Trading the QQQs: The Fin Strategy

By: Wendy Kirkland

The following is an excerpt from Wendy Kirkland's Option Trading the Quintessential: QQQs

The Fin strategy utilizes the Commodity Channel Index (CCI) and the Average Directional Index (ADX) indicators. When looking at the CCI indicator, the areas that represent oversold or overbought could be thought of as fins of dolphins or sharks above or below the surface of the water.

Let’s talk about trading the fins. When a stock is overbought, there is a fin area at the top of the CCI indicator; that is when you are going to consider purchasing put weekly options. If the CCI indicator is creating an oversold fin, you will consider purchasing call options. In addition to the CCI, you will incorporate the ADX DI (ADX directional movement) lines.

You want the direction of the DI lines to support the direction of the upcoming move of the developing fin. An example would be an oversold fin, you will want to see the +DI (bullish) showing strength by rising. If on the other hand, the QQQs are overbought with a fin at the top of the indicator, you will want to see the –DI (bearish) showing strength. If the DI line is lethargic, you will want to wait before entry.

Often, if the DI lines show no interest in the trade direction, therefore, you will not take the early entry at the peak of the CCI, but will wait for the confirmation of the 100/-100 move. If the +DI and –DI lines braid or swing back and forth, you will stand aside, because the direction is uncertain.

There are times when you follow this strategy that there are two trades a day; one in the morning and one in the afternoon. Other times there is one or none. Much depends on what is happening with the overall market. If there is indecision or shallow swings, the DI’s are apt to braid and this is a time to stand aside rather than try to sort out the market’s direction.

Practice this strategy on paper or virtually until you can tie together the CCI and DI lines. It is so important to have the DI lines heading up as you enter a new trade. The directional change supports the direction of the change. With DI support, the trade will likely go flat or continue in the previous direction.

There are times when the market as a whole and the price on the 10-minute chart will go through a period of consolidation or low volatility where the swings of the fins and the DI direction changes are too shallow (say, the swings average to be .20) to be profitable trades. Then stand aside and wait for deeper swings; wait for volatility to pick up.

Now you might ask if the trade will work equally well in other time frames beyond the 10-minute chart. It may. I have tried them all at one time or another and have found that I had the most success with the 10-minute time frame. You, of course, could study the possibilities yourself. At the time I tried the other time frame charts, it could have been a trying trading environment. But for me, I like quick trades. Get green and get gone.

A variation that I have been experimenting with is to trade the 60-minute QQQ chart and trade the peaks that are greater than 200 and -200. There are lots of swings where I have to close my eyes as I hold through them, but it keeps me in a trade for a longer period of time and I am realizing nice gains. Try to Paper trade this and see how it works out for you. Hold until the opposite fin reaches the 201/-201+ range even if there are several overbought/oversold moves that are less than 200/-200.

As you practice and follow the trades as they take place, you will decide on the strategies that best suit your individual trading style and the amount of time you have to devote to following the QQQ charts that day or week. You will quickly become an expert, where you can quite often anticipate the next direction in which the price is headed.