Category Archives: All Resource Guides

0-DTE Strategy Guides, All Resource Guides, Archive

Developing an Entry Strategy

Posted on by Conor Browne

Entry Strategies

Here’s a list of entry strategies you’ve suggested, along with a few additional ones that are commonly used:

  1. Early Entry: Enter the market just minutes or immediately after the open, trying to account for the fact that about two thirds of the time, IV has peaked near the open.
  2. Wait for IV to Stabilize: Instead of entering at the very beginning of the market session, wait for implied volatility to calm down a bit before entering.
  3. Predicting IV Peaks: This strategy involves trying to determine when the implied volatility will likely peak for that morning session due to economic influencers and entering at that time.
  4. Pre-market Entry: This strategy involves entering prior to all the market action to try and get in front of a potential early morning move.
  5. Breakout Strategy: This strategy involves entering a position when the price breaks above resistance or below support. Traders often use this strategy in conjunction with technical indicators and chart patterns.
  6. Pullback Strategy: Also known as a retracement strategy, it involves entering a position when the price pulls back to a trendline, moving average, or other support or resistance level after a strong move.
  7. Reversal Strategy: This strategy involves entering a position when the price appears to be changing direction. This can be determined using candlestick patterns, divergence with an oscillator, or other technical indicators.
  8. News-based Entry: Entering a trade based on news events. This could be an earnings announcement, a change in interest rates, or a geopolitical event that is expected to impact the market.
  9. Momentum Strategy: This strategy involves entering a position when the price is showing significant momentum in one direction. This could be identified using moving averages, MACD, or other momentum indicators.
  10. Scaling In: Gradually entering a position over time to achieve a better average price. This could involve entering additional positions as the price moves in the trader’s favor or against them.

Please remember that each of these strategies requires careful risk management and an understanding of the market conditions in which they are most effective. It’s also crucial to develop a clear plan for when to exit a trade, not just when to enter.

Developing an Entry Strategy: A Data-Driven Approach

Developing an effective entry strategy adaptable to changing market conditions can be complex but rewarding. Here’s a process you can consider:

  • Study Different Entry Strategies: Understand the different entry strategies that traders use. You’ve already identified several – entering at the start of the trading day, waiting for the IV to stabilize, predicting IV peaks, or entering before market action to anticipate early morning movements.
  • Test Your Strategies: Begin by picking one strategy and sticking to it for a specific period or number of trades. This might be a week, a month, or a certain number of trades. Whatever you decide is appropriate. Collect as much data as possible about each trade – entry point, exit point, IV at different times, and any other relevant market conditions.
  • Evaluate and Learn: After the predetermined period, assess your performance. How did your trades perform? Are there correlations between your actions and your performance? What were the market conditions like? This stage involves learning from your actions and understanding how different strategies work in various market situations.
  • Refine Your Strategies: Based on your analysis, refine your strategies. Maybe you need to tweak your entry point or hold off a bit longer before entering the trade. It’s about optimizing your approach based on your experience.
  • Switch Your Strategies: After refining one strategy, move on to the next. Apply the same process – stick with the strategy for a specific period, collect data, assess, learn, and refine.
  • Compare Your Strategies: Once you’ve tested and refined all the strategies, compare them. Which performed best in which market conditions? Do certain strategies tend to perform better than others?
  • Create Your Hybrid Approach: You may find that no single strategy performs best in all conditions. So, consider creating a hybrid approach where you apply different strategies based on different market conditions.
  • Continual Optimization: Remember that the market is always changing. What works today might not work tomorrow. So, it’s crucial to keep testing, evaluating, learning, and refining.

How long this process will take depends on how many trades you make, how varied the market conditions are during your testing periods, and how quickly you can analyze and understand your data. It is helpful to use automated tools or software to aid in data collection and analysis. Remember, this is a process of continual learning and adaptation.

Every trade is an opportunity to learn and refine your strategy. By using a data-driven approach, you can gradually build up a comprehensive understanding of how different strategies perform under various market conditions and use this knowledge to optimize your trading approach

All Resource Guides, Archive, Volume Profile Guides

LVN Strategy Guide

Posted on by Conor Browne

Trading the LVN Strategy with OTM Butterfly

Step 1: Set Up Your Chart

Chart Configuration:

  • Use a trading platform with volume profile analysis capabilities (e.g., TradingView, ThinkorSwim)
  • Apply the volume profile indicator to your futures chart (e.g., ES futures for the S&P 500).

