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Trading Strategy

· 12 min read
Femi Adigun
Femi Adigun
Senior Software Engineer & Coach

Table of Contents​

  1. Core Strategy Overview
  2. 30-Minute Bias Determination
  3. Fibonacci Retracement Levels
  4. Entry and Exit Rules
  5. Risk Management
  6. Do's and Don'ts
  7. Industry Best Practices
  8. Common Mistakes and How to Avoid Them
  9. Volume Analysis
  10. Alternative Trend Confirmation Methods
  11. Psychology and Discipline
  12. Advanced Techniques

Core Strategy Overview​

The System​

This strategy combines intraday trend analysis with Fibonacci retracement levels to identify high-probability options trading opportunities on SPY using 5-minute charts.

Key Components​

  • Daily Bias Determination: First 30 minutes (two 15-minute candles)
  • Fibonacci Levels: 23.6%, 38.2%, 50%, 61.8%, 78.6% retracements
  • Primary Signals: 78.6% (CALL entries) and 23.6% (PUT entries/CALL exits)
  • Risk Management: Trend confirmation and position sizing

30-Minute Bias Determination​

Morning Analysis (9:30-10:00 AM)​

Examine the first two 15-minute candles:

CALL Day Criteria​

  • Both candles are green (bullish)
  • Strong opening momentum upward
  • Price trading above opening level
  • Bullish engulfing patterns

PUT Day Criteria​

  • Both candles are red (bearish)
  • Strong opening momentum downward
  • Price trading below opening level
  • Bearish engulfing patterns

Neutral/Choppy Day​

  • Mixed candle colors
  • Small body candles with long wicks
  • Price oscillating around opening level
  • Action: Reduce position sizes or avoid trading

Bias Confirmation​

  • Volume: Higher volume validates the bias
  • Gap Behavior: Gaps filling or extending support the bias
  • Pre-market Action: Overnight movement alignment

Fibonacci Retracement Levels​

Daily Range Calculation​

  • High: Highest point of the current trading day
  • Low: Lowest point of the current trading day
  • Range: Daily High - Daily Low

Key Levels and Their Significance​

78.6% Retracement (Blue Line)​

  • Primary CALL Entry Zone
  • Strong statistical support level
  • Institutional buying often occurs here
  • Signal: Price crosses below = BUY CALLS

61.8% Retracement (Green Line)​

  • Secondary support/resistance
  • Golden ratio level
  • Often acts as a pause zone

50% Retracement (Yellow Line)​

  • Psychological level
  • Common retracement depth
  • Decision point for trend continuation

38.2% Retracement (Light Red Line)​

  • Early resistance level
  • First Fibonacci resistance
  • Watch for rejections

23.6% Retracement (Red Line)​

  • Primary PUT Entry Zone
  • Strong resistance level
  • Signal: Price crosses above = SELL CALLS/BUY PUTS

Entry and Exit Rules​

CALL Entries​

Primary Signal: Price touches or crosses below 78.6% level

Entry Criteria​

  • Price reaches 78.6% retracement
  • Preferably on a CALL day (bullish bias)
  • Volume confirmation (higher than average)
    • RSI showing oversold conditions (<30)

Position Sizing​

  • WITH trend bias: Full position (1-3% of account)
  • AGAINST trend bias: Half position (0.5-1.5% of account)

PUT Entries​

Primary Signal: Price touches or crosses above 23.6% level

Entry Criteria​

  • Price reaches 23.6% retracement
  • Preferably on a PUT day (bearish bias)
  • Volume confirmation (higher than average)
  • RSI showing overbought conditions (>70)

Exit Strategies​

Profit Targets​

  • Conservative: 25-50% profit
  • Aggressive: 100-200% profit
  • Swing: Hold until opposite Fibonacci level

Stop Losses​

  • Time-based: Exit by 3:30 PM if no movement
  • Price-based: Exit if price moves 0.5% against position
  • Fibonacci-based: Exit if price breaks next Fibonacci level

Emergency Exits​

  • Exit immediately if daily bias changes dramatically
  • Exit if volume spikes against your position
  • Exit if major news breaks

Risk Management​

Position Sizing Rules​

  • Maximum risk per trade: 1-3% of total account
  • Daily maximum risk: 5% of total account
  • Weekly maximum risk: 10% of total account

Portfolio Protection​

  • Never risk more than you can afford to lose
  • Diversify expiration dates (don't put all trades in same week)
  • Limit number of concurrent positions (maximum 3-5 positions)

Options-Specific Risk Management​

  • Avoid trading options with less than 7 days to expiration
    • Choose options with adequate liquidity (bid-ask spread <$0.10)
  • Monitor theta decay especially on longer holds
  • Be aware of upcoming earnings or FOMC meetings

Do's and Don'ts​

✅ DO's​

Strategy Execution​

  • DO wait for clear Fibonacci level touches
  • DO confirm with volume when possible
  • DO respect the 30-minute bias for position sizing
  • DO use the alert system to avoid emotional decisions
  • DO keep detailed trade logs with entry/exit reasons
  • DO practice proper position sizing
  • DO have predetermined exit strategies before entering

