We are creatures of habit. Habits form patterns that become rules of a sort for how we live our lives in a dependable way.
One of the most compelling illustrations of this is Danish photographer Peter Funch’s “42nd and Vanderbilt” project. He stood at that corner in New York City and from 8:30 to 9:30 a.m. between 2007 and 2016 took photos of commuters on their daily pilgrimage. Many of them were the same people, day in and day out, just more grey and grizzled over time. Their faces always had the same expressions, mostly grim. Many wore the exact same shirts in 2016 that they wore in 2007, or shirts in a similar color and style. They also consistently did the same things, like holding a to-go coffee cup the same way.
That sort of habitual consistency is also frequently seen in the stock market. People who figure out how to read the patterns and act accordingly can make a lot of money, and because of that consistency, they can do so in a way that mitigates a lot of the risks of playing the market.
It’s called rules-based trading, and I should know because it’s a strategy I’ve used and share.
Rules-based trading is really a dependable approach for beginners and those with a low appetite for risk. It’s quite simple, actually, for those who do their homework and who are mindful of and keep to schedules.
It’s a way to piggy-back off the seasonal buying and selling that marks the activities of the institutional investment community, and reflects both bullish and bearish environments. Here are some examples.
On the bull side, take a look at Rockwell Automation. Between Nov. 13 and Dec. 26 in 21 of the last 23 years, the stock has gone up, with an average return of 5.76 percent. The return on options plays: 50 percent to 100 percent.
On the bear side, there’s Skecher, whose stock has declined between Sept. 14 and 27 in 17 of the last years, showing an average 6.82 percent decline. Putting options on that play will get a return of 50 percent to 100 percent.
Here’s why this system is a good one to put in place. You know what you’re getting. It’s designed to “set and forget.” You place your trade and don’t do anything more with it until it’s stopped out, the target is reached or you hit a trailing stop loss. You’re set as long as you keep it all within the precisely defined windows.
You avoid the psychological pressures of trading, but still get the fun of watching how it’s going without having to constantly be monitoring and analyzing new information. However, you do have to do your homework to identify likely targets (through data available on platforms like Yahoo Finance and Bloomberg) and apply the option strategy that fits.
Rules-based trading is an excellent way to build market knowledge and discipline that, over time, you’ll be able to take to the proverbial bank.
Certus Trading makes it easier to get into rules-based trading with our Profit Scheduler Club for options. We do the data analysis and show what options strategies will apply best, equipping you to comfortably make the trade.