Traders forecast price behavior based on assumptions. We share how to find a model that helps you make sound decisions, using a price distribution model that differs from the regularly applied normal distribution.
To explain the statistical distribution of price happenings, most models, often due to the lack of better knowledge, push every behavior into a Bell curve distribution.
If price behavior is normally distributed, a simple strategy for making money would be to open positions around the 2-sigma (2-standard deviation) band around the actual average price and predict that prices stay in that range 95% of the time: collecting income with a probability of 95% to keep it.
Hence, we could sell two credit spreads (an iron condor) at the outer borders of the price range and collect 10 cents on each trade side of one-dollar spreads. If the statistic adds up, you would always make money long-term; however, let us calculate the case and see what reality tells us:
- To achieve a 10 cent premium income on the Put and Call side, 30 days to expiration, on a $1 spread, we need to move to a delta of 10 or ±0.10.
- The option delta ten tells us that the market maker statistics assume there is a 90% chance for the chosen strike price to sell that it comes in the money during the time to expiration.
Let us state the mathematical facts and calculate an expected return of this correlation using SPY, ETF of the S&P 500 Stock Market Index, for one contract, controlling 100 shares.
In the Event of Winning the Stock Options trade (selling an iron condor), your income per contract would consist of the following:
- Premium Collected: $20.00
- Commission Paid: $ 2.60 ($0.65 per leg)
- Net Income: $17.40
In the Event of Losing:
- Loss of the spread: $80.00 (spread – premium collected)
- Initial Commission: $ 2.60 ($0.65 per leg)
- Closing Commission: $ 1.30 (one leg)
- Slippage (1 cent): $ 1.00 (to close one leg)
- Net Loss: $84.90
Trade Expectation with probabilities:
- Winning: 90% * $17.40 = $15.66
- Losing: 10% * $84.90 = $ 8.48
- Expected Income: $ 7.81
On an Investment $82.60 an 8.7% ROC (return on capital) per month
Hence, you would trade for an average 8.7% return on capital per month. A simple calculation and strategy and you are profitable for the rest of your trading career; however, only under the condition that the price behavior of SPY follows a normal distribution.
Unfortunately, the actual price development of underlying assets is erratic and not normally distributed. Therefore, we distinguish three price happenings at the edge of upside and downside price moves and in the center of the price development.
Normal and Erratic Distribution Models Compared
Our schematic shows a considerable difference in actual price distribution (in color), which does not replicate the standard distribution model (blue in the background). Hence, predicting with an incorrect model leads to false conclusions and as such, making easy money in the stock market does not exist. However, you can create an edge as a retail trader by applying a different price distribution model and simple strategies.
The actual happening: When an asset is accumulated (bought), other market participants quickly notice and jump on the bandwagon, raising the demand and prices. Same on a sell-off. The crowd follows the leaders!
Take the following notes:
- Prices are erratically distributed, not normal, and you better operate with a system that considers this in its algorithms.
- Do not extrapolate past actions into the future. Instead, let your system conclude from the action of now, notifying you about underlying changes in supply and demand that might lead to directional solid price moves.
A natural model that follows the described would be the systemic reading: It predicts, based on specified pre-happenings, the potential and the expected magnitude of a price movement, comparable to predicting an earthquake based on seismic readings.
When overlaying the critical price action, of the center, on falling and rising prices with the normal price distribution model, we see that only about 68% of the price actions are coherent with the Bell Curve Model. When we now calculate our expected return, we come to the following conclusion:
- Winning: 68% * $17.40 = $11.83
- Losing: 32% * $84.90 = $27.13
- Expected Income: -$15.30
An Investment of $82.60 leads to -18.5 % expected ROC per month longer-term.
Our calculating is underlining why 76% of the retail traders lose money. If you use the wrong model to forecast, you will lose money long-term, even if you have close to 70% winning trades by trying to gauge the price distribution of assets.
So, what to do now?
Instead of assuming that you know with a high likelihood where the price distribution to the up and downside will be boxed-in, use a system that tells you when predictable price moves most likely will happen.
To replicate the actual happening in the financial markets, we built a high probability model with an attainment rate at or above 65% that considers the actual radical or erratic price distribution.
NeverLossTrading Price Move Model
Theory: Key asset holders will have a solid need to re-balance their inventories. Thus, at a particular price expansion, they will either float- or shorten supply, which will result in an opposite directional price move that will then take away from our profits. Knowing this, we pre-calculate how far the expected price move will reach, and there we take profit, assuming it will retrace or reverse after.
Hence, we let the market leaders appraise the asset price journey and latch on, entering and exiting positions faster than institutions.
Our brand name derives from the concept of repairing a trade instead of accepting a stop loss; however, Never Stop Loss Trading was a bit lengthy.
TradeColors.com is our introductory system to high probability trading. We always allow for upgrades; you only pay the difference if you start with TradeColors.com and upgrade after.
Many of our clients purchase more than one system: Our systems are productivity tools, and by combining them, you produce a higher participation rate and higher returns.
Please find here a PDF of our offering…click.