Risk Management​

  • DO cut losses quickly when wrong
  • DO take profits when targets are met
  • DO respect daily and weekly loss limits
  • DO trade smaller when bias conflicts with Fibonacci signals
  • DO monitor economic calendar for high-impact events

Discipline​

  • DO stick to your predetermined rules
  • DO review trades weekly for improvement opportunities
  • DO maintain consistent trading hours
  • DO take breaks after significant losses

❌ DON'Ts​

Strategy Violations​

  • DON'T chase price away from Fibonacci levels
  • DON'T ignore the 30-minute bias completely
  • DON'T trade without volume confirmation on major moves
  • DON'T overtrade when signals are unclear
  • DON'T modify stop losses to avoid taking losses

Options-Specific Don'ts​

  • DON'T buy options with less than 7 days to expiration
  • DON'T hold options through earnings without planning
  • DON'T ignore bid-ask spreads (avoid wide spreads)
  • DON'T buy far out-of-the-money options hoping for lottery tickets

Risk Management Violations​

  • DON'T risk more than 3% per trade
  • DON'T add to losing positions (no averaging down)
  • DON'T trade when emotionally compromised
  • DON'T ignore predetermined stop losses
  • DON'T trade during major news events without experience

Psychological Pitfalls​

  • DON'T revenge trade after losses
  • DON'T get overconfident after winning streaks
  • DON'T change strategy mid-trade
  • DON'T trade to recover losses quickly

Industry Best Practices​

Professional Trading Standards​

  1. Always have a plan before entering any trade
  2. Risk management is more important than being right
  3. Consistency beats home runs
  4. Keep detailed records of all trades
  5. Continuously educate yourself on market conditions

Options Trading Best Practices​

  1. Understand Greeks (Delta, Gamma, Theta, Vega)
  2. Trade liquid options with tight bid-ask spreads
  3. Be aware of upcoming events that affect volatility
  4. Don't fight time decay unnecessarily
  5. Consider implied volatility when entering positions

Technical Analysis Standards​

  1. Multiple timeframe analysis (use higher timeframes for context)
  2. Volume confirmation on breakouts and reversals
  3. Support and resistance respect market structure
  4. Trend following is statistically more profitable than counter-trend
  5. Wait for confirmation rather than predicting

Risk Management Industry Standards​

  1. 2% rule: Never risk more than 2% of account on single trade
  2. 6% rule: Stop trading if you lose 6% in a day
  3. Position sizing: Base on account size, not emotions
  4. Diversification: Don't put all capital in one strategy
  5. Regular review: Analyze performance monthly

Common Mistakes and How to Avoid Them​

Mistake 1: Ignoring Volume​

Problem: Taking signals without volume confirmation Solution: Always check volume on major moves; high volume validates signals

Mistake 2: Fighting the Fibonacci Levels​

Problem: Holding positions that go against key levels Solution: Respect 78.6% and 23.6% levels as decision points

Mistake 3: Overleveraging​

Problem: Risking too much per trade or trading too many contracts Solution: Stick to 1-3% risk per trade regardless of confidence level

Mistake 4: Emotional Trading​

Problem: Making decisions based on fear or greed Solution: Use alerts and predetermined rules; step away when emotional

Mistake 5: Ignoring Time Decay​

Problem: Holding options too long without price movement Solution: Set time-based exits; don't hold stagnant positions

Mistake 6: Chasing Entries​

Problem: Entering trades after price has moved away from Fibonacci levels Solution: Wait for the next setup; missing a trade is better than a bad entry

Mistake 7: No Exit Strategy​

Problem: Entering trades without knowing when to exit Solution: Define profit targets and stop losses before entering

Volume Analysis​

Setting Up Volume in ThinkOrSwim​

  1. Right-click chart → Studies → Add Study
  2. Search for "Volume" and add it
  3. Add "Volume SMA" (20-period) for context

Volume Interpretation​

High Volume Signals:

  • Volume 2x above 20-period average
  • Validates price moves and breakouts
  • Institutional participation

Low Volume Signals:

  • Volume below 20-period average
  • Weak moves likely to reverse
  • Lack of institutional interest

Volume at Key Levels:

  • High volume at 78.6% = Strong support, bounce likely
  • Low volume at 78.6% = Weak support, could break
  • High volume at 23.6% = Strong resistance, reversal likely
  • Low volume at 23.6% = Weak resistance, could break through

Alternative Trend Confirmation Methods​

Opening Range Breakout (ORB)​

Setup: Mark first 30-60 minutes high/low range

  • Bullish: Break above opening range high
  • Bearish: Break below opening range low
  • Use with: Combine with 30-minute bias for confirmation

Pre-Market Analysis​

Factors to Consider:

  • Overnight futures movement
  • Gap up/down at market open
  • Pre-market volume and direction
  • Key level breaks overnight

First Hour Momentum​

Method: Count green vs red candles in first hour

  • 3-4 green candles = Strong bullish bias
  • 3-4 red candles = Strong bearish bias
  • Mixed candles = Choppy, reduce position sizes

