Riding the Market

Heather Cullen

Heather Cullen

In The Money

Heather Cullen Blog Riding the market

Riding The market

We all ride the same market – but we have very different results. Research shows that between 70% and 90% of traders lose money – you have to wonder: why do we do it?

In his book, Best Loser Wins, Tom Hougaard, has some fascinating statistics. He cites a study of 25,000 people who traded currencies daily, and over 15 months they executed 43 million trades – a very decent sample size! They found that 62% of the trades made a profit, which is a good hit rate. So, these traders made money, right?

No, unfortunately. Why not? Because when they won, they made an average of 43 pips. When they lost they lost an average of 83 pips, twice as much. You don’t have to be a mathematician to work out that they are not going to last very long.

Heather Cullen Blog Broker Failure Rate

Which brings me to the ITM strategy. What it is doing is not catching every wave and riding it from beginning to end. The only way you can do that is in hindsight, which is how I think a lot of trading books are written! Instead, it is getting into relatively safe trades, and getting out before any large moves down.

Flipping the Switch

I have been thinking about and testing new strategies – one that was a spectacular failure was ‘flipping the switch’. My reasoning was that after getting out of a bull trade, why not ‘flip the switch’ and enter a bear trade. After all, if you are not bullish doesn’t that mean you are bearish?

Actually, no. Not a good idea.

There is a time for sitting on the sidelines, as the results of this proved. Using various parameters for the SMAs, I examined the results: all were bad. 

Heather Cullen Blog 10 50 SMA

Here’s the results for the last 10 years for the commonly used 10/50 SMA.

You can see that using the bull strategy, even though you made more losses than gains, you would still win overall because your wins were double your losses. But adding in the bear traders was disastrous: although you made slightly more on a winning trade your percentage of winning trades was very small – you would crash your account quite swiftly.

And here are our results using the 10/200 ITM strategy:


You can see that although we had an equal number of wins and losses because the size of our wins is 5 times bigger than our losses then it wins overall. And this is without leverage.

Heather Cullen Blog 10 200 SMA

Choosing your options

A few posts ago we looked at  why options were expensive, and concluded that it was the effect of interest rates, not volatility. It makes selecting suitable options for the ITM strategy more difficult, but let’s have a look.

We can see that getting an effective price less than 1% above the current price is difficult if we are looking a year out. Buying an option with a closer expiry is a solution, the only real downside being that you will have to roll out more often. There are several January 24 options that work, with 50 – 60% leverage some February, with 50 – 58% leverage and one in March with 50% leverage.

Of course, you have to consider whether it is a good time to get into the market. Let’s review the charts.

SPY Chart

The morning star from last week didn’t work out – as is the way of many candlestick patterns. I am sure that authors who write about predicting the market using candlesticks with perfect accuracy are definitely using hindsight!

Heather Cullen Blog SPY Chart

Last week was dismal, and our SMAs looked as though they were going to cross – but on Friday we had a lovely big green cancel on relatively high volume which was encouraging. I was hoping for a better week this week – but the news out of the middle east is worrying.

Anyway, now we don’t have to worry about support at the $416 level, as it is now below our 200 SMA and we will have had a death cross before we get there.

SPYG Chart

A similar candlestick pattern to SPY, with the morning star failing – but the good thing was that it didn’t trade much lower than last week, seeming to find support at the $59 level. Another encouraging sign was the fact that Friday’s candle took SPYG back up to where it gapped down.

Heather Cullen Blog SPYG Chart

I have drawn in a green dashed rectangle, showing the gap. Traders watch gaps closely. If the gap is closed next week then that will be a bullish sign, alternatively if it treats the gap as a resistance then it is bearish. Definitely been in consolidation for three weeks now.

Why is SPYG not as dismal as SPY? Well, all will be explained when we look at the QQQ chart

QQQ Chart

Heather Cullen Blog QQQ Chart

You can see that the QQQ chart is similar to SPYG, and for good reason: there is a significant overlap in the stocks that they hold. SPYG is the S&P 500 ‘growth’ Index, holding 240 stocks, and QQQ has come to be associated with tech stocks, which are heavily represented in SPYG. Hence the similarity between QQQ and SPYG.

