With the word on The Street echoing statements like: "This is the most volatile market we've seen in 30 years," I seem to be entering my trading career in very difficult market conditions. I know, my friends are asking: "But you said you can make money in any market condition: up, down or even sideways." Although this certainly is true, it does seem to be easier to take advantage of trends and directional movements. I say this mostly because I've been studying trends and looking at swing trades. Additionally, I realize that there's a different kind of analysis involved in trades that take advantage of stagnation.
You may have realized this for yourself if you read my post on Trading P.I.T. Session 5 because of the need to quickly compare the different risk graphs for the various ways to take advantage of stagnation. A Calendar Spread is a great way to make money on a stock that's expected to trade in a set range. In order for me to really unlock the power of Calendar Spreads I'm going to need some more sophisticated analysis software. I've been working out simple Excel spreadsheets for basic analysis, but it's really difficult to compare the variations on the trade without risk graphs and the ability to compare all the aspects of an option (strike price, cost, delta, gamma, theta, etc...). Being able to match the risk graph with your outlook for the stock is the idea here. It may even be that you'd favor a Diagonalized Iron Butterfly instead of a Calendar Spread in a glance with the ability to quickly compare the risk graphs.
I'll be working on getting OPUS or something to help me assess these kinds of trades. I think I'm going to stick to the original trending trades here in the beginning. I favor the Ratio Backspread for these directional moves right now because of the uncertainty of specific direction for the market as a whole. It seems like stocks are getting ready to actually move in a direction, but that direction seems unclear. Maybe August isn't the month to actually establish a trend... we'll see.
In the meantime, I've discovered Interactive Brokers' recorded webinars about Trader Work Station (their trading platform). I now know how to place a Spread now, but I'm still a little confused about entering the stop-loss position automatically if the initial order fills. Now that I know the basics of Trader Work Station I'm sure I can get an answer from a coach on the Teach Me To Trade coaching hotline or attend a live IB webinar and ask.
I have managed to open a few positions and will let you know more as they develop and/or close.
Monday, July 31, 2006
Wednesday, July 26, 2006
Trading P.I.T. Session 5
In tonight's Trading P.I.T. class, Bill Keevan presented Call and Put Calendar Spreads. Calendar Spreads are a powerful way to profit from stagnation in a stock. If you're familiar with Covered Calls, you've got a head start on understanding the basic strategy.
Without going into much detail about a Covered Call strategy, the basic idea is that you own the underlying security and sell the Out of The Money (OTM) Call for a market premium. Doing so limits your downside risk by the amout of the market premium, and if the stock doesn't move at all, you make a nice profit on the sale of the Call Option. If the stock goes down, you've offset your losses by the premium you took in with the sale. If the stock moves above the strike price, the option will be exercised; you'll make a nice profit, while limiting your risk, but will be out of the stock and unable benefit from further increases in the stock's value. You can make a nice percentage return using Covered Calls, but owning the stock ties up a considerable amount of your money and although you gain some downside risk protection, it's only offset by the amount you were paid for writing (selling) the call.
In a Call Calendar Spread we will buy a long-term Call Option (say 6 months out); this is akin to owning the stock like in the covered call strategy described above. We then sell another, short-term Call Option and take in the premium. By doing so, we don't have to tie up as much of our capital; this is the way we use the leverage that Options provide to make considerably more reward on risk. We can typically expect 4-8 times the reward on risk using a Call Calendar Spread instead of a Covered Call. In either the Covered Call or the Call Calendar Spread, we achieve maximum profits if the underlying security rises to, but does not exceed the Strike Price of the Call Option we sold. If the stock does rise above the strike price on the option we sold, we will be exercised and need to either buy back the short-term option or perform a same day substitution cover the Option we sold.
To me, this is the most complex strategy to describe profitability, especially without having a risk graph. Basically, when you combine the options in a risk graph, you'll see a range of profitability at expiration with fairly steep slopes around a peak that is centered above the strike price of the option we sold.
