A few days ago, while I was in the beautiful town of Charlottetown on Prince Edward Island, my one and only indicator was signaling a trade. As a result, I immediately sent out an alert to my loyal subscribers issuing a trade.
Seven trading days later, SPY moved lower and we took off the trade for a healthy 19% profit. So far this year, we’ve had great success using this one simple indicator. We’ve made 45 trades in total with an average return of 11.3% per trade. Think about it, that’s like 45 dividend payments paying out 11.3% with each payment . . . in just 8.5 months.
Investing isn’t just about buy and hold. There are viable alternatives to complement your overall portfolio. The strategies I use are a valuable tool to boost your overall gains . . . especially during times of turmoil, much like we are seeing today.
Keep It Simple
I keep it super simple when I trade. I pick one technical indicator and I use it for its specifically intended purpose. As an options trader, I’m looking to make steady, reliable gains without too much of a holding period. In order to make options trades, I use a tool that helps me do a few things:
1) It alerts me that a profitable trade may be on the horizon. That gives me time to prepare.
2) It tells me when I should think about getting out.
3) It lets me adjust my time horizon to craft a trade that fits my needs.
As I said before, I keep it very simple. I use a few basic versions of ONE simple tool to take advantage of sentiment and technical extremes on highly liquid ETFs.
With that said, I would like to share the most powerful technical indicator that I use in my proprietary model: the Relative Strength Index (RSI).
The RSI was developed by J. Welles Wilder, Jr. It is an overbought/oversold oscillator that compares the performance of an equity – in our case a highly liquid ETF – to itself over a period of time. It should not be confused with the term “relative strength,” which is the comparison of one entity’s performance to another.
How the Technical Indicator Works
RSI allows me to gauge the probability of a short- to intermediate-term reversal. This technical indicator does not tell me the exact entry or exit point, but it helps me to be aware that a reversal is on the horizon.
I love short-to-intermediate time frames for trades. It means I don’t have to lock up lots of capital for a long time to profit. I can put a trade on and often close it out within one to three weeks. That goes for winners and losers.
Knowing that a short-term top/bottom is near, I am able to increase the probability of a potential trade. Conversely, knowing that a reversal is on the horizon I am able to lock in profits on a trade.
I am a contrarian at heart. I prefer to fade an index – whether overbought or oversold – when the underlying index reaches a “very overbought/very oversold” state. Fading means to place a short-term trade in the opposite direction of the current short-term trend.
Of course, other factors must come into play before I decide to place a trade. But I know that in most cases, when an index reaches an extreme state a short-term reversal is imminent.
Here is the guideline for my “High-Probability Trades”:
- Very overbought – an RSI reading of greater than or equal to 85.0
- Overbought – greater than or equal to 75.0
- Neutral – between 30.0 and 75.0
- Oversold – less than or equal to 30.0
- Very oversold – less than or equal to 20.0
Since I’m looking for extreme conditions, I almost always focus only on very overbought and very oversold conditions. When an asset hits more neutral levels, that’s an indication to close the trade out.
I use three different RSI time frames. The shorter the duration of the RSI, the more I want to see an extreme reading. The time frames are RSI (2), (3) and (5) days.