Defined Opportunities:
Objective of the Discipline
With integrated risk controls, the objective of the Defined Opportunities Strategy is to take advantage of moderate Market moves in either direction after tests of dynamically identified support and resistance levels defined by management that occur over time, and then repeat the process within a structured proactive and regimented discipline so as to provide a reasonable investment alternative to traditional money management.
Description of the Strategy
The Defined Opportunities Strategy is a "Stick and Move" strategy designed to enable investors to realize positive results regardless of market direction, economic conditions, and without sacrificing time or lifestyle. Most importantly, it helps to remove the burden the Market imposes by providing a proactive investment alternative to traditional management.
The Defined Opportunities Strategy is a correlated market timing and stock selection strategy, which trades QID and QLD exclusively. This is a "Stick and Move" trading strategy, because we will not hesitate to take profits quickly according to rule. This strategy also mitigates risk with two-try parameters and market based stop loss mechanism to attempt to limit losses when our assessments do not work in our favor. The trades can be held for more than one day, but they could also be closed the same day if the Market satisfies our profit-taking rule within the same day too.
The Strategy is designed with the objective of simplicity with the understanding that less complicated strategies result in more nimble portfolios. With that, there are only three possible positions for this strategy: cash, QID, or QLD.
Using a predefined methodology based on our combined market analysis, and the rules listed below, the Defined Opportunities strategy is a process that reacts directly to tests of important support and/or resistance levels in the NASDAQ as they are defined by our management. We focus on the NASDAQ, and we could use either the Dow or the S&P 500 at our discretion, but only within the same scope of the rules outlined herein.
Although the strategy takes advantage of both up and down Market cycles, the trades suggested in this strategy are never actually short, and that makes this strategy suitable for IRAs so long as the client is deemed qualified and his risk tolerance matches the risk profile and expected volatility of the strategy. This strategy also allows some of us to appreciate the downside moves just as much as the upside moves in the Market. Within this strategy these opportunities are virtually the same, with the exception of a simple symbol change.
Of equal importance, the Defined Opportunities Strategy also weeds out the noise surrounding the Market every day, and allows every day to be approached in the same objective fashion, within our predefined rules. By distilling the noise, this strategy adopts qualities that give it the opportunity to be effective in any market environment.
Rules Associated With the Strategy
- Begin trading 5 minutes after the open.
- Expect to hold all trades overnight.
- Use the NASDAQ to guide all trading decisions.
- Use Technical Analysis to define entry levels.
- Trade QID and QLD exclusively.
- Use the same dollar amount for every trade.
- Do not use margin.
- Buy either when support is tested or when resistance breaks higher.
- Short either when resistance is tested or when support breaks lower.
- Buy signals tell us to buy QLD and target the next level of resistance.
- Short signals tell us to buy QID and target the next level of support.
- If ever 2% in gains are achievable, secure gains and go to cash.
- If gains are secured, we prepare for a new trade based on the rules.
- Use conditional market orders.
- Do not use stop losses. Instead sell when support or resistance breaks.
- If support breaks after being tested, sell QLD immediately.
- If resistance breaks after being tested sell QID immediately.
- Tests are official when the market comes within 3 points of support or resistance respectively.
- Balance Rule: If support or resistance levels break slightly after the 3-point rule is satisfied, sell immediately. Ex. 0.001 is a break.
- If the Market moves 5 points above or below a parameter after balance, initiate a second trade in the direction of that break. If the direction is up, a long position is implemented (QLD). If the direction is down, a short position is implemented (QID).
- If the Market reverses direction after establishing a second long or short according to the 5-point rule, and the reversal causes the Market to break that respective parameter again too, close that position and revert to cash if the break is equal to or greater than 1 point.
- Limit stops to two stops per parameter. This would occur if a second stop occurs after the 5- point rule has been satisfied.
- Stop trading around that parameter after 2 stops. Refrain from trading around that parameter again until another parameter is tested first or a new day begins.
- Never initiate trades in the middle of a channel.
- Only initiate trades when support or resistance levels are tested.
- If a position is open at the end of the day, hold it overnight.
Risk Controls and Assessments
The risk associated with the Defined Opportunities Strategy includes overnight risk. Given the added degree of risk associated with this strategy, an additional risk assessment is necessary too. The possibility of a surprise overnight event could affect the results of this strategy. If that surprise has a negative impact on the overnight position, a greater than expected loss could occur. In the event that a surprise causes the Market to move aggressively in the opposite direction of our overnight trade, we should be willing to take a larger than expected loss immediately as well. We should then revert to cash and re-engage the strategy based on the rules.
Additionally, the risk controls integrated into this strategy are not traditional stop losses, but they do serve a similar purpose. Instead of setting a stop loss, we know exactly where we will sell our position before we enter it based on Market levels instead, with the understanding the correlated ETFs we trade should move measurably in line with the Market, barring extraneous circumstances. This is part of our predefined rules.
Strictly, for every test of support or resistance, only two stops are allowed. The first is the stop from the initial test. Because we limit our entries to within three Market points of support or resistance, our first stop should be equivalent to approximately three Market points as well. The second stop is based on the 5-point rule and the associated 1-point break. Therefore, if we are stopped a second time our loss should be about six Market points accordingly. Therefore, because we limit the stops to two stops per test, we also limit our losses to approximately nine market points (NASDAQ). This may fluctuate from time to time given varying market conditions and volatility. For example, the Market may move faster than reasonably possible to achieve our ideal stop, therefore causing skew to our ideal risk control objective, but at no time changing the discipline. If two stops occur around a given parameter we draw the line, and consider that parameter ineffective for the time being. That parameter can be used again, but only after another support or resistance level has been tested first, or a new day has begun. Given occasional volatility, our losses can fluctuate slightly, but the process is also unyielding. Therefore, we will revert to cash and control our risk no matter what.
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