There are many ways to structure a Calendar Spread. Unlike a Covered Call, you can take advantage of a stagnant-to-bearish outlook by using a Put Calender Spread. The flexibility of this trade adds to the complexity. You can choose to structure the spread At The Money (ATM), Out of The Money (OTM) or even diagonalize the spread by buying and selling different strike prices. By comparing the difference in premiums between the options, you can choose which spread will match your outlook.
In order to make the most informed decision between the variations on this trade, it is a tremendous help and time savings to compare the risk graphs by using OPUS or another Options Analysis program. Of course the tools of the trade (yes, pun intended) cost you money, but consider this: If you're building a house, but are not willing to buy a nail gun, it will probably cost you more in labor than you saved on the tool.
Without going into much detail about a Covered Call strategy, the basic idea is that you own the underlying security and sell the Out of The Money (OTM) Call for a market premium. Doing so limits your downside risk by the amout of the market premium, and if the stock doesn't move at all, you make a nice profit on the sale of the Call Option. If the stock goes down, you've offset your losses by the premium you took in with the sale. If the stock moves above the strike price, the option will be exercised; you'll make a nice profit, while limiting your risk, but will be out of the stock and unable benefit from further increases in the stock's value. You can make a nice percentage return using Covered Calls, but owning the stock ties up a considerable amount of your money and although you gain some downside risk protection, it's only offset by the amount you were paid for writing (selling) the call.
In a Call Calendar Spread we will buy a long-term Call Option (say 6 months out); this is akin to owning the stock like in the covered call strategy described above. We then sell another, short-term Call Option and take in the premium. By doing so, we don't have to tie up as much of our capital; this is the way we use the leverage that Options provide to make considerably more reward on risk. We can typically expect 4-8 times the reward on risk using a Call Calendar Spread instead of a Covered Call. In either the Covered Call or the Call Calendar Spread, we achieve maximum profits if the underlying security rises to, but does not exceed the Strike Price of the Call Option we sold. If the stock does rise above the strike price on the option we sold, we will be exercised and need to either buy back the short-term option or perform a same day substitution cover the Option we sold.
To me, this is the most complex strategy to describe profitability, especially without having a risk graph. Basically, when you combine the options in a risk graph, you'll see a range of profitability at expiration with fairly steep slopes around a peak that is centered above the strike price of the option we sold.
There are many ways to structure a Calendar Spread. Unlike a Covered Call, you can take advantage of a stagnant-to-bearish outlook by using a Put Calender Spread. The flexibility of this trade adds to the complexity. You can choose to structure the spread At The Money (ATM), Out of The Money (OTM) or even diagonalize the spread by buying and selling different strike prices. By comparing the difference in premiums between the options, you can choose which spread will match your outlook.
In order to make the most informed decision between the variations on this trade, it is a tremendous help and time savings to compare the risk graphs by using OPUS or another Options Analysis program. Of course the tools of the trade (yes, pun intended) cost you money, but consider this: If you're building a house, but are not willing to buy a nail gun, it will probably cost you more in labor than you saved on the tool.
Monday, July 24, 2006
Interactive Brokers Adventure
It was a dark and stormy night in the middle of the hottest day of Southern California's current record-breaking heatwave when I began to attempt to put my Interactive Brokers adventure down in sans-serif, mono-spaced font. I'm sure the immediate question is: Why use a mono-spaced font? Or, more likely: What does sans-serif mean? The real answer is: Stop asking silly questions! None of that matters. This is the account of signing up for an Interactive Brokers (IB) brokerage account, why are you asking about fonts? Nothing to see here folks, keep moving... If you're not interested in reading my colorful-commentary, or you're impatient, scroll to the end of this post for my executive summary.
I had already set up an account with OptionsXpress (OX) about a month earlier, but did not fund it. I did attempt to put in some paper trades together on OX using their virtual trader interface. OX's interface seems simple enough, but I have a couple complaints: 1) The virtual trading interface is not exactly the same as their live trading interface. 2) Although they're modestly priced for multiple contract options and medium-to-large lot stock orders, for small orders, they are rather expensive (even at the "active trader" rate).
Both of these are major factors in my decision to not use OptionsXpress and instead go with Interactive Brokers. I plan to take advantage of the virtual trading in exactly the same way as I'll manage my real account, so the disparity in abilities between OX's virtual trader and their live trading interface is undesirable. Also, because my account will be small to start with, I won't be able to take advantage of the multi-contract Option discounts nor large lot stock purchases, so the Cost of Trade will weigh heavily against gains and will enhance losses.
I have heard a number of complaints by non-professionals about IB's interface. Interactive Brokers seems to have gained a reputation amongst amateurs of being difficult to use, yet I have not heard such complaints from professionals. I'm a reasonably savvy computer user (ok maybe even a full-fledged computer geek), so I'm not dissuaded by a complicated interface; I'm willing to put in the time today to learn to use a powerful order entry tool for my career in professional trading. I figure once I'm through the learning curve I get to take advantage of a very nice platform for placing trades.
Without the typical negatives touted about Interactive Brokers being of any significance for me personally, the remaining reasons for choosing IB make it seem like a no-brainer. Both my weekly call-in coach (Rob Craig) and my mentor (Jordan Stokes, who I'll sit down with in mid-September) use and recommend Interactive Brokers. Both of these gentlemen are successful traders and I'm going to mimic them in the beginning as I discover my own style of trade and risk tolerance. Another huge point is that Interactive Brokers is cheap, really cheap. So cheap that Bill Keevan made the remark in one of the Trading P.I.T. sessions that he doesn't even factor in the cost of the trade into is profit/loss calculation. I like that -- the ability to be an active trader without it costing much to get in and out of positions. Also, some Option plays require 4+ legs to put the strategy together -- this could likely end up offsetting gains greatly. Interactive Brokers also has an outstanding reputation over an extended period of time (29 years) for accurate order execution.
Interactive Brokers also seems to be the choice for professional traders because they don't place artificial restrictions on your orders - things like a required distance between your stop and limit when opening a position. IB allows very sophisticated, advanced order specification and routing. It is also worth noting that they allow you to trade just about every kind of tradable security under the sun: Forex, futures, options, ETFs, etc... If it's tradable, IB has it. IB's interface may be a bit more complicated than other brokerage firms, but that's because they expose so much power and flexibility. They really give you a lot of control over your trade and with such control there is far more to know and consider when trading through them.
On a personal note about the learning curve involved with IB's trader interface: consider my background. I'm a musician and computer programmer. Neither are instant-gratification pursuits. You don't just pick up a French Horn and a week later you're performing at Carnegie Hall. It takes years of disciplined practice. With the right attitude, patience, and acceptance of the learning curve you can make great strides. Even when you get to the top of your game, music, like many things, requires diligence to keep your skills sharp. Use it or lose it. Programming is the ultimate discipline of a lazy person. On the surface you may not think so, but one tenet of programming is the desire to save time. Programmers will spend thousands of hours in order to save minutes; however, those minutes are saved by everyone, everyday when they use what the programmers were willing to spend thousands of hours creating. I'm certainly willing to put in the time to get past the learning curve and take advantage of all those very nice benefits IB offers.
Now that you can (hopefully) understand my motivation to get an Interactive Brokers account, I can recount the tale of the actual sign-up process. After reviewing the various accounts that Interactive Brokers offers, I considered signing up for an advisor account. I thought: Cool, I can manage multiple accounts from one? That should work quite well for me as I plan to manage my father's account someday too. However, I stumbled when I was faced with some questions about being considered a professional and the tax implications, etc. Also, I had a reality check moment where I realized it was probably a bit ambitious to take on an adviser's account before having actually placed even a single trade. Even though having an adviser's account is likely in my future, I was getting ahead of myself.