Choose Time Frames:

  • Use higher time frames (15-minute, 60-minute) to identify the overall market trend.
  • Use lower time frames (1-minute, 5-minute) for detailed entry points and LVN identification.

Step 2: Identify Market Direction (Pre-Market Analysis)

Analyze the Trend:

  • Analyze before the market opens, using the 15-minute and 60-minute charts.
  • Identify the overall market trend using moving averages (e.g., 50-period, 200-period).

Confirm Market Sentiment:

  • Look for higher highs and higher lows for bullish trends and lower highs and lower lows for bearish trends.
  • Use additional indicators (e.g., HullMA, SMA, MA Crossover) for trend confirmation.

Step 3: Identify Low Volume Nodes (LVNs) on the Volume Profile

Analyze the Volume Profile:

  • Identify significant price movements within the session volume profile.
  • Look for Low Volume Nodes (LVNs) where a noticeable drop in volume indicates a potential price gap.

Validate LVNs:

  • Ensure the LVN aligns with key support or resistance levels and significant price action points.
  • Confirm the LVN with volume spikes before and after the LVN, indicating a sharp price movement.

Step 4: Plan the OTM Butterfly Trade

Select Strike Prices and Adjust Width Based on Volatility Regime:

  • Zombieland (VIX < 17): Narrow width (e.g., 10-20 points wide). Set the middle strike price near the anticipated target level based on the LVN.
  • Goldilocks (VIX 17-32): Moderate width (e.g., 20-30 points wide). Set the middle strike price near the anticipated target level based on the LVN.
  • Chaos (VIX > 32): Wide width (e.g., 30-50 points wide). Set the middle strike price near the anticipated target level based on the LVN.

Ensure Sufficient Asymmetry (Debit ≤ 10% of Width):

  • Calculate the maximum acceptable debit for the butterfly trade, ensuring it is at most 10% of the width. For example, if the width is 20, the maximum acceptable debit is

Step 5: Enter the Trade (Valid Entry Time: 9 a.m. to 10:30 a.m. for Futures, 9:30 a.m. to 10:30 a.m. for Indexes)

Wait for Price Confirmation (Based on Silver Bullet Strategy):

  • Monitor the price action as it approaches the identified LVN during the valid entry period.
  • Look for a swing high/low violation and subsequent reversal: For bearish trades, wait for the price to move above a recent swing high and then reverse downward. For bullish trades, wait for the price to move below a recent swing low and then reverse upward.

Confirm Reversal:

  • Use a 1-minute or 5-minute chart to confirm the price reversal after the swing high/low violation.

Place the OTM Butterfly:

  • Execute the OTM Butterfly trade once price action confirms the direction near the LVN.
  • Ensure the debit is at most 10% of the width to maintain a favorable risk-to-reward ratio.

Set Stop Loss and Profit Targets:

  • Place a stop loss beyond the LVN to protect against adverse moves.
  • Set initial profit targets based on the expected move within the LVN range and overall market trend.

Step 6: Dynamic Exit Strategy

Monitor Position Relative to Profit Tent:

  • Continuously monitor the price action to see if it moves into the profit tent of the butterfly spread.
  • If the price is within the profit tent on a 0DTE day, the positive theta decay will accelerate, increasing profitability.

Inside the Profit Tent:

  • If the price is inside the profit tent, hold the position to maximize the benefits from rapid theta decay.
  • Monitor the gamma risk as expiration approaches, adjusting the position to lock in profits or reduce risk.

Outside the Profit Tent:

  • If the price is just outside the profit tent, use a trailing stop to manage the position.
  • If the price moves toward the profit tent, allow the trade to continue, giving it a chance to enter the high-profit zone.
  • If the price moves further from the profit tent, tighten the trailing stop to protect against losses.

Gamma Risk Management:

  • As expiration approaches, gamma risk increases. Be prepared to adjust or close the position if the price movement becomes erratic.
  • Use a trailing stop or manually adjust the butterfly wings to manage gamma risk and protect profits.