VIX Chart

The VIX was flattening off, but who knows the effect that the middle east crisis will have on the market? If we look at the effect of the war in Ukraine we will get some idea.


Heather Cullen Blog ITMeter

The week ahead

The futures do not look good at this stage. To be expected, of course. Looking back at the most recent international situation, the invasion of Ukraine, we can see that it was at the start of a bear market. Did it cause the bear market? Who knows? Will the Hamas strike on Israel cause another bear market? Again, who knows?

But don’t you just want everything to settle down? We seem to be lurching from crisis to crisis.  Bit of a depressing note to end on, I am afraid.  


Photo by Hugo Bailey on Unsplash

12 thoughts on “Riding the Market”

  1. Hi Heather,

    Thank you for writing your books and doing a blog like this. I look forward to reading your blogs every week. You are so helpful to novice investors like me. I didn’t know where to begin and you have helped tremendously with that. One question for you. With the option chain you posted above, which one would YOU choose? How do you choose which one would be the biggest bang for your investment but at the same time keep you on the safer side if the trade went against you?

    1. HI Charity, thank you so much for your kind words! They are truly appreciated.
      Re your question – which one of the opions would I have chosen? All the ones in bold are possibles, and in choosing for myself I would look at which others I already have in my account, and also at how much spare cash I wanted to spend.
      The options range from $16,247 to $21,714 so that would be a consideration. If I wanted to only spend $20,000 then I would probably go for the Feb 250 strike at bid / ask $18,308 / $18,442. It isn’t much more than the Jan 250 so seeems like a good choice.
      The other thing I would look at is what leverage I already had in my portfolio; I usually go for 85% DITM, 10% ATM and 5% OTM, but of course, that changes when the prices change so I keep making adjustments. If I was low on DITM I might go for the 50% leverage, so the Mar 215 strike.
      There is always a bit of personal choice and circumstances, but I would be OK buying any of the ones in bold (i.e. Jan 215 / 230 / 250 / 270 or Feb 215 / 230 / 250 or Mar 215)
      Hope this helps.

  2. Heather, a quick question – why wouldn’t getting out on the 10/50 death cross be a good idea? We would limit our losses.
    Thanks, Shari

    1. Hi Shari
      I do agree that getting out on the 10/50 would be a tighter stop on your losses – but the problem is: when do you get back in again?
      If you get out on the 10/50 death cross, the 10/200 will be still giving the ‘stay in’ signal (as the 200 SMA is more stable than the 50 SMA) so when do you get back into the market?
      If you then get back in when you have a 10/50 golden cross then you are effectively trading the ITM strategy with different parameters.
      I have run both through my (under construction) new system for the last 30 years and here are the results using the open price the day after the cross and no leverage.
      10/200: 60% winners, average gain $22.63 / 40 losses, average loss $5.48
      10/50: 40% winners, average gain $10.79 / 60% losses average loss $4.33
      I am testing now to see if there is a better way to use the 10/50 OUT signal, & have a back in signal that works – will keep everyone posted.
      Hope this helps.

  3. Your as-always excellent blog comment prompt several questions for the risk-averse reader:
    1. When is it too late to prudently take a new position? Please place this in the context of early August and then in that of last week’s activity, or today’s Monday activity after market open. I felt that if I missed the early days following a golden cross, it was too late. Today, I feel like “waitin’ and seein”.
    2. Calmly adapted, predetermined strategies: I satisfactorily use a 15% trailing stop/
    30% profit exit combo for stocks. I have not yet found a satisfactory gtc exit strategy for options, notably thinly traded ones, whether on SPY, GSPY, or other securities. Help, please.

