Options trading- Drill down method
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Options Trading: Drill Down Method by TradingWarz www.tradingwarz.com
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Options Trading: Drill Down Method by TradingWarz www.tradingwarz.com
Table of Contents Introduction .................................................................................................................................................. 4 Preconditions ................................................................................................................................................ 5 TradingWarz Chart Patterns Summary ......................................................................................................... 6 Drill Down Method........................................................................................................................................ 8 Opening Range Breakout .............................................................................................................................. 9 3 MINUTE CHART EXHIBIT ....................................................................................................................... 10 5 Minute Chart Exhibit ........................................................................................................................ 14 15 MINUTE CHART EXHIBIT ..................................................................................................................... 18 Fractal Entries or As Above So Below Trades (TradingWarz Patterns on lower time frames) ................... 22 INSIDE POWER FRACTAL ENTRIES ............................................................................................................. 24 DOUBLE INSIDE POWER FRACTAL ENTRIES ................................................................................................ 28 NIRVANA FRACTAL ENTRIES .................................................................................................................... 32 HOLY GRAIL FRACTAL ENTRIES ................................................................................................................ 36 Trigger or breakout trading......................................................................................................................... 40 Advanced triggers ................................................................................................................................... 40 5 Minute Chart Exhibit ........................................................................................................................ 42 10 Minute Chart Exhibit ...................................................................................................................... 46 15 Minute Chart Exhibit ...................................................................................................................... 50 Fibonacci Power Entries – Previous Day’s Range & Reversal Trading ........................................................ 54 Previous Day’s Range Fibonacci Power Entry ......................................................................................... 55 Fibonacci Reversal Power Entry .............................................................................................................. 55 Fibonacci Trade Management & Execution ............................................................................................ 56 Fibonacci Power Entries – Chart Examples ............................................................................................. 58 Outside Bars Trading Strategies .................................................................................................................. 63 Combination Trading – Time Frame Hacking .............................................................................................. 63 Risk Management & Consistency................................................................................................................ 65 Sizing and Scaling .................................................................................................................................... 66 Targets .................................................................................................................................................... 67 Trailing Stops........................................................................................................................................... 68 Consistency & Focus ............................................................................................................................... 68 Naked Call & Put Options & Option Strikes/Expiry Selection ..................................................................... 69
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Options Trading: Drill Down Method by TradingWarz www.tradingwarz.com
Automated Orders ...................................................................................................................................... 70 Non Automated Orders .............................................................................................................................. 71 Compounding.............................................................................................................................................. 72 Scanners and TradingWarz Indicators ........................................................................................................ 73 Resources .................................................................................................................................................... 74 Risk Disclaimer ............................................................................................................................................ 75
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Options Trading: Drill Down Method by TradingWarz www.tradingwarz.com
Introduction The purpose of this book is to share with you my years of experience in trading the markets and various financial instruments. My trading style involves firstly finding stocks/instruments that have a likely chance of breaking out the next day, which I call Preconditions. Secondly, once I have these picks defined, I use various trading strategies by drilling down to lower time frames to find probable low risk/high reward trading opportunities. This I’ve coined the drill down method. Trade execution and management is one key part of the equation to being a successful trader, but an often overlooked and underrated factor is proper position sizing and risk management. I’ve discussed below a complete method to managing your size and risk with many chart examples for your reference. Remember with a 2:1 risk/reward ratio, we only need to win 34/100 trades in order to make a profit! My goal is to educate you and provide you with an opportunity to become a “fisherman” and to adapt and grow as a trader overtime. Remember it only takes one good fisherman to feed a whole village and I strongly encourage you to take the knowledge from this book and share it to those who can benefit from it. The only limits we face in this field are the limits we place on ourselves. There is no ceiling to your potential, and you can achieve your goals in many different ways from day trading to swing trading to investing. Trading is fractal in nature and there are infinite setups on all time frames. Every day we have a fighting opportunity to achieve our dreams and my goal is to help prepare you for the Trading War!
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Options Trading: Drill Down Method by TradingWarz www.tradingwarz.com
Preconditions Before we start trading, we need to first find stocks that are likely to make directional moves. The key word is likely, we never have a 100% edge. Especially when trading options, we need to attack tickers/instruments that have been consolidating and option premiums have been decaying. The TradingWarz patterns – Holy Grail, Inside Power, Double Inside Power & Nirvana help to find these consolidating tickers/instruments with the goal of entering trades before the breakout or climax occurs. We want to enter setups that have relatively cheap option premiums and have great risk to reward. The TradingWarz patterns are all variations of Inside Bars. Inside Bars are one of the most powerful yet very simple trading strategies. Simply put, Inside Bars represent a period of pause or consolidation in the ticker/instrument. In general, tickers/instruments tend to consolidate before explosive moves either to the upside or the downside. Thus, by identifying Inside Bars we can anticipate large moves within various stocks, commodities, and other instruments. What makes Inside Bars even more reliable are that they are a non-subjective tool. They are not a combination of subjective lines or indicators and involve very little human speculation. It either is an Inside Bar or it’s not. An Inside Bar occurs when the trading price action of a specific time frame completely trades within the previous bar. This is visually displayed as a candlestick bar that is within the range of the previous bar. This happens on all time frames from the one-minute chart to the monthly chart. In other words, we can say the Inside Bar is trapped within a range.
