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Avoiding Calamity with the RMO

THEOPTIONCLUB.COM

DISCLAIMER
This presentation is offered for general educational purposes and therefore should not be considered complete, precise, or current. Many of the matters discussed are subject to detailed rules, regulations, and statutory provisions which should be referred to for additional detail and are subject to changes that may not be reflected in this presentation. No statement made during this presentation should be considered a recommendation to buy or sell a security or to provide investment advice. Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (ODD). Copies of the ODD are available from your broker, by calling 1-888OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. This presentation is subject to the same Terms and Conditions governing the use of our website (http://www.theoptionclub.com/terms_of_service.php) and your continued viewing of this presentation will be deemed acceptance of those Terms and Conditions.

DISCLAIMER
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY.

Copyright Notice
Copyright 2011 by TheOptionClub, LLC. MetaStock is a Trade Mark of Equis Intl. PowerPoint template copyright Crystal Graphics, Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of TheOptionClub, LLC. The information contained herein may be changed without prior notice. Product names used in this presentation are for identification purposes only and may be trademarks of their respective companies. Data contained in this presentation is for informational and demonstration purposes only.

"The genius of investing is recognizing the direction of a trend not catching highs and lows." - John Bogle, the founder of The Vanguard Group
Source: http://financialedge.investopedia.com

THE BUY AND HOLD DILEMMA

The Problem
Volatile equity markets have been eroding investors capital and their confidence with successive market downturns. Traditional safe havens have either themselves seen downturns (e.g., real estate), become subject of rampant speculation (e.g., gold), or offer little return (e.g., Bank CD accounts).

SPY Jan 2000 Apr 25th 11

Source: Yahoo! Finance


Copyright 2011 by http://www.TheOptionClub.com

SPY Jan 2000 Apr 25th 11

Source: Yahoo! Finance


Copyright 2011 by http://www.TheOptionClub.com

SPY Jan 2000 Apr 25th 11

Source: Yahoo! Finance


Copyright 2011 by http://www.TheOptionClub.com

Fidelity Magellan 00 Apr. 11

Source: Yahoo! Finance

Copyright 2011 by http://www.TheOptionClub.com

Todays Goal
Identify a method that allows us to
1. Pursue stock market appreciation while... 2. Avoiding significant capital draw downs.

Todays Agenda
The nature of trend following. Review of recent bear markets and market corrections. Overview of the Rahul Mohindar Oscillator (RMO) trading system. Use of the RMO to protect capital.

Todays Agenda
The nature of trend following. Review of recent bear markets and market corrections. Overview of the Rahul Mohindar Oscillator (RMO) trading system. Use of the RMO to protect capital.

Trend Trading
The objective of Trend Trading is to adopt a directional position in the market, consistent with the prevailing trend. Trends can last months, even years. A trader wants to enter the primary trend at a point of relative safety, then ride it for as long as is practical.

Nature of Trend Following


Trend following does not call the tops or bottoms of a trend. A disciplined trend follower will generally capture most of the trend, but not all of it. Trend following works in bullishly trending markets. Trend following works in bearishly trending markets.

Nature of Trend Following


Often, trend following does NOT work well during market consolidations.
You may get successive buy and sell signals within a short time frame You experience whipsaws.

The RMO system is a trend following system.

Todays Agenda
The nature of trend following. Review of recent bear markets and market corrections. Overview of the Rahul Mohindar Oscillator (RMO) trading system. Use of the RMO to protect capital.

SPY Monthly Chart


(Jan 93 May 11)

Source: MetaStock

Copyright 2011 by http://www.TheOptionClub.com

SPY Monthly Chart


(Jan 93 May 11)

Source: MetaStock

Copyright 2011 by http://www.TheOptionClub.com

SPY Monthly Chart


(Jan 93 May 11)

Source: MetaStock

Copyright 2011 by http://www.TheOptionClub.com

SPY Monthly Chart


(Jan 93 May 11)

Source: MetaStock

Copyright 2011 by http://www.TheOptionClub.com

SPY Monthly Chart


(Jan 93 May 11)

Source: MetaStock

Copyright 2011 by http://www.TheOptionClub.com

SPY Monthly Chart


(Jan 93 May 11)

Source: MetaStock

Copyright 2011 by http://www.TheOptionClub.com

SPY Monthly Chart


(Jan 93 May 11)

Source: MetaStock

Copyright 2011 by http://www.TheOptionClub.com

SPY Monthly Chart


(Jan 93 May 11)

Source: MetaStock

Copyright 2011 by http://www.TheOptionClub.com

SPY Monthly Chart


(Jan 93 May 11)

Source: MetaStock

Copyright 2011 by http://www.TheOptionClub.com

Todays Agenda
The nature of trend following. Review of recent bear markets and market corrections. Overview of the Rahul Mohindar Oscillator (RMO) trading system. Use of the RMO to protect capital.

Rahul Mohindar
RMO = Rahul Mohindar Oscillator
Rahul Mohindar is a well-known trader in India and a featured commentator on CNBC and CNN in India. Equis acquired rights to the RMO and it is now included as one of the standard systems that is included with MetaStock.

What is the RMO?