Example Scenario

Bullish OTM Butterfly Setup (Valid Entry Time: 9 a.m. to 10:30 a.m.)

Identify Market Direction:

  • The market is in an uptrend on the 15-minute chart, confirmed pre-market.

Find LVN:

  • On the futures volume profile, identify a Low Volume Node (LVN) at $4050-$4070, indicating a potential price gap.

Confirm with Price Action:

  • Price is currently at $4020 and moving upwards.

Plan the OTM Butterfly:

  • Volatility Regime: Goldilocks (VIX 17-32), moderate width (20-30 points).
  • Middle strike (short strikes) at $4100.
  • Buy one $4050 call, sell two $4100 calls, buy one $4120 call.
  • Ensure the debit is at most 2 points (10% of 20 points width).

Wait for Price Confirmation:

  • Between 9 a.m. and 10:30 a.m., monitor the price as it approaches the LVN at $4050-$4070.
  • Look for a swing low violation and subsequent reversal upward.

Confirm Reversal:

  • On a 1-minute chart, see the price move below a swing low at $4030, then reverse upward.
  • Switch to a 30-second chart and confirm the reversal near $4050- $4070.

Place Trade:

  • Enter the OTM Butterfly with the middle strike at $4100.
  • Ensure the entry is within the valid time window and the debit is ≤ 2 points.

Set Stop Loss and Initial Profit Targets:

  • Stop loss at $4025 (below the LVN).
  • Initial profit targets at $4100 (middle strike) and $4120 (upper strike).

Dynamic Exit Strategy

Inside the Profit Tent:

  • The price moves into the profit tent and stabilizes around $4100 by mid-afternoon.
  • Hold the position to benefit from positive theta decay, monitoring the price closely.
  • As expiration approaches, manage gamma risk by adjusting or considering closing the position if the price remains stable within the tent.

Outside the Profit Tent:

  • The price is just outside the profit tent at $4080.
  • Use a trailing stop to potentially allow the price to move into the profit tent.
  • If the price starts moving away from the tent, tighten the trailing stop to protect against losses and close the position if necessary
All Resource Guides, Archive, Volume Profile Guides

Market Memory

Posted on by Conor Browne

Harnessing Market Memory: A Novel Approach to Volume Analysis for Day and Swing Traders

Abstract:

This article explores a unique method for analyzing trading volume in financial markets, grounded in the concept of ‘market memory.’ Market memory, a term rooted in the works of Benoit Mandelbrot, serves as a metaphor for the lasting impact of trading events, similar to how a scar provides a record of past injury. We investigate how market memory influences price movements, aiding traders in predicting real-time price trajectories for both day and swing trading.

Introduction:

Like living organisms, financial markets bear the scars of their history. These scars are not visible on the surface but are subtly etched into the fabric of the market, leaving indelible marks known as ‘market memory.’ As Mandelbrot’s theory posits, the market doesn’t forget; it carries the memory of past events, influencing the future in a fractal, non-linear fashion. The ‘volume profile,’ an often-overlooked analytical tool, serves as a prism through which we can perceive and analyze this memory.

Volume Profile and Liquidity:

Volume profiles visually represent trading volume distributed across different price levels. High-volume nodes indicate areas of significant liquidity where the price tends to consolidate, akin to a battlefield where bulls and bears vie for supremacy. Low-volume nodes, or ‘volume wells’, represent areas of lower liquidity where the price tends to move more freely, trending in a particulardirection. Understanding these dynamics of consolidation andtrending is crucial in predicting price movements.

Persistent Volume Profile Features and Their Strength:

The strength of a volume profile feature—be it a high-volume node or a volume well—is determined by its size, longevity, and the degree of volume change at its edges. Large, well-established nodes act as robust consolidation zones, their edges representing significant support or resistance levels. Their relative strength can be visualized using color coding and line thickness on the chart. Furthermore, the relationship between parent (large) and child (small) nodes offers crucial insights into market structure and potential price movement.

Interpreting Market Memory Through Volume Profile:

A volume profile allows traders to decode market memory and develop predictive scenarios for price movements. Price behavior around volume nodes and wells provides insights into the market’s path of least resistance. Steep edges of high-volume nodes signal inflection points in the market, while the absence of volume (in volume wells) often precedes accelerated price movements. Thus, interpreting market memory through a volume profile aids traders in anticipating market behavior, arming them with a reliable tool to navigate the often-turbulent financial markets.