Market Internals​

Key Indicators:

  • TICK (upticks vs downticks)
  • TRIN (Arms Index)
  • VIX (volatility index)
  • Sector rotation patterns

Psychology and Discipline​

Mental Framework​

  1. Accept that losses are part of trading
  2. Focus on process, not outcomes
  3. Consistency is more important than being right
  4. Emotional decisions are usually wrong decisions

Daily Routine​

Pre-Market (8:30-9:30 AM):

  • Review overnight news and futures
  • Mark key levels and Fibonacci retracements
  • Set alerts for entry points
  • Review economic calendar

Trading Hours (9:30 AM-4:00 PM):

  • Execute predetermined plan
  • Monitor positions without overanalyzing
  • Take notes on market behavior
  • Stick to risk management rules

Post-Market (4:00-5:00 PM):

  • Review all trades taken
  • Update trade journal
  • Analyze what worked and what didn't
  • Plan for next trading day

Dealing with Losses​

  1. Accept the loss quickly
  2. Analyze what went wrong objectively
  3. Don't try to "get even" immediately
  4. Take a break if needed
  5. Return to systematic trading

Managing Winning Streaks​

  1. Don't increase position sizes dramatically
  2. Continue following the same rules that created success
  3. Take some profits off the table
  4. Stay humble and focused
  5. Remember that losing streaks will come

Advanced Techniques​

Multi-Timeframe Analysis​

Higher Timeframe Context:

  • Use 15-minute charts for broader trend
  • Use 1-hour charts for major support/resistance
  • Use daily charts for overall market direction

Fibonacci Extensions​

Beyond Retracements:

  • 127.2% extension for profit targets
  • 161.8% extension for major moves
  • Use when price breaks key retracement levels

Options Greeks Management​

Delta: Measure of price sensitivity

  • Higher delta = More responsive to price moves
  • Lower delta = Less responsive, cheaper options

Theta: Time decay

  • Avoid high theta options close to expiration
  • Factor in weekends and holidays

Vega: Volatility sensitivity

  • High vega = More affected by volatility changes
  • Low vega = Less affected by volatility

Advanced Entry Techniques​

Scaling In:

  • Enter 50% position at first Fibonacci touch
  • Add remaining 50% on confirmation

Layered Entries:

  • Multiple small entries around Fibonacci levels
  • Average better entry price

Market Regime Awareness​

Trending Markets:

  • Fibonacci retracements work better
  • Trend-following strategies excel
  • Breakouts more reliable

Range-Bound Markets:

  • Mean reversion strategies work better
  • Support and resistance more reliable
  • Breakouts often fail

High Volatility Markets:

  • Wider stops needed
  • Smaller position sizes
  • More frequent whipsaws

Economic Calendar Integration​

High-Impact Events:

  • FOMC meetings and announcements
  • Non-farm payrolls
  • CPI/inflation data
  • GDP releases

Event Trading Strategy:

  • Avoid trading 30 minutes before/after major announcements
  • Reduce position sizes on event days
  • Have predetermined exit plan for unexpected news

Final Checklist​

Before Every Trade​

  • 30-minute bias determined
  • Fibonacci levels clearly marked
  • Volume analysis completed
  • Risk amount predetermined (1-3% of account)
  • Exit strategy defined
  • Economic calendar checked
  • Alerts set for key levels

During the Trade​

  • Monitor volume for confirmation
  • Stick to predetermined exit rules
  • Avoid emotional decisions
  • Don't modify stops to avoid losses
  • Take notes on market behavior

After Every Trade​

  • Record entry/exit in trade journal
  • Analyze what worked/didn't work
  • Calculate actual risk/reward
  • Update running P&L
  • Plan improvements for next trade

Emergency Procedures​

If Technology Fails​

  1. Have backup platform ready
  2. Know how to exit positions by phone
  3. Keep broker phone number accessible
  4. Have mobile trading app installed

If Account Hits Daily Loss Limit​

  1. Stop trading immediately
  2. Close all open positions
  3. Analyze what went wrong
  4. Don't trade again until next day
  5. Review and adjust strategy if needed

If Market Conditions Change Dramatically​

  1. Exit all positions quickly
  2. Wait for conditions to stabilize
  3. Reassess market regime
  4. Adjust strategy accordingly
  5. Start with smaller positions when resuming

Success Metrics​

Daily Metrics​

  • Win rate (aim for >50%)
  • Average win vs average loss (aim for 1.5:1 or better)
  • Maximum drawdown (keep under 5% daily)
  • Number of trades (quality over quantity)

Weekly/Monthly Metrics​

  • Overall profitability
  • Sharpe ratio (risk-adjusted returns)
  • Maximum consecutive losses
  • Strategy adherence rate

Continuous Improvement​

  • Monthly strategy review
  • Identify patterns in losses
  • Refine entry/exit criteria
  • Adapt to changing market conditions
  • Stay educated on market developments

Remember: This strategy is a framework for disciplined trading. Market conditions change, and adaptation is key to long-term success. Always prioritize risk management over profit maximization.