Trade Apgar is a concept described by Dr. Alexander Elder in his book “The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management“.
Apgar score is a measure of the physical condition of a newborn infant. It is obtained by adding points (2, 1, or 0) for heart rate, respiratory effort, muscle tone, response to stimulation, and skin coloration; a score of ten represents the best possible condition. Dr Elder’s idea was to adopt this concept for trading.
This system can be developed according to your trading style and indicators that you use. It should also change according to the trading strategy that you want to deploy.
After I came across this concept, I started applying it to my screening process of potential option trading opportunities. This exercise made me realize how blindly I was executing option trading, solely relying on probability, without considering market trends and market conditions.
Trade Apgar Screening Method
There are 5 indicators I use for Trade Apgar.
- 50 days and 100 days moving average
- MACD
- Money Flow Index
- TTM Squeeze
- Directional Movement Indicator (DMI)
In the example below, I wanted to Short AVGO and the Trade Apgar indicates 7 points out of 10 (red arrows).
It is important to note that the Trade Apgar method is subjective because, in your mind, you are hoping the stock to move one of the directions (up, down, or sideways). One method to overcome this is to count the Trade Apgar points quickly without analyzing too much. This will allow you to count ONLY the obvious signals and not trying to see something that does not exist on the chart.
Step 1 – Check the weekly chart
The weekly chart is analyzed first to see if I am betting against the current trend.
Using the AVGO below as an example, it’s clear that the stock is in an uptrend but three indicators show that it is in a slight pullback. This tells me that if I am wrong (I want to short it), I should get out ASAP because AVGO is still in an uptrend.
1) 50 days and 100 days moving average
The bars are way above the moving averages. – Zero-point.
2) MACD
Both the line graph and bar chart are showing a downtrend. I would give one point if either one of these is in agreement with the direction I am interested in. In this instance, both are. – One point.
3) Money Flow Index
It showing overbought. – One point.
4) TTM Squeeze
No apparent sign in agreement with the short direction. – Zero-point.
5) Directional Movement Indicator (DMI)
The pink line is above the green. Not a strong trend but nonetheless it is showing a downtrend. – One point.
Step 2 – Check the daily chart
The daily chart will give me a shorter term prediction.
1) 50 days and 100 days moving average
The bars are touching the moving average. – One point.
2) MACD
The line graph is showing a downtrend. – One point.
3) Money Flow Index
It showing overbought. – One point.
4) TTM Squeeze
It’s going down – One point.
5) Directional Movement Indicator (DMI)
The pink line is below the green. – zero point.
Does Trade Apgar Work?
To answer this question, I have compiled my previous directional option trading data.
I used the following 5 indicators to examine each trade. Just to clarify, all these 2016 trades were placed before coming across to Trade Apgar so some of the trades were carried out with even zero Trade Apgar points!
- 50 days and 100 days moving average
- MACD
- Money Flow Index
- TTM Squeeze
- Directional Movement Indicator (DMI)
Trade Apgar scores for 2016 Directional Option Trades (Diagonal / Double Diagonal)
Take Away
- Directional trades with Trade Apgar score below 4 points had no edge – about 50% winning rate which is the same as flipping a coin.
- The Profit and Loss (PNL) for these trades with Trade Apgar score below 4 points had negative PNLs.
- The three wins with Apgar scoring zero points are likely outliers. I got lucky on those.
- The winning number was almost twice as much as the losing (29 wins vs 16 losses), yet the PNL was negative.
- Do not trade blindly! Despite the small sample size, it is clear that directional trade when done blindly without using any indicators was a bad idea.