Trend Following can easily increase your win rate when trading credit spreads. For instance, if you are trading a .15 delta credit spread, you have an 85% win rate. However, if you trade a .15 delta credit spread in the direction of the trend, you historically have a 94% win rate. Now before I get into the step by step details on how to use Trend Following to increase your win rate and profitability when trading credit spreads, let me explain some key concepts.

Trend Following originally became popular in the early 1900s with the rise of traders like Richard Dennis, The Turtle Traders, Bill Dunn, Paul Tudor Jones and Richard Donchian. Trend Following is the idea of following the big waves in the market. The market can only be four main phases: accumulation, markup, distribution, or decline. These are all fancy words to say, the market can either be trending up, trending down, or going sideways.

Credit Spreads are a popular options strategy that has a directional bias. Let me give some examples. If you are trading a put credit spread, you make money when the market goes up, stays the same or goes down slightly. If you are trading a call credit spread, you make money when the market goes down, stays the same or goes up slightly. To have a higher win rate on your trade, you need to be good at predicting direction.

The real question is “how do I follow the trend and pick the right direction?”

Here are ways to successfully follow the trend:

• The 200 Day Moving Average: This is regarded as the industry standard when it goes to identifying a stocks trend. If the stock is above the line, then the market is bullish. If the stock is below the line, then the market is bearish.
• Donchian Channels: This was created by Richard Donchian who was mentioned above a legendary trend follower back in the day. If the stock is above the middle line, the stock is bullish. If the stock is below the middle line, the stock is bearish

Now, let’s get on to the more practical tips to help you trade credit spreads with the trend. This is easier than you think, but I have to remind you: there is no holy grail trading strategy. This may help you win more, but you will still experience losses. Make sure you know what you are trading before you trade.

How to trade credit spreads with the trend (practical):

• Market is bullish and you’re confident: sell a put credit spread at a .20-.30 delta. This means you have a lower win rate but will collect more credit. This is the idea of trading based on your conviction because you believe the trend will continue.
• Market is bullish and you’re unsure: sell a put credit spread at a .15 delta. This means you have a higher win rate, and you give the stock more room to move. You’ll collect less credit, but you are giving yourself a higher chance of profit.
• Market is bearish and you’re confident: sell a call credit spread at .20-.30 delta. This means you have a lower win rate but will collect more credit. This is the idea of trading based on your conviction because you believe the trend will continue.
• Market is bearish and you’re unsure: sell a call credit spread at .15 delta. This means you have a higher win rate, and you give the stock more room to move.

Key takeaway: always trade in the direction of the trend

Ideally, you should be using a trading strategy with defined rules, so that you know exactly what to do step by step in any situation. If you don’t have a strategy but want one, check out my strategies here! If you are someone who works full-time, has a family or are busy all the time and want direct access to my trade alerts, check out my Inner Circle Program! The program has a 90%+ win rate with our credit spreads and a “Make Money Or Don’t Pay” guarantee.

Thank you for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer