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High ProbabilityPlays in aDirectional Market:Stick with Five Star SetupsWritten Danielle Shay with Simpler Trading Simpler Trading Austin, Texas (512) 266-8659 www.SimplerTrading.com
FINDING A FIVE STAR TRADEWhat is a Five Star trade? It’s a trading system in which five pieces of criteria are all true.Those five pieces, in and of themselves, are standalone trading setups with an edge. Sowhat happens when you combine multiple high probability setups? You have the mastersetup - my highest probability bet - The Five Star.High probability directional bets are my bread and butter. The key to identifying these, isto use technical analysis to first identify the direction of the overall tide, match this withunderlying fundamental analysis, and then identify directional moves on a specific index,sector, industry, or stock - before they take off.Identifying High Probability Directional BetsTo do this, I start by identifying the strongest and weakest sectors through a top-downanalysis process. This is done through a combination of:1. Fibonacci analysis and technical analysis on the primary sector charts2. Analysis of the four indexes3. Analysis of additional industries such as Chinese internet stocks, housing sector, etc.Once I notice a trend, I look for fundamental backing to hold up the technical picture.This method of analysis is applied to identify the strongest and weakest stocks. Therefore,allowing traders to focus in on those areas for their long and short positions. For example,I look for strong stocks within strong sectors, and weak stocks within weak sectors.Once I’ve found my marks, I jump on them - primarily through the options market, but Ialso employ this strategy for my long-term stock accounts as well.This method, the Five Star Setup, is the core of my analysis. It leads me to the gold at theend of the rainbow, the trades I call my “Five Star Trades.”Shifting Sectors Throughout TimeIn 2017, the financials, industrials, and technology stocks were my favorite. Throughout thebeginning of 2018, I shifted my strategy to trade more consumer discretionary, consumerstaples, and still - technology. Why? When the tide shifts, I change the area I’m looking at.I want to focus on the area that is trending and outperforming the overall market. In theoptions market, the best place to focus is the area that’s making greater than expectedmoves. By starting with top down, sector analysis, you’ll know where to focus.Page 2
TRADING WITH OPTIONSIn this market, opportunities are all around us, and it’s up to the individual trader to decidewhich space they want to partake in. You can select buy and hold moves in the stockmarket, make plays in various sectors through ETFs, trade short or longer term options onstocks you favor, or trade futures. Either way, learning how to make directional bets throughexpert technical analysis, starting with the overall tide, will allow you to profit in the market.Overall, I like making my bets through the options market. Why options?LeverageOptions provide me with adequate leverage that allows me to make substantial gains ondirectional plays - gains that far outpace gains I could receive if I just traded stock alone.When trading stock, you really need a substantial amount of money invested in a certainname before you can see returns, and those trades can take quite a while to generatereturns. The same isn’t true with me for options. I particularly favor lower priced names,where I can make an investment as low as 150 per contract. My typical trades generallycost me about 300-500 per contract. The low price barrier to entry point with optionstrading takes away the giant barrier to entry that comes with trading stocks.Time TableLike I mentioned before, investors wanting to build a stock portfolio should expect thatit’ll take time to see solid gains. With options, we’re able to place trades that work on ourpersonal time frames. If you want to day trade, you can! If you want to select trades that’lllast about a wee
market, make plays in various sectors through ETFs, trade short or longer term options on stocks you favor, or trade futures. Either way, learning how to make directional bets through expert technical analysis, starting with the overall tide, will allow you to profit in the market. Overall, I like making my bets through the options market.
