The new Blue Line Trading System website is up and running. Please go to the home page and create your log-in and you will be able to access all Updates and manage your subscription. Subscribers will continue to get Updates & Alerts via email (although from the Bluelinetradingystem domain in place of the Fastmail).
The new structure will be more efficient and allow me to post updated charts, tables and videos, as well a special free blog that will include not only market related posts, but just about anything I want to get off of my chest, akin to the old AllAllan days where a lot of us first met.
"A good time will be had by all."
The New Option Profit-taking and Exit Strategy
This is probably the biggest and best adjustment we have ever made at Blue Line Trading, a/k/a AllanTrends. I rushed it out last week because those of us behind the scenes who were independently testing it were so impressed that we wanted to immediately start using it in our own trading. So I want to roll it out as soon as possible, even if it meant there would be a little confusion, since the coding for the trading tables had not been completely done.
The Why's and Wherefores
Our trend-signal line has been very good at getting into new trends, whether of short or intermediate or even longer term trends. Where it has faltered has been in getting us out of trades near maximum profits, and at times, with profits at all. The staggered profit taking formula was my first attempt to fix this gap, but that ended up leaving too much gain on the table, and when we had blockbuster gains, too little of the original position was still in the trade to take full advantage of those gains. This fixes that hole, and in a big way.
How Our Trailing Profit-Taking Stops Work
(1) Simply put, as the profit on the option trade rises, the stop trails the percentage gain; as that percentage gain increases, so does that stop.
(2) All trades start with a -50% hard stop, but as the trade starts to make money that stop decreases, quickly reaches break-even and then stays far enough behind the actual gain so as not to get prematurely stopped out.
(3) Once the percentage gain reaches a peak and starts to decline, the trailing stop halts its rise and stays put, waiting for the price to decline and trigger the exit.
Examples - from last week's trading
VZ call: Bought at 1.20 then rose all the way to a high of 5.70, a +307% gain. At that time, the trailing stop was at 4.28 (33% lower than peak profit). When the VZ call fell below 4.28, the stop was triggered and trade exited at 4.20. Net gain on the trade was +200%.
Note on the chart how as VZ rose after the Buy Signal and generated as much as a 307% gain on the calls. Instead of waiting for those gains to waste away, the trailing profit stop kicked in to protect a good part of those gains.
In the case of BABA, the calls were bought at 5.25 and ran up to 17.70. They then declined to their trailing stop level on this past Thursday's weakness and were exited at 13.25. The calls closed Friday at 11.15
We exit the trade with more profits than we would have had waiting for price to continuing declining to the trend line.
Obviously, the risk is that price reverses back up and continues going in the direction of the trade, in which case additional profits are left on the table.
The Trade Off
All of our extensive backtesting reveal much more profitable end results by the earlier trailing profit exits. The charts above illustrate the logic behind the new exit strategy, and the testing shows that much many profits are saved than are given up. Again, once more because it is so important: Many more profits are saved than are given up.
Trailing Stop Price Levels
The levels will be provided in the trading tables and updated as needed. The most recent tables will always be posted in the Updates and posted to the web site. In addition, by Monday morning the trade tables will auto-generate special Alerts which will be sent out via email and push notifications (not quite ready yet).
This has been a rather wordy explanation, but the exit strategy is very straightforward: As always, Blue Line will send you Buy & Sell signals. The trades will be monitored and followed up with Profit-Taking alerts in accordance with our trailing stop formula.
For the first time we will have a third trade status: Flat. This results in profits already being taken while awaiting a new trading signal. The good news is that it allows me to add a new model or two to keep the trades coming. What has been discovered is that older models that we discarded because we kept giving all the profits back waiting for a new signal, suddenly look very attractive because they had big profitable runs before running out of gas. Trailing stop profit-taking is perfect for these models, so expect to see them populate the tables in the days and weeks ahead.
*The trade tables currently track the options even though they have been stopped out. This has caused some confusion so we are working on redesigning the table to for better clarity that an option has been exited and no longer in play. Everything about the system is being coded for automatic operation, eliminating the introduction of human error into the equation (not that I've ever made a mistake).