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Options Trading: Drill Down Method by TradingWarz www.tradingwarz.com
Generally, for day trading purposes, I scan the daily, 2 day, 3 day & 4 day to find tickers that are likely to have explosive moves. For swing trades, I scan the weekly, 2 week & 3 week charts. For position trades (longer swings/investments), I scan the monthly, 2 month & 3 month charts. Now that we’ve identified instruments that are likely to move, we need to execute actual trades. This is where we use the Drill Down Method. But before we get into this method, here is a summary of the TradingWarz Chart Patterns which make up my Precondition setups.
TradingWarz Chart Patterns Summary
TradingWarz Holy Grail Pattern: Outside Bar followed by Inside Bar Purpose: Tends to trap both bears and bulls with the outside bar breaking previous highs/lows. The inside bar adds to the contraction and option premium decay, priming the instrument for a breakout with great risk to reward. Second most common pattern.
TradingWarz Double Inside Power Pattern: Two consecutives Inside Bars Purpose: Tends to greatly decay option premiums and accumulates trapped bear/bull traders within a tight range. We tend to see expansion for this tight range with a break above the high/low during the next candle formation. Very rare pattern.
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TradingWarz Inside Power Pattern: Single Inside Bar Purpose: Tends to decay option premiums and accumulates trapped bear/bull traders within a tight range. We tend to see expansion for this tight range with a break above the high/low during the next candle formation. Most common pattern of the 3.
TradingWarz Nirvana Pattern: Inside Bar followed by Outside Bar Purpose: Having an outside bar at the end of the pattern tends to trap both bars and bulls. We tend to see a directional move once the high/low of the outside bar has been triggered. Very rare pattern.
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Drill Down Method With the TradingWarz Patterns we set the stage. We identify instruments/tickers that are likely to break out of their previous period high/low. However, that’s not enough. We need to find a way to actually enter and execute trades. This is why I created the Drill Down Method. The Drill Down Method involves going to a lower time frame from your Precondition and finding a low risk/high reward entry. The Drill Down Method consists of the following: 1. The Opening Range Breakout (3, 5, 15 min are my preferred time frames) 2. Fractal Entries or As Above So Below Trades (TradingWarz Patterns on lower time frames) 3. Fibonacci Power Entries a. Previous Day Range b. Range Expansion reversal trading (also used for target taking) c. Morning & Afternoon Fibonacci Legs (From my first book: The Golden Partnership – Fibonacci & Automated Options Trading www.tradingwarz.com ) 4. Trigger or Breakout Method When you first start trading the Drill Down method, I suggest you focus on each of these setups one at a time and to trade each of them for a minimum of 100 trades to fully master them. You can do this through simulation trading, back testing or risking small size. It’s critical to understand that these setups give us an edge but are never 100% accurate. Thus, we must focus on proper risk management and position sizing to protect our capital.