Conclusion:

By integrating Mandelbrot’s theory of market memory with volume profile analysis, traders can better understand market dynamics.

This innovative method provides a unique perspective on historical trading activity and a powerful predictive tool for future price movements. As traders and analysts, recognizing and understanding these ‘scars’ of the market, we are better equipped to anticipate, navigate, and ultimately profit from the intricacies of financial markets.

The final article would be much longer, with detailed sections on each topic, including practical examples, further elaborations on the theories involved, and potentially some empirical evidence of its effectiveness in real-world trading. This is an outline that broadly covers the key topics.

Here are the topics that would benefit from further detailing, along with the suggested empirical evidence:

  • Market Memory Theory: An introduction to Mandelbrot’s theory of market memory, explaining how markets, like living organisms, retain a memory of past events. Empirical evidence could include comparing past and present market events and demonstrating recurring patterns underlining the theory.
  • Understanding Volume Profile: A detailed explanation of volume profiles, including their creation and interpretation. Empirical evidence could involve presenting a volume profile chart, labeling key elements (high-volume nodes, lowvolume nodes), and explaining their significance.
  • High-Volume Nodes and Liquidity: In-depth analysis of high-volume nodes and how they represent areas of significant liquidity, influencing price movements. Empirical evidence could include specific examples of charts with highvolume nodes dictating price consolidation.
  • Low-Volume Nodes (Volume Wells) and Liquidity: A comprehensive explanation of low-volume nodes or volume wells and how they lead to more free price movement. Empirical evidence could include charts illustrating situations where price has moved freely due to low-volume nodes.
  • Strength of Volume Profile Features: An explanation of how the strength of volume profile features is determined, focusing on size, longevity, and the degree of volume change at the edges. Empirical evidence could involve charts highlighting these factors, correlating them with the strength of the price movements.
  • Parent-Child Nodes Relationship: Discuss the concept of parent (large) and child (small) nodes and how their relationship can influence price action. Empirical evidence could include charts illustrating parent-child node relationships and subsequent price action.
  • Market Memory through Volume Profile: A section on how volume profile can decode market memory, predicting price movements. Empirical evidence could include past trading charts where volume profile analysis has successfully predicted price action.
  • Real-world Case Studies: These could be a series of charts taken from various markets (equity, commodities, forex, etc.) showing how the volume profile analysis has been applied in real-world situations and the outcomes.
  • Concluding Remarks: The final section should wrap up the key findings, reinforcing the potential of this approach for traders.

While charts and case studies provide concrete examples, they should be supplemented with a robust theoretical framework to explain the concepts and validate the approach adequately

All Resource Guides, Archive, Foundational Guides

Retrospective Process

Posted on by Conor Browne

Weekly Retrospective:

Review Journal Entries:

  • Assess market conditions
  • Evaluate trade execution
  • Assess mental state during each trade
  • Evaluate the overall management of these factors

Identify Trends and Patterns:

  • Evaluate areas of strength
  • Identify areas for improvement

Develop action plans:

  • Focus on specific, measurable and actionable steps
  • Address areas for improvement

Reflect on the Process:

  • Consider lessons learned
  • Acknowledge steps taken to improve
  • Identify steps still needed to reach the desired performance level

 

Monthly Retrospective:

Review Monthly Journal Entries:

  • Assess market conditions
  • Evaluate trade execution
  • Assessment state during each trade
  • Evaluate the overall management of these factors

Identify Trends and Patterns Over the Month:

  • Evaluate areas of strength
  • Identify areas for improvement

Develop Action Plans:

  • Focus on specific, measurable and actionable steps
  • Address areas for improvement

Reflect on the Process:

  • Consider lessons learned
  • Acknowledge steps taken to improve
  • Identify steps still needed to reach the desired performance level
All Resource Guides, Archive, Foundational Guides

Make Journaling a Habit

Posted on by Conor Browne

Building the Habit: A Step-by-Step Guide to Master Trading Journaling and Continuous Improvement

To transform the daunting task of creating a habit into an approachable, step-by-step process, we’ll borrow from the wisdom of behavior science. We’ll apply the four laws of behavior change, as outlined by James Clear in his book, “Atomic Habits,” to mastering trading journaling and continuous improvement.