Our tool to calculate the expected price move is the SPU = Speed Unit, and it indicates how far a price move shall reach until it comes to an end.
With our systems, you can operate with conditional buy-stop and sell-stop OCO orders (one-cancels-the-other). Without the need to be in front of your computer for the orders to execute. You enter by price thresholds, ensuring that other market participants have the same directional assumption as you do and exit at the SPU target or adjust the trade at the stop.
By a change in the frequency and amplitude of the price movement over time, we specify indications to act on high probability price turning points, applying mechanical rules rather than leaving room for interpretation.
Takeaways
- Operate with a system that gives you a 65% or higher likelihood to forecast price movements at critical price turning points.
- Let your system extrapolate the price movement for where to take profit.
- Engage with a system-defined stop that is highly likely to bring the trade to target in the usual statistical price volatility.
Let us give some examples of how such a system can help you, using SPY, the ETF of the S&P 500 Index.
SPY Day Trading Chart
The above chart contains multiple NLT Indicators that spell out price thresholds based on different assumptions:
- Buy >, Sell <, Buy_SPU, Sell_SPU, Buy_T, Sell_T, at key price turning points
- Buy_C >, Sell_C <, at trend continuation points
You initiate a trade when the price threshold is surpassed in the price movement of the next candle, allowing you to place buy-stop or sell-stop orders or longer-term conditional orders.
The dots on the chart spell out the target, which forecasts the exit point of the trade, in 1-5 candles, and we explain further in the following example.
To make your day trading actions less predictable for other market participants, we use the NLT Timeless concept to construct a pure price-based chart that keeps risk and reward in a proper relationship.
Our indicators definitively work on time-based charts for every asset, time, and tick situation: The NLT Timeless Concept is our most recent development for helping traders make sound trading decisions repetitively for day trades and longer-term investments.
SPY Daily Chart, December 20 to January 14, 2022
Chart Analysis
Situation-1: We have several trading opportunities in this situation:
- Buy_T> 463.21 on 12/21/2021, which was confirmed on December 22, and a long position to Target-1 was initiated.
- At the end of December 22, another signal was added: Buy> 467.81 (Floating) and allowed the target to be moved to Target-2.
- On December 27, Target-2 was reached, and the trade closed. By our rules, we do not initiate further transactions at the exit level without seeing a pullback and neglect additional signals printed.
Situation-2: Three NLT signals indicate a short trade potential at the end of the day, January 5, 2022:
- In the price movement of January 6, 2022, the price threshold of $468.28 was surpassed, and a short position opened.
- On January 6, a Floating signal was added. The price development of the day did not reach Target-1 and allowed to move the trade’s exit to Target-2. If you trade out of an IRA account, shorting the stock is not permitted, then we share methods of options trading that you can follow the downwards price movement of the share.
Situation-3:
- The signal, Buy_T> 469.85, indicated a potential price turning point; however, the target was limited by an NLT Box Line, and we only trade those signals at breakouts of the box.
- The signal, Buy > 473.20, was not confirmed by the price movement of the next day not reaching the buy-threshold.
- The signal Sell < 463.44 led to a trade that remains open when writing this article, and even if it would be a losing trade, we would still stay in the expected 65% range of winning. Please also consider that the first two trades added a higher income by trading for Target-2. Adding all this up spells out a positive expectation of the model and indicator.
During writing this publication, the last trade on SPY was still open; the price development of January 18 quickly validated the set direction, and the market dropped and reached the set target. Please see the following chart, showing how quickly erratic price moves can go and with the suitable model on hand you can follow.
SPY Daily Chart, December 20 to January 18, 2022
Another sell signal was printed at the exit candle (Target-1); however, we do not enter at an exit candle but always find other opportunities to participate in a trade. You recognize, there are rules to learn, and we teach those one-on-one in our mentorships where we tailor our program to your wants and needs, covering multiple topics you need to master to trade the markets. We put them together in the following summary graphic:
Crucial Trading Success Factors
Conclusion:
- Trade with a high probability system gives you mechanical rules for trade entry, exit, stop, or adjustment.
- Have a business plan for trading that you stick to, containing an action plan (when and how to trade, when not) and a financial plan (assets, timeframes, return opportunities and the financial goal).
- Analyze the situation well and take fewer and high quality/high probability trades only.
In our mentorships, we help you to have all this in place. Please take a look at the overview of what we want to share with you when you are working with us:
NeverLossTrading Mentorship Program Elements
With the help of our systems, we help retail traders to decide at trade entry for the five significant challenges they face to prevent the common mistakes often made:
- Trade entry decisions (when to trade)
- Exit decisions (where to take profit)
- Stops (where to place them)
- Maximum time in a trade (specified by the signal)
- Risk to reward (only trade at favorable setups)
Make a difference and come on board to high probability trading; we are happy to find out in a private session which of our systems and mentorship suit you best.
contact@NeverLossTrading.com Subj.: Demo.
We are happy to hear back from you,
Thomas Barmann (inventor and founder of NeverLossTrading)
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