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Opening Range Breakout The opening range breakout (ORB for short) is a setup that involves waiting for the first bar of the day to close. This can be used on any time frame you choose. For day trading, I focus on the 3, 5 and 15 minute chart ORB setups. When the first candlestick closes, we look to take the breakout of that bar. If it breaks the high of the candlestick, we look to enter a long a position with shares or naked call options. If it breaks the low of the candlestick, we look to enter a short position with shares or naked put options. Our goal is to read the initial price action at the open. Who’s trapped? Who can potentially get a stop run? By waiting for the first bar to close we can use this as a tool to execute our trades. The lower the time frame you Drill Down to, the smaller the bars tend to be. This inherently means higher risk but also higher reward. We can also use Combination Trading and Time Frame hacking (see below) to use ORBS for swing trading by using higher time frames such as the Weekly and above to be our Precondition and using the Daily, Hourly and other micro timeframes to be our Drill Down Entry. Step by step process: 1. Scan and find a TradingWarz Precondition setup 2. Drill Down to the 3, 5, or 15 minute chart and wait for the first candle to close 3. Execute the trade using the breakout of the opening range Trade Management: 1. Maximum risk per trade should be 1-2% of your capital
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Options Trading: Drill Down Method by TradingWarz www.tradingwarz.com
2. Stop loss can either be placed on opposing side of entry bar or more aggressively using a Fibonacci level for a tighter stop loss 3. Scale out using Risk Multiples (see risk management section below) or using Fibonacci extensions 4. Watch this video: https://www.youtube.com/watch?v=O4_6-PTAQlY 3 MINUTE CHART EXHIBIT
$UPST September 2nd 2021 - 9:33 Candle Entry CALLS
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$WFC September 7th 2021 – 9:33 Candle Entry CALLS
$MRNA September 7th 2021 – 9:33 Candle Entry CALLS
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$AMC August 31st 2021 – 9:33 Candle Entry CALLS
$BABA September 2nd 2021 – 9:33 Candle Entry PUTS
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$AAPL September 8th 2021 – 9:33 Candle Entry PUTS
$SQ September 8th 2021 – 9:33 Candle Entry PUTS
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$NET September 7th - 9:33 Candle Entry PUTS
5 Minute Chart Exhibit
$TSLA September 1st 2021 – 9:35 Candle Entry CALLS
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$UPST September 2nd 2021 - 9:35 Candle Entry CALLS
$GME August 26th 2021 – 9:35 Candle Entry CALLS
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$ZM September 3rd 2021 – 9:35 Candle Entry CALLS
$SPCE August 30th 2021 - 9:35 Candle Entry PUTS
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$SQ August 31st 2021 – 9:35 Candle Entry PUTS
$V September 2nd 2021- 9:35 Candle Entry PUTS
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$NIO August 30th 2021 – 9:35 Candle Entry PUTS 15 MINUTE CHART EXHIBIT
$KO September 7th 2021 - 9:45 Candle Entry CALLS
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$NVDA September 3rd 2021 - 9:45 Candle Entry CALLS
$UBER September 2nd 2021 - 9:45 Candle Entry CALLS
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$NFLX September 8th 2021 - 9:45 Candle Entry CALLS
$SPY September 7th 2021 - 9:45 Candle Entry PUTS
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$V September 10th 2021 - 9:45 Candle Entry PUTS
$KO September 10th 2021 - 9:45 Candle Entry PUTS
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Fractal Entries or As Above So Below Trades (TradingWarz Patterns on lower time frames) The basic TradingWarz Precondition setups include the Holy Grail, Inside Power, Double Inside Power & Nirvana. Now, what if we Drill Down to a lower time frame? These patterns are fractal in nature meaning they can be happening on any time frame at any given point. From the 15 second chart to the monthly chart these patterns are continuously developing and providing us with non subjective trading tools. For day trading, using the 3, 5 and 15 minute charts (or a time frame of your choice) we can look for Fractal Inside Bar variations to enter a trade. In a sense we are trading an Inside Bar within an Inside Bar and these can lead to very explosive moves with potential low risk high reward opportunities. This method can also be used from a swing trade perspective, see the Combination Trading – Time Frame Hacking section below. Step by step process: 1. Scan and find a TradingWarz Precondition setup 2. Drill Down for fractal entries (Holy Grail, Inside Power, Double Inside Power & Nirvana) on lower time frames 3. Execute the trade using fractal inside bar setups Trade Management: 1. Maximum risk per trade should be 1-2% of your capital 2. Stop loss can either be placed on opposing side of entry bar or more aggressively using a Fibonacci level for a tighter stop loss
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3. Scale out using Risk Multiples (see risk management section below) or using Fibonacci extensions 4. Watch this video: https://www.youtube.com/watch?v=Yy54bPC60G4&t=10s
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INSIDE POWER FRACTAL E NTRIES
$TSLA August 30th 2021 – 13:45 Candle Entry CALLS
$MCD September 13th 2021 – 10:30 Candle Entry CALLS
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$SPY September 1st 2021 – 11:30 Candle Entry CALLS
$GME August 30th 2021 – 9:57 Candle Entry CALLS
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$NFLX August 27th 2021 – 10:30 Candle Entry PUTS
$MU September 1st 2021 – 9:45 Candle Entry PUTS
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$ZM September 8th 2021 – 15:30 Candle Entry PUTS
$SNAP September 10th 2021 – 15:18 Candle Entry PUTS
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DOUBLE INSIDE POWER FRACTAL ENTRIES
$SNAP September 9th 2021 – 11:30 Candle Entry CALLS
$EA September 14th 2021 – 10:15 Candle Entry CALLS
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$TSLA September 13th 2021 – 12:30 Candle Entry CALLS
$AAPL September 7th 2021 – 9:54 Candle Entry CALLS
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$NIO September 7th 2021 – 15:05 Candle Entry PUTS
$BAC September 14th 2021 – 10:15 Candle Entry PUTS
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$FB September 10th 2021 – 14:30 Candle Entry PUTS
