,” right?
What about asset classes to trade? I talked about options. You could trade equities, you could trade futures, you could trade futures, Forex. You could trade mutual funds if that’s what you choose, hopefully you don’t. But if you chose to, you could choose that. But you chose to choose that. (Wow, lots of choosing going on!) You need to have that as part of your trading plan, as part of your system that you’re building out. Strategy creation system.
For me, it’s equity options on stocks that have weekly options on them, which at time of the recording is just under 500 companies-ish have weekly options on them. If you can’t find one out of 500, we got a problem. Don’t worry about the other 9,500 stocks that are out there, right? Or the 5,000 non weekly optionable stocks. You don’t need all of that. Just give me the weeklies. That’s mine. Now that’s me. That is in my system. Right?
So Rob, how do we do this? How do we build this out? Well, *ta da!* if I had balloons and horns going off…
INTRODUCING TO YOU…Strategy Creation System!
Now there are four words and you probably want to write these down. And once you do that, you’re going to think it’s silly. You really are, you going to go really? That was it? Write them down and we’ll talk about them.
The very first one in strategy creation system identification. Identify.
The second one is enter.
Third is manage.
Fourth is exit.
See, sounds simple. But it’s the hardest thing you’ll ever do to create a winning options trading system, period, hands down.
Identify what are the rules for you to identify a candidate that even fits? I already said for me as an example, one of my rules, it has to have weekly options on it. It has to have for one of my systems, a Wilders average true range of at least $4. That means it moves on average between high and low, at least $4 a day. I don’t want something that just kept flat going sideways there. Right? They call it flat line in the medical industry. Right? My daughter’s an RN – flat-line. Okay. I don’t want that as a stock. I’m looking for something that’s got some movement to it. Now I’m not looking for whipsaw, I’m not looking for gaps all over the place. Right. But I do want some movement. Right?
I look for price range. I look at the options themselves. How expensive of the options. All right. Well, does that really matter for identify? Sure for that the candidate to make it on my list, it does. Now you have to find that fit your criteria. And our Power Option Plays, one of the premier services that we offer here at WealthBuildersHQ.com, we trade companies like Amazon that are, you know, $2000, $3,000 companies, Google Booking, , Chipotle, you know, under $2000 right now, and hasn’t been to 2000 yet, but maybe by the time you hear this, who knows? But companies like that, but we also trade much lower priced stocks as well. We trade the United Healthcares of the world, and the Home Depots of the world, and the Apples and the Facebooks and so forth. We trade all of those, but they fit a criteria to get entered into my system, right?
Once I’ve identified candidates as a, as a starting point, I now need to identify an entry signal. What says to me, “Oh, this is where I hit enter to get into the trade. “I’m ready. I want to buy…… Now.” Hit the button over and over and over again. Hit enter.
Once I’ve entered into the trade, now I need to manage it. Am I exiting the trade all at once? Am I scaling out of the trade? Am I setting up a trailing stop? Am I setting up hard stops? How and when do I adjust my stops if I’m scaling in and out of the trade. You see all the pieces I’m talking about. Every component of that trade needs to be laid out in there. That’s the management piece of it. You’re in; now, how do you manage it?
Ultimately, finally, is the exit component. How do I get out of the trade? What’s the reason, you know, I was looking for a $4 move. I got to $3 and 90 cents. Is that enough? Am I going to pull the trigger and call it a day? Oh yeah, I am. What about if bad news comes out in the company? What if I’m holding it longer than I thought and now we’re coming up on earnings? (Which was episode seven. If you haven’t listened to that one, you should have our podcasts, the stock market millionaire on earnings, right?).
Identify, enter, manage exit. Sounds simple. It is the most complex than you’ve ever done. That is why we’ve put, put together complete trading systems for our students to use. That’s why myself, and Brandon, and Ryan, and Tony, and Amelia and all of us at WealthBuildersHQ.com give trade setups with identifications of how we go about and trade these. And then you make the decision, does it fit your personal risk profile for you to take that trade?
You see, you can take my strategy creation system, but that’s like saying, you’re going to take my baseball glove and you’ll catch as good (or as bad) as I do on the field. It doesn’t work that way just because you’re using my glove. That doesn’t mean you’re as good or better or worse than I; it just means you have my glove. It just means you have my system. You still need to take my system, which I’ve done all the hard work and now you need to tweak it for you. I’m okay. Taking trades on companies up to $3,000+ on an Amazon, you may go,
“Whoa, Whoa, Whoa, Whoa, Rob, dude, I ain’t got that kind of green to pay for an option. So I think I’ll cap mine off at that $200 level.” That’s okay. So you took my system and you tweaked it to make it your system.
There you have it, ladies and gentlemen, it is critical. It is key that you build out a trading system and you want a winning trading system. The only way to do it, that I have been able to find is to build it out, utilizing what I call Strategy Creation System – SCS. You’ve got great options, trading strategies out there, they won’t work without having a good system. You’ve got great day trading options strategies. They will not work without having a good system.
So with that ladies and gentlemen, you have yourself, a great rest of your day. Stay focused on the quest to becoming a great trader. Keep crushing it. And remember you’re just one trade away. I’ll see all of you at the next podcast. Hey folks, make sure you go ahead and like us subscribe to us. Get on the RSS feeds downloaded, come check it out on the website, we’ve got the podcast there as well, and I’ll see all of you at the next step to take care of, then see you soon. Bye.