Step 1: Make it Obvious (Cue)

The first step to habit formation is to make the cue obvious. In this case, the cue is finishing a trade.

Action: Dedicate a specific, clutter-free space for your trading journal. This could be a physical notebook or a digital platform. Have it open on your desk or screen whenever you’re trading. Seeing the journal will remind you to log your trades immediately after they’re done.

Step 2: Make it Attractive (Craving)

The next step is to make the habit attractive. To do this, we’ll use a technique called ‘temptation bundling,’ where you link the habit you need to do with one you want to do.

Action: Pair journaling with an activity you enjoy. For example, treat yourself to your favorite beverage while journaling, or listen to a favorite piece of music. This simple reward system makes the process of journaling more appealing.

Step 3: Make it Easy (Response)

Make the habit so easy you can’t say no. The trick is to start small and gradually build up.

Action: Initially, don’t worry about detailed journal entries. Start with logging just three key details – the trade, the outcome, and one sentence on why you made the trade. Once you’re comfortable with this, slowly expand your entries to include emotions, reasoning, and lessons learned.

Step 4: Make it Satisfying (Reward)

The final step is to make the habit satisfying. We’re more likely to repeat a behavior when the experience is positive.

Action: Dedicate time each week to review your journal and reflect on your progress. Seeing your improvement in black and white is a powerful motivator.

Embrace Continuous Improvement

Now that the journaling habit is established let’s focus on the continuous improvement process:

  1. Weekly Reviews: Schedule a fixed time every week to review your journal. Look for patterns, common mistakes, or successful strategies. Use your findings to tweak your trading plan.
  2. Set Monthly Goals: Set small, achievable goals for each month based on your weekly reviews. This could be reducing a particular mistake or implementing a new strategy.
  3. Monthly Reflection: Review your progress towards your goals at the end of each month. Celebrate your wins, learn fromyour failures, and adjust your goals for the next month.

Remember, the goal isn’t overnight transformation but consistent, incremental improvement. Over time, these small steps will compound into significant growth in your trading career.

All Resource Guides, Archive, Foundational Guides

Create a Journal & Playbook

Posted on by Conor Browne

I’m sure you’ve heard me say, that if you want to become a consistently profitable, professional trader, you must keep a journal. Well, I’m going to make it easy for you by telling you exactly what should be in your journal and how you should use it every day, and evaluate it every week.

What your journal should contain…

Screenshot_2023-01-19_at_1.00.44_PM.png

What your journal might look like…

Screenshot_2023-01-19_at_1.01.47_PM.png

Process for keeping this journal:

  1. Set aside time: Set aside a specific time each day, such as the end of the trading day, to update your journal.
  2. Review your trades: Review your trades for the day and fill out the template with the relevant information.
  3. Reflect on your performance: Reflect on your performance and take note of any patterns or trends that emerge.
  4. Make adjustments: Based on your progress and what you’ve learned, make adjustments to your trading process and plan accordingly.
  5. Review regularly: Review your journal regularly, such as once a week, to reflect on your progress and make any necessary adjustments.

Remember that journaling is a powerful tool for self-reflection and learning; keeping the journal requires you to be consistent and honest with yourself. It’s also critical to go over your journal on a regular basis and make any necessary changes to your plan as you go.

Process for your daily trading…

  1. Monitor market conditions: Keep an eye on the market conditions just before and after the market opens, such as the market’s direction, volatility, and any news or events that may impact the market.
  2. Identify the entry point: Identify the point at which you will enter the trade. This should be based on your trading plan and take into account the market conditions and your risk management strategy.
  3. Place the order: Once you’ve identified the entry point, place the order for the SPX OTM Butterfly. Try to get as close to a 1 to 9 risk to reward as you can. Easy way is to make the debit 1/10 the price of the spread.
  4. Manage the trade: Manage the trade in three separate periods, morning from 9:30 to 12 PM, then early afternoon from 12 noon to 2:30 pm, and then late afternoon from 2:30 pm to 4 pm, which is the close of the market. Follow your plan for exiting the trade based on the market conditions structure and your profit management strategy.
  5. Evaluate the trade: Once the trade is closed, evaluate the trade based on your plan and the market conditions. Reflect on what you did well and what you can improve for the next trade. Enter these thoughts in your journal.