$PTON September 14th 2021 – 14:18 Candle Entry PUTS
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NIRVANA FRACTAL E NTRIES
$KO August 13th 2021 – 12:15 Candle Entry CALLS
$EA September 14th 2021 – 13:45 Candle Entry CALLS
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$AMC September 7th 2021 – 15:45 Candle Entry CALLS
$GE August 27th 2021 – 10:03 Candle Entry CALLS
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$PTON September 14th 2021 – 12:15 Candle Entry PUTS
$AAPL September 14th 2021 – 12:15 Candle Entry PUTS
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$ATVI September 9th 2021 – 13:20 Candle Entry PUTS
$LYFT September 10th 2021 – 13:42 Candle Entry PUTS
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HOLY GRAIL FRACTAL E NTRIES
$FB August 19th 2021 – 10:45 Candle Entry CALLS
$TSLA August 30th 2021 – 11:25 Candle Entry CALLS
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$FUBO August 30th 2021 – 11:30 Candle Entry CALLS
$EA August 19th 2021 – 10:00 Candle Entry CALLS
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$HOOD September 14th 2021 – 12:30 Candle Entry PUTS
$MSFT September 24th 2021 – 10:30 Candle Entry PUTS
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$HCA September 14th 2021 – 12:15 Candle Entry PUTS
$UBER September 14th 2021 – 14:12 Candle Entry PUTS
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Trigger or breakout trading The trigger or breakout trading strategies are based on taking breakouts of key consolidation areas or previous support/resistance looking for an immediate directional move. The simplest way to implement this is using the previous day’s high & low as your trigger pivot. If we break the previous day high’s go long shares or enter naked call options looking for a continuation higher. If we break the previous day’s low go short shares or enter naked put options looking for a continuation lower. The idea behind trigger or breakout trading is to trigger a stop loss run from trapped buyers/sellers who are forced to cover their positions when it goes against them as well as a combination of new buyers/sellers who find the stock/instrument to be of good fair value at the breakout price.
Advanced triggers As I’ve developed as a trader over the years, I’ve found that you can front run the traditional trigger levels of the previous day’s high/low. How? This is a question I get daily, and it comes down to a combination of Fibonacci, Candlestick wicks and experience trading the same stock tickers over and over again. If you want to front run your trigger entries, take the previous day’s range and look for traps. Ask yourself, how did we close in the last hour? Where are the major candlestick wicks and using the Fibonacci of the previous day’s range identify key stop run areas. This is how you can “front run” the previous day’s high/low as triggers and get n earlier in the trade. Step by step process:
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1 – Mark the previous day’s high/low for your trigger breakout or use the advanced trigger method 2 – Enter long or short when the trigger breaks either using stop limit orders or waiting for candlestick confirmation Trade Management: 1. Maximum risk per trade should be 1-2% of your capital 2. Stop loss can either be placed on opposing side of trigger entry bar or more aggressively using a Fibonacci level for a tighter stop loss on the trigger bar 3. For conservative and wider stop losses, the stop loss can be placed on the opposing trigger, or using the previous day’s Fibonacci levels (as described below) 4. Scale out using Risk Multiples or using Fibonacci extensions of the trigger bar. Additionally, the Fibonacci Reversal Power Entries are great targets to use for exiting a trigger entry. 5. Watch this video: https://youtu.be/S4mrL-V5ojc
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5 Minute Chart Exhibit
$MRNA September 9th 2021 - 9:40 Candle Entry CALLS
$UBER September 1st 2021 – 9:45 Candle Entry CALLS
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$NIO September 7th 2021 - 9:30 Candle Entry CALLS
$AMD August 23rd 2021 – 9:30 Candle Entry CALLS
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$NVDA September 8th 2021 - 9:30 Candle Entry PUTS
$TSLA September 8th 2021- 10:35/10:45 Candle Entry PUTS
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$SQ September 8th 2021 - 9:30 Candle Entry PUTS
$NFLX September 10th 2021 - 9:30 Candle Entry PUTS
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10 Minute Chart Exhibit
$MCD July 27th 2021 - 9:40 Candle Entry CALLS
$TSLA August 30th 2021 - 9:30 Candle Entry CALLS
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$AAPL September 7th 2021 - 9:30 Candle Entry CALLS
$AMC September 7th 2021 - 9:30 Candle Entry CALLS
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$NVDA September 8th 2021 - 9:30 Candle Entry PUTS
$NIO August 30th 2021 – 9:30 Candle Entry PUTS
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$KO September 10th 2021 – 9:40 Candle Entry PUTS
$PFE August 27th 2021 – 9:30 Candle Entry PUTS
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15 Minute Chart Exhibit
$NFLX August 27th 2021 – 9:30 Candle Entry CALLS
$GOOGL September 1st 2021 – 9:30 Candle Entry CALLS
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$CHWY August 24th 2021 – 9:30 Candle Entry CALLS
$MRNA September 9th 2021 – 9:30 Candle Entry CALLS
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$ORCL September 13th 2021 – 10:00 Candle Entry PUTS
$HOOD September 13th 2021 – 9:30 Candle Entry PUTS
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$SQ September 8th 2021 – 9:30 Candle Entry PUTS
$CAT September 7th 2021 – 9:30 Candle Entry PUTS
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Fibonacci Power Entries – Previous Day’s Range & Reversal Trading In my first book The Golden Partnership – Fibonacci & Automated Options Trading at www.tradingwarz.com, I go in extensive detail on the Fibonacci and I strongly encourage you if you want to implement Fibonacci based strategies that you watch my Fibonacci playlist on YouTube (see resources section) and/or grab a copy of that book. After our Precondition has been met, an instrument can do one of two things. It can open within the previous day’s high/low (inside open) or it can gap completely out of the range. Before we get into the actual setups below you will find a screenshot of the Fibonacci settings I use on my charts.
