Trading by Numbers: Scoring Strategies for Every Market

In Trading by Numbers, they present a scoring system that uses a trend score and a volatility score, removing the guesswork and giving you a solid guide to the markets. Based on the score, the authors provide a toolkit of option strategies that are best to execute in each specific situation. Using common indicators and patterns, the book provides analysis for choosing your right strategy while managing risk.

Introduction:

The genesis of this book came from a very simple concept. We wanted to write a book that we wished was available when we started our trading careers. As hard as it may be to believe now, it wasn’t too long ago that a new trader pretty much had two choices for learning the markets: (1) Find an experienced trader who would let you shadow his every move or (2) open an account and hope you had equity left over after you learned all the painful and expensive lessons. Sure, there have always been the in-depth books that cover various trading topics in excellent detail, but most never seemed to have that practical edge—the kind of edge that takes the material from the realm of the academic to the realm of being real-life applicable.

Trading by Numbers is our attempt to provide the necessary depth for understanding the markets and strategies while still maintaining a level of practicality that allows you to try these strategies on your own tomorrow. We wanted to provide you with a user’s manual, rather than a reference book.

The material is presented in two main sections. The first four chapters lay out an approach to adding structure to your analysis. The two key market dimensions that every trader must understand are trend and volatility. Chapter 1 sets the stage for analyzing trend and volatility by examining the role of technical analysis. Chapter 2 discusses trends and how to quantify them for your trading decisions. We want to be clear that we’re not ascribing a level of precision that doesn’t exist in the markets. Rather, the goal of scoring is to help you remove emotion and opinion from the process so that you can take an honest look at what the market is trying to tell you. Chapter 3 follows with a structured, quantified approach to market and trade candidate volatility. The result of both chapters will be a two-dimensional score that will help you choose the appropriate strategy.

Chapter 4 is a stand-alone chapter discussing risk and how to manage it in an uncertain market. In our view, managing risk is perhaps the most important discipline you can master in the markets. For many traders, we recommend starting with Chapter 4 if you are not inclined to read a book through in sequence.

The second major grouping of the book begins with Chapter 5 and continues through to Chapter 16. Each of these chapters deals with a different strategy. We start with some of the simpler strategies such as covered calls in Chapter 6 and move on to more complex strategies like the iron condor in Chapter 16. While we generally have sequenced these according to complexity and the order in which many traders naturally learn them, you can start anywhere and jump around at will. If you already understand basic directional strategies, feel free to start with straddles and strangles in Chapter 8. The point is that each strategy mostly stands alone, so there’s no requirement to take them in the order presented. On the few occasions where we do reference other material, we include the chapter reference for you to easily review.

You’ll notice that we liberally apply stories to the strategies, especially in the introductions. Our style of teaching is to establish a common understanding of concepts from other life experiences and then draw the parallels to the trading strategy. While not perfect, we hope it better accomplishes our goal of making this text more usable. Finally, we want to thank our model (albeit fictitious) trader, Frank, for serving as the example of the strategies in action. By seeing examples of the strategy played out, we trust you’ll gain a better appreciation of when to use or forgo the various options available to you.

Contents:

• Market Scoring
• Trend Scoring
• Volatility Scoring
• Protecting Your Position
• Covered Calls
• Long Calls
• Long Puts
• Straddles and Strangles
• Debit Spreads
• Cash-Secured Puts
• Credit Spreads
• Horizontal Spreads
• Diagonal Spreads
• Index Options
• Butterfly Spreads
• Iron Condors

Trading by Numbers: Scoring Strategies for Every Market By Rick Swope, W. Shawn Howell pdf