You will learn a mechanical method of stock selection. The selection process for trading options differs quite a bit, from the method presented in the Trader's Manual "How To Pick Stocks That Go Up." You may decide that you will only add stocks to your "Selection List" when a market buy alert or sell alert is triggered. Alternatively, you might decide to trade in and out of the market leaders, and stay with them all the way to the top. In this event, you would only need to add a new stock when you close a position. However, should you be a very active trader, you may choose to update your list weekly. You will soon know which method will be best for you.

Market Timing

You will learn how to time the market, so that you will always trade with the trend. Most stocks move with the general market, so it is imperative that you know how to determine the trend. You must also know what time it is on the market clock. As a market ages it becomes increasingly overvalued; thus, much riskier.

At any time, there are three trends in operation simultaneously, short-term, intermediate-term, and long-term. In order to select the appropriate option contract, you must determine the time frame that you wish to trade. To assure that you will never be confused about the trend of any stock or market index, you will learn how to draw a proper trendline. (This is described in the "Trader's Manual," or in our free report "How To Draw A Proper Trendline.")

We attempt to enter trades just after the trend has changed, and we try to hold our positions for several months. If we have selected a security that advances quickly, the profits can be enormous. However, if you determine that the market is nearing a top, you shouldn't buy an option that expires three to six months, hence. Only pay for time value, when the situation warrants it.

Option prices react more quickly to news than the price of the underlying. When trading options you should think short-term, and this involves setting tighter trailing stops, because moves both up and down may be sudden.

The Trading System

The trading system that I have developed is based on moving averages, and you will learn how to confirm the Buy and Sell signals with technical indicators. You will also learn how to measure the risk involved in each trade, and you should never take a trade, unless it conforms to your particular comfort level.

The system is designed to give you Long Put and Call Buy Signals, just as the trend is reversing. You will trade the chart of the underlying security, and follow the option prices in your daily log.

System based position trading is the most profitable way to trade. When a signal is triggered, the TradeSmart System allows you to take a position, and hold it as long as the momentum remains strong.

How To Make Trading Easy

When the market timer gives you a Buy Alert, you should have a Selection List of the best stocks, and you must be ready to enter the market, just as it breaks out to the upside. You may wish to limit the number of stocks that you follow. By doing so, you will become very familiar with their chart patterns.

As I mentioned earlier, trading options successfully depends upon entering the market, when the volatility of the underlying security is low. This is also the point, when the option premium is the least expensive. Never purchase an option, unless the underlying security is demonstrating strong momentum. When you follow these concepts, I know that you will enjoy trading options.

Trading The Leaders

Once you have found the leaders, it is possible to trade options on only these stocks, and ignore the rest. This makes trading very easy; however, you must be able to find the leaders very early, and then pyramid your profits all the way to the top. To do this well, you must know exactly what constitutes a top, and exit while the underlying stock is still advancing. Study the Yahoo! trades in Chapter 15, to learn how this is done.

The leading stocks will have the best momentum, and while you are trading them, the system may give you Continuation Buy Signals, after short reactions. This will allow you the opportunity to purchase another option, extending the expiration date and your profit potential. As long as the momentum is strong, you should purchase another option. This technique allows you to stay with the leaders, all the way to the top. Very short-term options carry more risk, and lose time value faster, than options with several months to expiration. However, they can be profitable if you buy options that are either at-the-money or slightly in-the-money, as long as you don't pay too much for the time value.

I have had to learn some things the hard way, and I have lost money. You can benefit from my experience, which has taught me never to make live trades depending upon the advice of another. A stranger will never have the same interest in your capital as you do.

Most option traders lose. The TradeSmart Option Trading System detailed in the following chapters, will give you the ability and confidence that you will need to join the winning 10%. I strongly suggest that you paper trade the stocks on your Selection List, until you are absolutely convinced that this is a trading system that you can trust completely, and will follow without reservation. Don't put your capital at risk until you are sure that you are putting on the best trade.