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Previous Day’s Range Fibonacci Power Entry When we open inside the previous day’s range, we can use the Fibonacci tool to take that range and dissect it into sections. Using key Fibonacci levels such at the 0.5 and 0.618 we can enter trades using limit orders or candlestick confirmation. See Fibonacci Trade Management & Execution for further details on entries. Step by step process: 1 – Draw the Fibonacci from the previous days low to high to dissect the charts into sections. 2 – Using the limit entry or candlestick confirmation to enter the position
Fibonacci Reversal Power Entry When we gap over the previous day’s high/low or when we break out of the previous day’s range, we can use the measured move to look for areas of reversals. Key Fibonacci levels such as the 0.169, 0.272 & 0.5 can help us find potential areas for Algo dumping of overnight positions causing a reversal to occur. Step by step process: 1 – Draw the Fibonacci of the previous day’s range. Apply the extensions to the range to spot key areas for potential reversals 2 – Using the limit entry or candlestick confirmation enter the position
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Fibonacci Trade Management & Execution These are sample trade plans that I use when trading every day in the markets. These are suggestions and I encourage you to investigate which one of these plans will work best on the instrument you are trading using back testing. Also, it is very important for you to pick a plan that you can consistently follow. These are just suggestions and as you get more experienced, you should be a creator and create trading plans that work best for you. Using Limit orders “all or nothing” Entry: 0.618 or 0.5 Fibonacci of previous day’s range or as reversal areas with extensions Stop: Above/Below 0.886 Fibonacci Target: 50% at 10% Extension, remainder in layers at the 27.6% extension and up Using Limit orders “average in” Entry: 25% on 0.382, 25% on 0.5, 25% on 0.618, 25% on 0.786 or scale in similarly on the extensions for reversal trading opportunities Stop: Below impulsive leg low/high depending on the direction and for reversal trading stops at the complete measured move. Targets: Use Risk Multiples to scale out i.e 25% at 1.5, 50% at 2, 25% at 3 (See Risk Management section below).
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Fibonacci Candlestick Confirmation Entry: Wait for candlestick confirmation anywhere between the 0.5-0.886. Enter 1 tick above the closing bar or enter at the close of the bar. If aggressive place limit order at 0.5 of confirmation candle to be filled on next candle. For reversal trading, look for candlestick reversal patterns such as the inverted hammer, doji, etc. at the key Fibonacci extension levels. Stops: On opposing side of candlestick entry or below most recent swing low pivot Targets: Scale out in multiples of your R. Ex. 25% 1.5 50% 2 25% 3 A general rule I like to implement when using candlestick confirmation is to look left for the most recent swing high or low and use that structure to set my stop to prevent getting wicked out. Watch: https://youtube.com/playlist?list=PLFAKby4qxtHVXUxudppWUtGrsqHZZiRV_
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Fibonacci Power Entries – Chart Examples
$NVDA September 10th 2021 58 | P a g e
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$NIO September 7th 2021 59 | P a g e
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$PYPL August 10th 2021 60 | P a g e
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$PLTR September 10th 2021 61 | P a g e
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$AMD September 13th 202 62 | P a g e
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Outside Bars Trading Strategies Inside Bars are my primary entry style, but outside bars can also be very effective. The major difference is the outside bars tend to be larger then Inside Bars as by definition an outside bar must break the previous bar’s high and low. This may lead to getting more expensive option premiums for options traders but also allows for potential wider stop losses. Both inside and outside bars have winning and losing streaks and I prefer to look at them as individual trading opportunities and not that one type is superior to the other. As, I’ve mentioned above, trading is fractal and creative in nature. Thus, I strongly encourage you to back test and try implementing outside bars and/or a combination of both bars to use as either 1 – Your Precondition for a trade or 2 – A Fractal Drill Down Entry.