After identifying that I desired an individual account, the details behind that account must be filled in. As mentioned, Interactive Brokers allows you to trade all kinds of markets and commodities. It seems like a simple enough decision: I want it all. I signed up for access to everything they offer, and supported the fact that I can be trusted with such access with all the necessary details. To avoid any unnecessary delay or rejection, I may have been slightly embellishing on some of the details of my experience with the different types of markets. I take full responsibility for my usage of such access, and stand by my stated experience. Please understand that I'm not advocating lying about your experience or net worth to bolster your account access; doing so can lead to many interesting ways of losing your money and may be considered a punishable offense.
It took hours to read through the roughly 40 legal agreements concerned with subscription and usage rights and disclosure of inherent risk of all the various types of markets and trades. After 4 cups of coffee, I was nearly through half and decided to take a break. There's only so much legalese I can take before the words are just a blur moving by in the background while I fantasize about... Wait, what was it that I just read? ... You get the picture. It was important for me to read and understand all of the agreements, and there were so many because of the level of access I was requesting. Make no mistake, setting up a brokerage account is not a casual thing that you should do for fun at the end of a long day.
The next step after reading through the agreements was to actually fund the account. Interactive Brokers required a minimum of $5,000 to fund my account (remember, I signed up for it all, including margin, etc... the minimum may be different for other types of accounts/access). As far as I could tell, you cannot move forward from this point until you set up the funding. That is, no paper trade acces, nothing... They seem to want serious customers, not lookey-loos. After I send the ACH payment, I scanned my driver's license and emailed it in, as proof of who I am and where I live. It seems all brokerage firms require some proof of who you claim to be and where you live. About a week later my account was activated. Immediately after, I asked for a paper trading account to be created for me to virtual trade. It took another few days for the virtual account to become active and now I have my account set up, funded and ready to trade.
Executive Summary (for the impatient):
Positives for Interactive Brokers:
I had already set up an account with OptionsXpress (OX) about a month earlier, but did not fund it. I did attempt to put in some paper trades together on OX using their virtual trader interface. OX's interface seems simple enough, but I have a couple complaints: 1) The virtual trading interface is not exactly the same as their live trading interface. 2) Although they're modestly priced for multiple contract options and medium-to-large lot stock orders, for small orders, they are rather expensive (even at the "active trader" rate).
Both of these are major factors in my decision to not use OptionsXpress and instead go with Interactive Brokers. I plan to take advantage of the virtual trading in exactly the same way as I'll manage my real account, so the disparity in abilities between OX's virtual trader and their live trading interface is undesirable. Also, because my account will be small to start with, I won't be able to take advantage of the multi-contract Option discounts nor large lot stock purchases, so the Cost of Trade will weigh heavily against gains and will enhance losses.
I have heard a number of complaints by non-professionals about IB's interface. Interactive Brokers seems to have gained a reputation amongst amateurs of being difficult to use, yet I have not heard such complaints from professionals. I'm a reasonably savvy computer user (ok maybe even a full-fledged computer geek), so I'm not dissuaded by a complicated interface; I'm willing to put in the time today to learn to use a powerful order entry tool for my career in professional trading. I figure once I'm through the learning curve I get to take advantage of a very nice platform for placing trades.
Without the typical negatives touted about Interactive Brokers being of any significance for me personally, the remaining reasons for choosing IB make it seem like a no-brainer. Both my weekly call-in coach (Rob Craig) and my mentor (Jordan Stokes, who I'll sit down with in mid-September) use and recommend Interactive Brokers. Both of these gentlemen are successful traders and I'm going to mimic them in the beginning as I discover my own style of trade and risk tolerance. Another huge point is that Interactive Brokers is cheap, really cheap. So cheap that Bill Keevan made the remark in one of the Trading P.I.T. sessions that he doesn't even factor in the cost of the trade into is profit/loss calculation. I like that -- the ability to be an active trader without it costing much to get in and out of positions. Also, some Option plays require 4+ legs to put the strategy together -- this could likely end up offsetting gains greatly. Interactive Brokers also has an outstanding reputation over an extended period of time (29 years) for accurate order execution.
