Using the RMO to Avoid Calamity

Avoiding Calamity with the RMO THEOPTIONCLUB.COM

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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 © 2011 by TheOptionClub, LLC. MetaStock™ is a

Trade Mark of Equis Intl. PowerPoint template copyright ©

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Copyright Notice

THE “BUY AND HOLD” DILEMMA

"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 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

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

Source: Yahoo! Finance

Fidelity Magellan ‟00 – Apr. „11

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

Source: Yahoo! Finance

Today‟s Goal…

Identify a method

that allows us to… 1. Pursue stock market

appreciation while...

2. Avoiding significant

capital draw downs.

Today‟s 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.

Today‟s Agenda



corrections.




SPY Monthly Chart (Jan ‟93 – May ‟11)

Source: MetaStock

Copyright 2011 by

http://www.TheOptionClub.com

Today‟s Agenda



corrections.




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. RMO

2. SwingTrd2

3. SwingTrd3

4. 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

Source: MetaStock

SwingTrd2 (Swing Trade 2) is pink and

SwingTrd3 (Swing Trade 3) is purple.

These indicators reflect the long-term

and medium-term trends.

When SwingTrd2 and SwingTrd3 cross it

represents a change in the strength of

the trend.

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 medium-term trend (ST2) and the long-term trend (ST3).

• Depending upon the direction of the cross-over, 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.

Today‟s Agenda



corrections.




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 market’s 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

2008 Market Collapse

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, it’s not about trading the

SPY…

• It’s 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

• Trader’s Action Pack

– http://www.theoptionclub.com/metastock

http://www.theoptionclub.com/rmo

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Using the RMO to Avoid Calamity

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