Combination Trading – Time Frame Hacking Starting off on a higher time frame then drilling down to a lower time frame for execution is my preferred method which I’ve coined the Drill Down Method. There are endless timeframes from the 1 min chart all the way up to the yearly charts and each one of these time frames can be drilled into on a lower time frame. The only key difference is as you go higher on the time frame ladder, it will take more time for the trade to play out. If trading options, you need to purchase further out expiry and in general your stop losses and targets will be larger then when day trading. There are infinite possibilities of pairings of Preconditions and Drill Down time frames.
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I call this combination trading. From the higher time frame, we can define a range and using the Drill Down methods we can enter a trade on a lower time frame. The main combinations I use are as follows: Day Trading 1. Start with the Precondition on the Daily Chart (Holy Grail, Inside Power, Inside Double Insider Power & Nirvana) 2. Drill Down on the lower time frames for execution. My preferred time frames are the 3, 5 or 15 minute charts Swing Trading & Investing 3. From a swing trading or investing perspective, the only thing that changes is the time frame. We can define our Precondition on larger time frames. I tend to stay on the 1-3 week & monthly and above. Now when we Drill Down our lower time frames will not be as micro, instead we can use the Daily, 4 hr, hourly, etc Various Sample Combination Trading Alignment 1 – Precondition: Daily Chart TradingWarz Patterns •
Drill Down for entry on the 3, 5, 15 min
2 – Precondition: Weekly Chart TradingWarz Patterns •
Drill Down for entry on the D, 4Hr, Hr, 30 min chart
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3 – Precondition: Monthly Chart TradingWarz Patterns •
Drill Down for entry on the 1W, 3D, 2D, D chart
I also tend to use time frames that are not as well known or popular such as the 2-4 day charts, 2-3 week Charts & 2-4 month charts. From these Preconditions, I then Drill Down to a lower time frame for entry or simply use the breakout method as discussed above.
Risk Management & Consistency This by far is the most important section of this book. Remember this, everything works in the stock market just NOT all the time. You can trade RSI, MACD, Bollinger bands, Volume profile and they all will win for a period of time and lose for a period of time. Instead, you should be focusing on what style/strategy will give you the best risk to reward. The higher your risk to reward the less frequent you need to win in order to earn a profit. Let’s look at Risk Multiples over 100 trades and the required win rate to make a profit.
R/R Wins Losses
1.5 41 59
2 34 66
3 26 74
4 21 79
Total
100
100
100
100
WR %
41%
34%
26%
21%
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As you can clearly see, as the risk to reward increased the required win rate goes down. This is what makes Fibonacci and TradingWarz Patterns so great as the risk to reward on these trades are far superior to most systems. If you are able to enter a Fibonacci retracement or TradingWarz Pattern setup and scale out to the measured move targets, you will likely earn a minimum of 23R depending on if you use limit or candlestick entries. This means out of 100 trades you need to win between 21-34 or 21%-34% of your trades to make a profit. From my historical testing, I find all strategies to earn about a 50% win rate overtime. All strategies have their win streaks and losing streaks and that is inevitable because we are playing a probability game. This is why a strategy with such a high R/R is best. On the other hand you can search for a strategy with a high win rate, let’s say 70%+. Usually these strategies produce an inverted risk to reward, often giving you less than 1x your risk. This is ultimately a losing game because if you do have a string of losers it will wipe out all the gains you’ve worked hard to earn. Don’t be fooled into buying accuracy, Risk to reward is all that matters.
Sizing and Scaling Let’s start off with the MUST follow rules that will keep you from blowing up your account. The most important rule is never lose more than 1-2% of your capital on any given trade. This means we treat all Fibonacci and/or TradingWarz setups equally. They all have the same potential to win or lose and it is our job to keep our losers small when we are wrong and let our winners run when we are right. It does not matter how beautiful the setup looks or what we heard on TV/Social Media is going to happen next in the markets. As a professional trader, we stay unbiased and 66 | P a g e
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trade every set up equally with equal risk. This means if you have a 10k account your risk would be between $100-$200 per trade. If you have a 1k account, your risk would between $10-$20 a trade. Once we determine what are risk per trade will be, this will be our Risk Unit or “R” multiple. I don’t want you to think of trades in dollar value anymore, I want you to see them in Rs. Did you lose 1R or did you make 2, 3,4R. Too many traders get caught up in the P/L and it emotionally hijacks their brains leading to poor decisions. The “R” system is something I learned many years ago and has prevented me from blowing up my account since. In theory, you would need to lose 100 trades in a row to lose your account when risking 1% or 1R. This is essentially impossible with a 50% win rate. So, before you enter your trade and depending on if you are going blind or using candlestick confirmation, make sure you buy enough shares/contracts such that if you get stopped out you will only lose 1-2% of your account. Sizing and Risk Management is our job as traders. The R system is the easiest way to scale while still managing risk appropriately.