Process for evaluating your trades at the end of the week:

  1. Review your trades: Review all the trades you took during the week using the trade log and journal you’ve been keeping. Pay attention to the trade type, entry, exit, result, market conditions, entry quality, mental state, and any other data points you’ve been tracking.
  2. Accumulate trade log statistics: Create a summary of the statistics for your trades, such as the total number of trades, the total profit or loss, the win-loss ratio, and the average profit or loss per trade.
  3. Reflect on your performance: Reflect on your performance for the week, and take note of any patterns or trends that emerge. Consider factors such as market conditions, entry quality, and mental state and how they may have impacted your performance.
  4. Assemble best examples: Identify the best examples of trades from the week, those that performed well and followed your plan and those that didn’t.
  5. Create a template (Your Playbook): Create a template for the best examples of trades that includes the trade type, entry, exit, result, market conditions, entry quality, and mental state, as well as any other relevant information.
  6. Organize the Playbook: Organize the playbook by the grades given to each trade from the journal. For example, you can create a section for “A” grade trades, a section for “B” grade trades, and an area for “C” grade trades. This will allow you to quickly reference the best examples of trades and see how they performed about the grades given in the journal.
  7. Update the Playbook: Make sure to update the playbook with new examples of trades at the end of each week. This will allow you to build a library of the best trades over time and to refer back to them as you continue to improve your trading process and performance.
  8. Reflect on the Playbook: Reflect on the Playbook and analyze its trades to understand what made them successful and how you can replicate them in the future.
  9. Incorporate the lessons: Incorporate the lessons learned from the best trades into your trading process and plan to improve your performance in the future.

It’s important to review your trades regularly and to be consistent in your efforts to evaluate your performance and improve your trading process. A well-organized playbook can help you to reference the best examples of trades quickly and to learn from your past performance.

All Resource Guides, Archive, Foundational Guides

Why Every Trader Needs a Journal

Posted on by Conor Browne

The Virtue of Vigilance: Why Discretionary Traders Must Prioritize Record Keeping

For anyone venturing into the world of trading, the allure often lies in the excitement of the markets, the prospect of lucrative returns, and the strategy and skill it takes to succeed. Yet, while these are integral facets of trading, there’s an unsung hero in the tale of successful trading: meticulous record-keeping. This article aims to spotlight the immense value that diligent record keeping brings, especially for discretionary traders.

  1. The Clear Mirror to Trading Performance

    Think of record keeping as a clear mirror that reflects your trading strategy’s blemishes and beauty spots. While live updates and account balances give you a sense of how you’re doing, they can’t comprehensively understand your performance. Only a well-maintained trading journal can offer that in-depth insight.

  2. The Basis for Continuous Improvement

    A trading journal isn’t just a record; it’s an essential tool for improvement. You create a robust data set by capturing the details of each trade — the strategy employed, the market conditions, the outcome, and even your emotional state. This data becomes the foundation for assessing what’s working, what’s not, and where adjustments might be needed.

  3. Quickly Spotting Patterns

    Discretionary trading, by its very nature, relies heavily on personal judgment. But how do you determine if your judgments consistently lead to gains or losses? By maintaining diligent records, both advantageous and detrimental, patterns in trading behavior become apparent. Recognizing these patterns early can be the difference between a minor setback and a significant downturn in profitability.

  4. Emotional Checkpoint

    Trading is not just a financial endeavor; it’s an emotional one. By keeping records of trades and personal reflections and emotions tied to each decision, traders can gain insights into how emotions impact their trading. Over time, this self-awareness can lead to better emotional regulation and more rational trading decisions.

  5. A Safety Net Against Overconfidence

    Success breeds confidence, which is generally beneficial. However, unchecked confidence in trading can border on recklessness. Regularly reviewing trading records ensures that a trader remains grounded, basing their confidence on tangible past performance and not mere gut feel.

  6. Legal and Tax Implications

    Beyond strategy and performance analysis, diligent record keeping is also crucial for tax purposes. With clear records, traders can ensure they comply with all necessary regulations and readily provide documentation if required.