    all the best,


    1. Hi Lowell – was that the comment above? It was answered on the post ‘Decisions Decisions’, I have reproduced it here. If it isn’t this one you mean, could you send it again please? Sorry for any mix up, am going to disable comments on posts more than a week old so that new comments come into the latest post. That is, if I can work out how to do it!
      Here was what I answered:
      In reply to Lowell Fink.
      Thank you for your kind words – always appreciated! Let me take the questions separately.
      1 – when is it too late to enter? This is, of course, the $64 thousand dollar questions. When backtesting, you enter the trade on the ‘buy’ signal (golden cross) and exit on the ‘sell’ signal (death cross). There is no way that I can figure on how to back test an entry on every single day for the last 30 years – but if you have any ideas please let me know. That’s why I do the weekly blog with the chart analysis so that you can get a feeling what the market is likely to do (based on previous chart patterns & trader actions) Right at the moent ‘waitin & seeing’ is probably a good idea. Watching for a drop through support which would mean not a good time to enter. If it bounced off probably a good time to enter.
      2.1 15% trailing stop If that lets you sleep at night then its a good idea! I ‘walk the talk’ and don’t get out until a death cross. Which may well be sooner than the trainling stop? Would have to check.IN an abrupt fall like covid it would be a good idea, but if it was a long gradual decline it might not work quite as well.
      2.2 The profit exit – again, as for the trailing stop. Good to have clearly defined entry & exit, it takes the emotion out of the situation. But they need to be backtested to see if they perform satisfactorily.
      I need to mention ‘thinly traded options’ – the market makers MUST provide a bid/ask for every options, and the prices must be within clearly defined paramters for the spreads so there is never a case when you can’t sell you SPY or SPYG option at a good price as the spread is mandated to be very low, from memory less than 1%. I’d have to check that but I am close.
      So even if there is no Vol and no OI, it doesn’t matter on SPY, SPYG and QQQ as they are the most heavily traded ETFs and hence have the tightest spreads.
      Maybe I should do a section on this in the next blog.

      Hope this helps.

  4. Hi Heather, If SPY has a death cross, it looks like SPYG would have the death cross after SPY. Should those traders in SPYG wait for the death cross to happen in SPYG (after it happens in SPY) or act upon the death cross in SPY since it looks like it would happen first?


    1. Hey Eli
      ITM has been backtested on SPYG using the signals from SPYG, so technically you should wait for the SPYG death cross.I’ve just looked at the SPYG chart after Monday’s trading, and it looks as though SPYG has closed the gap – tomorrows trading will tell us. So maybe we aren’t headed for a death cross after all!

  5. On the SPY and SPYG those were not true Morning Stars, as Morning Stars second candlestick body must be below the body of the first candle, preferably also below the body of the third candlestick body but not necessary. Steve Nison, who is credited with bringing Japanese Candlesticks to the U.S. considers the first candlestick as a Bear Separating Line, the Second Candlestick counts as nothing, and the third candlestick is a Bullish Engulfing Pattern. If you are an aggressive trader then the open the next day was above the Bullish Engulfing. If you are a conservative trader you would not enter the trade as it closed below the Bullish Engulfing. On October 6th, there is a large Bullish Engulfing, but so far this morning (October 9th), the Bullish Engulfing has not carried through, so no trade would be made based on the candlestick pattern.

    1. Yes, you are right – I didn’t look closely enough. The body on the bottom candle is not below the first candle, although the shadows are. Apologies. I just glanced at it, theought to myself that looks like a morning star and so wrote it, without checking.
      Not good.
      If I had been trading based on it I would have looked more closely – I think I was just wanting to give people hope and reassure them that everything was not lost!
      Luckily, the last 2 days have had nice green candles and it looks as though there is some support at $420. Fingers crossed.

  6. Several minutes ago, I sent you a message aking about my inquiry of two weeks ago, which was not commented on in Your next blog.

    I just confirmed that the Oct 9 Blog contained no reader comments/Heather Cullen responses whatever.

    Have you decided to discontinue your dialogue with your readers, or is this a temporary interruption? l would very much like to have your email address because the messaging part of your blog appears to have become inoperative

    Thanks in advance for your reply,

    Lowell Fink
    Int + 493559776
    Int + 663559616 (on whatsapp)

    1. Hi Lowell,
      no, I haven’t disabled it – the post only went up yesterday and so there weren’t any comments at that time. I’ve just logged in and there are several, so I will be answering them now.
      Re your query about a previous comment that wasn’t answered – I will chase it down and answer it – it was about stop losses, wasn’t it? I seem to remember answering it, but it is probably on a previous post. That keeps happening.
      I think what I am going to do is close comments after 7 days, so that only the current post accepts comments. I will try that and see if it solves it.
      Thank you for bringing it to my attention!

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