Targets My general rules are to use R multiples combined with the Fibonacci tools in order to scale out of a position. For example, scaling out 20% of your position at 1.5x your risk, 40% at 2x and the other 40% let’s say at the measured moved of 0.5 extension of the Fibonacci which lines up with your 4R. If you follow this approach, your reward will always be higher than 2R and this is the key to being profitable in trading. The losing trades are out of our control, so when we have winning trades we need to squeeze out as much profits as we can in a safe manner. You need to figure out how you want to scale out, it’s all a personal preference. Some people prefer to trade for
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home runs and some like base hits. Both are profitable, but to let the edges play out in each style, you need one thing - consistency.
Trailing Stops In general, I don’t move my stops right away. From my back testing and years of experience, the market likes to retest levels to shake out weak hands and trap breakout buyers. I’m sure you’ve been there before. Depending on your trading plan, I would recommend only moving up your stops when your first target has been hit. You need to give price enough room away from your stop loss so you don’t get poked out. It’s happened to me many times where I would get impatient, go to break even and get stopped out, just to watch the market reverse and run to all my targets. This will greatly hurt your profitability and its important to get used to taking your losers when you have to while allowing your winners enough time to work themselves out. As your layers of targets are being triggered, slowly inch your stop loss up to significant structure, and only go to break even when the chart allows it.
Consistency & Focus I need you to remember the only thing that separates the rookies from the professional in trading are the professionals are consistent. While the rookies get easily discouraged when a style/system produces a loser, a professional begins to salivate because they know the next trade is likely to be a winner. You have to discipline your mind to understand you are playing a numbers game very similar to flipping a coin. If you have a 50% win rate with your strategy/system you 68 | P a g e
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WILL have a winning streak and a losing streak. Personally, I’ve lost 10 trades in a row many times but have won back all my losings in a few trades because my risk to reward is always on point. I never lose more than my 1R risk unit. I have the mindset that when I lose its just a cost of doing business. Every business has costs and in trading, a draw down or losing streak is just one of them. This brings me to focus, you need to be able to consistently execute this system every day. You can’t pick and choose when you want to trade. For the edge of the strategy to work, you need to take all trades that fit the parameters.
Naked Call & Put Options & Option Strikes/Expiry Selection Naked options as an instrument are an excellent tool to get high leverage for your money without taking on excessive risk. If done correctly, when you buy (not sell) naked calls or puts you can only lose what you put in. Back to the risk management section above this means if your R unit is $200 for example you would be able to buy $200 worth of puts/calls or even more if using a stop loss. This keeps trading simple and ensures you are never over leveraging. The main downside to using options is that there are many variables associated with it involving time decay, implied volatility, etc. We cannot control all of these variables; thus we need to simplify the way we trade options. From my personal trading, I find it best to assume the max loss on any options play is between 50-100% of what I put in. Thus, I am at peace with losing all of the premium when I enter the naked calls/puts instrument.
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For selecting options strikes I also purchase slightly out of the money (OTM) contracts as I am looking for the stock/instrument to make a directional move in the short term. I also take a look at the volume and spread behind the contracts and if the OTM contracts have light volume or wide spreads, I will defer to in the money (ITM) contracts. For expiry, I always take the time frame I am on and multiply it by 2-3 to determine the expiry I am selecting. For example, when on the weekly chart, once I find a TradingWarz Precondition Pattern, I will purchase slightly OTM calls/puts with a minimum of 2-3 weeks of expiry. If I am day trading, I get the same week expiry as I am looking for quick moves on the lower time frames. It is key that you don’t risk more than 1-2% of your trading capital on each play, to preserve your account!