  7. A Beacon for Future Strategy

    Your past trades, captured diligently in your records, provide insights into how different strategies fare in various market conditions. Your trading journal can guide you as the market landscape changes, illuminating which strategies best suit the prevailing conditions.

In Conclusion

Discretionary trading thrives on intuition, experience, and judgment. However, traders need to complement their skills with diligent record-keeping to achieve and maintain peak performance. The adage “you can’t improve what you don’t measure” holds profoundly true in trading. By dedicating time to record, analyze, and reflect on each trade, discretionary traders can always move forward, learn from the past, and optimize for a prosperous future.

All Resource Guides, Archive, Foundational Guides

0-DTE Fundamentals Guide

Posted on by Conor Browne

0-DTE Fundamentals

The fundamentals of the 0-DTE (Zero Days to Expiration) trading strategy are built around capturing the rapid decay of options premiums on the day of expiration through asymmetric risk-to-reward setups.

Here’s a breakdown of the core elements:

Asymmetric Risk-to-Reward:

  • The foundation of the 0-DTE strategy is to place trades with extreme asymmetric risk-to-reward ratios. The most common approach is using Out-of-the-Money (OTM) butterfly spreads. These are constructed to limit potential losses while maximizing potential rewards. The debit is kept low, usually under 10% of the width of the butterfly.

Trend Following:

  • Trades are aligned with the current market trend to increase the likelihood of capturing larger moves in the direction of that trend. Market direction is typically determined using moving averages and other technical indicators.

Options Premium Collection:

  • The strategy focuses on the rapid decay of options premiums on the expiration day (0-DTE). This decay provides an opportunity to collect options premiums efficiently, especially in highly asymmetric setups.

Agile Continuous Improvement Process:

  • There is a strong emphasis on regularly reviewing and adjustingstrategies based on performance data. This agile approach allows forcontinuous refinement and adaptation, crucial for maintaining atrading edge in ever-changing market conditions.

Market Structure Analysis:

  • Volume Profile analysis is utilized to understand the market structure and anticipate potential price behaviors. Key elements include identifying High Volume Nodes (HVNs) and Low Volume Nodes (LVNs) to mark areas of potential support and resistance, which are crucial decision points.

Profit and Risk Management Framework:

  • The strategy focuses on monitoring the highest profit achieved and making dynamic “hold or fold” decisions throughout the trading day. As the end of the trading day nears, gamma risk increases, requiring a tighter risk management approach. Scenarios are built for favorable and unfavorable price movements, allowing premeditated decisionmaking.

Strategy Variations:

The 0-DTE strategy is not limited to a single approach; it includes several variations to adapt to different market conditions:

  • OTM Butterfly: A basic long butterfly in the direction of the trend.
  • Batman Strategy: This strategy consists of two long OTM positions, effectively creating a “winged” set up to capitalize on large moves in either direction.
  • Time Warp Strategy: Involves placing both a put fly below the market and a call fly above when trends are unclear or extreme/low volatility is expected. This trade can go out to 1, 2, or 3 days to expiration to capture overnight moves.

Volatility Regime Consideration:

The strategy dynamically adjusts trade types and widths based on the current VIX level. For example:

  • Low VIX (<17): More 1, 2, and 3-DTE trades.
  • Moderate VIX (20-23): Mix of 0, 1, and 2-DTE trades.
  • High VIX (25+): Primarily 0-DTE trades.

Mental Toughness and Discipline:

  • A key component of success with the 0-DTE strategy is the mental aspect. Traders are encouraged to develop mental toughness and discipline, as no strategy or edge can be effectively executed without it. This includes sticking to the plan, executing under pressure, and continuously learning from mistakes.

Incorporation of Eastern Philosophies:

  • The strategy’s philosophy also incorporates Zen principles such as impermanence and the balance of yin and yang (soft skills like strategy and analysis vs. hard skills like mental toughness and discipline). This holistic approach helps traders maintain a balanced and focused mindset, which is crucial for navigating the uncertainties of trading.

These fundamentals combine to create a robust, adaptable trading strategy designed to thrive in various market environments while maintaining a strong focus on risk management and continuous improvement.