4 Indicators comprise the trading strategy.
1. 2. 3. 4. RMO SwingTrd2 SwingTrd3 EXIT Swing Signal

One expert advisor One template.

RMO Template

Source: MetaStock

RMO

Source: MetaStock

RMO
Above Zero Line = Permission to take Bullish Trades.

Below Zero Line = Permission to take Bullish Trades.


Source: MetaStock

SwingTrd2 & SwingTrd3

When SwingTrd2reflect the long-term it These indicators Trade 2) is pink and SwingTrd2 (Swingand SwingTrd3 cross represents a change in the strength of and medium-term Trade SwingTrd3 (Swing trends.3) is purple. the trend.
Source: MetaStock

RMO Template

Source: MetaStock

RMO Template

Source: MetaStock

Trading System Rules


The RMO can be used in many ways, including as a stand alone indicator. The RMO may be used on any underlying security and in any time frame. The rule-set portrayed is based upon those rules published by Equis, Intl., and is intended for use with daily, or perhaps weekly, charts.

Rule 1 - Identify Primary Trend


If the RMO is above the zero line it is in a bullish zone. If in a bullish zone, you want to avoid short positions and look for long positions. If below the zero line, the RMO is in a bearish zone and you want to avoid long positions and look for short positions. This rule keeps you trading in a direction that is consistent with the prevailing trend. It is NOT a trigger.

Rule 2 - Intermediate Trend


SwingTrd2 (Pink) looks at a medium-term trend. When ST2 is above zero it is in a bullish zone (blue bars) and we would be looking for bullish opportunities. When ST2 is below zero we are in a bearish zone (red bars) and would be looking for opportunities to sell. We need both the RMO and ST2 to coincide.

Rule 3 - The Entry Point


Swing Trade 3 (purple) is a long-term trend measurement. We are looking for a cross of the mediumterm trend (ST2) and the long-term trend (ST3). Depending upon the direction of the crossover, we get a bullish or bearish entry signal, i.e., Blue or Red arrows. The signal is only good if Rule 1 and 2 are satisfied.

Rules Simplified Bullish Trade


RMO above zero. (Green Ribbon) Blue bars. Blue buy arrow. These criteria do not need to occur in the same bar.

Rules Simplified Bear Trade


RMO below zero. (Red Ribbon) Red bars. Red sell arrow. These criteria do not need to occur in the same bar.

Example Alert (Fri., Oct 1st)

ST2 just crossed above ST3. Buy above the high of the current bar.

Source: MetaStock

Trade Entry
Bullish Trade Set-up
Enter on the next bar after all three rules are satisfied. The entry is made one tick above the prior bar's high.

Bearish Trade Set-up


Enter on the next bar after all three rules are satisfied. The entry is made one tick below the prior bar's low.

EPB Trade Setup

Source: MetaStock

Setting A Stop Loss


You must use a stop-loss, even when trading options. The recommended stop-loss is placed right below the low of the lower
prior day's bar or the low of the day preceding that.

Alternatively, you can use a support level.

Trade Management
If you get a arrow in the opposite direction, check your trends
Rule Of Thumb: If both the primary and intermediate-term trends remain consistent with your trade, stay in it.

If you get a second trigger signal in the direction of your trade, do not add to the position. Instead, move your stop higher or take other action to protect your gains.

Todays Agenda
The nature of trend following. Review of recent bear markets and market corrections. Overview of the Rahul Mohindar Oscillator (RMO) trading system. Use of the RMO to protect capital.

Underlying Philosophy
The vast majority of stocks will follow the primary trend of the broad market. An investor and/or trader will have the greatest probability of success when trading with the broad market trend. So, what if we use the RMO to identify the broad markets primary trend and avoid trading against that trend?

Applying the RMO


We will use the SPDR S&P 500 ETF (SPY) as a broad market proxy.
Note: We are NOT trading the SPY, we are using it as a barometer for broad market conditions.

If the primary trend of the SPY is bullish we have a green light in our portfolio to get long stocks. If the primary trend of the SPY is bearish we must exit or protect our long stock positions.

July-August 11 Sell-Off

Source: MetaStock

July-August 11 Sell-Off

Source: MetaStock

July-August 11 Sell-Off

Source: MetaStock

July-August 11 Sell-Off

Source: MetaStock

July-August 11 Sell-Off

Source: MetaStock

July-August 11 Sell-Off

Source: MetaStock

July-August 11 Sell-Off

Source: MetaStock

2008 Market Collapse

Source: MetaStock

2008 Market Collapse

Source: MetaStock

2008 Market Collapse

Source: MetaStock

Shifting Time Periods and Reducing Whip Saws

Source: MetaStock

Shifting Time Periods and Reducing Whip Saws

Source: MetaStock

Shifting Time Periods and Reducing Whip Saws

Source: MetaStock

But, Protect How?


Tighten Stops Buy Puts Sell Calls Collars Apply Hedges

Offense or Defense?
Remember, its not about trading the SPY Its about identifying when to play offense and when to get on defense. When the primary trend of the broad market is bullish Play Offense! When the primary trend of the broad market is bearish Get on Defense!

Special Links
Learn to Trade the RMO with Options:
http://www.theoptionclub.com/rmo

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http://www.theoptionclub.com/metastock

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