Automated Orders You can set up conditional orders in your broker to fill you on the options of your choice when the underlying stock touches a certain price. Let’s say you want to buy $AAPL on a pullback when the stock is at $130.00, but you don’t want to buy shares instead you want to buy naked call options. You can set a conditional order using the call option of your choice which will fill you at either the market price or a designated limit price when $AAPL pulls back to $130. This is game changing! This allows you to place automated orders when the market is closed or open. This set and forget approach will give you freedom and flexibility and is how I trade the markets with minimal stress and involvement. If you do want to have a stop loss on your option play,
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you can simply add a bracketed order to stop you out at a fixed amount let’s say 50% or you can use a conditional order to stop you out based on the underlying share price. The broker I use of choice is Interactive Brokers, here is a guide they did on setting up conditional orders: https://www.interactivebrokers.com/en/index.php?f=584
Non Automated Orders If you prefer to wait and watch the price action before entering your position, I suggest you use the candlestick confirmation entry guide noted above. This will allow you to have a bit more confirmation before entering a position, but could lead to you paying higher premiums as you may be getting into the move late. Additionally, if you are an active trader and are monitoring the setups, you can simply wait for the price action using the Drill Down Method and enter the options play using limit or market orders to purchase your naked calls or puts.
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Compounding Compounding is what sets apart the trading business from all other business endeavours. Below is a table that shows starting with a $10k balance, risking 2% per trade, earning roughly 4R per month and re-investing your gains monthly. This allows your Risk Unit to slowly increase month over month. If we were to repeat this process for 5 years, $10k will become over $1,000,000. This should aid in your motivation and vision to inspire you to want to learn and become better trading.
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Scanners and TradingWarz Indicators With the purchase of this book, you will be granted free access to our private member’s twitter and discord channels for a trial period. I use a combination of automated and manual scans when searching for TradingWarz Patterns. The scanners I use are posted and shared in the private twitter feed @Twarzprivate as well as in our discord channel. The TradingWarz Golden Indicators and TW Nirvana Indicator are posted in our discord channel under premium resources. Attached to the email you’ve received for this book; you will find a Member’s Swing Room and Discord Guide or you can download it here: https://tradingwarz.com/wp-content/uploads/2021/09/Members-Swing-Room-Discord-Guide.pdf
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Resources Complete beginner’s guide to trading: https://youtu.be/PU8-ybwZi5I Risk Management: https://youtu.be/9pGm0E4pUBc Risk Management & Order Types: https://youtu.be/oY1y1ZtbvkQ Order Entry: https://www.youtube.com/watch?v=0jTgZKvPeEY&t=264s How to trade Futures: https://www.youtube.com/watch?v=hIJALDylCck Mindset: https://youtu.be/9pGm0E4pUBc Investing: https://youtu.be/UbqIxv5yL6M Candlesticks: https://www.youtube.com/watch?v=uHmlfh3DtZY&t=2s Trading Strategies: Playlist: https://youtube.com/playlist?list=PLFAKby4qxtHXreLNp1j5E9LLXtLR_J36_ Inside Bar: https://www.youtube.com/watch?v=3YWaeuQjxyQ&t=2s Time Frame Alignment: https://www.youtube.com/watch?v=RniVY2av0nY Wicks: https://www.youtube.com/watch?v=m7X1_rj-flE&t=171s ORB: https://youtu.be/O4_6-PTAQlY Trade Management: https://www.youtube.com/watch?v=zT-kfZ1FXBQ Full Fibonacci Trading Course: https://youtube.com/playlist?list=PLFAKby4qxtHVXUxudppWUtGrsqHZZiRV_ Discounts: Trendspider: Use DISCOUNT CODE TZ25 for 25% OFF anything at checkout Tradingview: GET $30 OFF any plan using this link: https://www.tradingview.com/?offer_id=10&aff_id=26961 Unusual Whales 5% off: https://unusualwhales.com/referral#TradingWarz
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Risk Disclaimer This book and associated materials are for educational purposes only and should NOT be considered investment or trading advice. Futures, stocks and options trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures, stocks and options may fluctuate, and, as a result, you may lose more than your original investment. You are responsible for all the risks and financial resources you use and for the chosen trading system. You should not engage in trading unless you fully understand the nature of the transactions you are entering into and the extent of your exposure to loss. If you do not fully understand these risks you must seek independent advice from your financial advisor. All trading strategies are used at your own risk. Any content in this book and associated materials or at tradingwarz.com should not be relied upon as advice or construed as providing recommendations of any kind. It is your responsibility to confirm and decide which trades to make. Trade only with risk capital; that is, trade with money that, if lost, will not adversely impact your lifestyle and your ability to meet your financial obligations. Past results are no indication of future performance. In no event should the content of this correspondence be construed as an express or implied promise or guarantee. TradingWarz LLC is not responsible for any losses incurred as a result of using any of our trading strategies and materials. Loss-limiting strategies such as stop loss orders may not be effective because market conditions or technological issues may make it impossible to execute such orders. Disclaimer None of the content published here within or at tradingwarz.com constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Copyright information All of the contents of this book and associated material are protected from copying under U.S. and international copyright laws and treatises. Any unauthorized copying, alteration, distribution, transmission, performance, display or other use of this material is prohibited.
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