Interactive Brokers also seems to be the choice for professional traders because they don't place artificial restrictions on your orders - things like a required distance between your stop and limit when opening a position. IB allows very sophisticated, advanced order specification and routing. It is also worth noting that they allow you to trade just about every kind of tradable security under the sun: Forex, futures, options, ETFs, etc... If it's tradable, IB has it. IB's interface may be a bit more complicated than other brokerage firms, but that's because they expose so much power and flexibility. They really give you a lot of control over your trade and with such control there is far more to know and consider when trading through them.
On a personal note about the learning curve involved with IB's trader interface: consider my background. I'm a musician and computer programmer. Neither are instant-gratification pursuits. You don't just pick up a French Horn and a week later you're performing at Carnegie Hall. It takes years of disciplined practice. With the right attitude, patience, and acceptance of the learning curve you can make great strides. Even when you get to the top of your game, music, like many things, requires diligence to keep your skills sharp. Use it or lose it. Programming is the ultimate discipline of a lazy person. On the surface you may not think so, but one tenet of programming is the desire to save time. Programmers will spend thousands of hours in order to save minutes; however, those minutes are saved by everyone, everyday when they use what the programmers were willing to spend thousands of hours creating. I'm certainly willing to put in the time to get past the learning curve and take advantage of all those very nice benefits IB offers.
Now that you can (hopefully) understand my motivation to get an Interactive Brokers account, I can recount the tale of the actual sign-up process. After reviewing the various accounts that Interactive Brokers offers, I considered signing up for an advisor account. I thought: Cool, I can manage multiple accounts from one? That should work quite well for me as I plan to manage my father's account someday too. However, I stumbled when I was faced with some questions about being considered a professional and the tax implications, etc. Also, I had a reality check moment where I realized it was probably a bit ambitious to take on an adviser's account before having actually placed even a single trade. Even though having an adviser's account is likely in my future, I was getting ahead of myself.
After identifying that I desired an individual account, the details behind that account must be filled in. As mentioned, Interactive Brokers allows you to trade all kinds of markets and commodities. It seems like a simple enough decision: I want it all. I signed up for access to everything they offer, and supported the fact that I can be trusted with such access with all the necessary details. To avoid any unnecessary delay or rejection, I may have been slightly embellishing on some of the details of my experience with the different types of markets. I take full responsibility for my usage of such access, and stand by my stated experience. Please understand that I'm not advocating lying about your experience or net worth to bolster your account access; doing so can lead to many interesting ways of losing your money and may be considered a punishable offense.
It took hours to read through the roughly 40 legal agreements concerned with subscription and usage rights and disclosure of inherent risk of all the various types of markets and trades. After 4 cups of coffee, I was nearly through half and decided to take a break. There's only so much legalese I can take before the words are just a blur moving by in the background while I fantasize about... Wait, what was it that I just read? ... You get the picture. It was important for me to read and understand all of the agreements, and there were so many because of the level of access I was requesting. Make no mistake, setting up a brokerage account is not a casual thing that you should do for fun at the end of a long day.
The next step after reading through the agreements was to actually fund the account. Interactive Brokers required a minimum of $5,000 to fund my account (remember, I signed up for it all, including margin, etc... the minimum may be different for other types of accounts/access). As far as I could tell, you cannot move forward from this point until you set up the funding. That is, no paper trade acces, nothing... They seem to want serious customers, not lookey-loos. After I send the ACH payment, I scanned my driver's license and emailed it in, as proof of who I am and where I live. It seems all brokerage firms require some proof of who you claim to be and where you live. About a week later my account was activated. Immediately after, I asked for a paper trading account to be created for me to virtual trade. It took another few days for the virtual account to become active and now I have my account set up, funded and ready to trade.
Executive Summary (for the impatient):
Positives for Interactive Brokers:
- Powerful capabilities
- Trade many different markets
- Cheap!
- Reliable
- Well-established brokerage firm
- Virtual (paper) trade interface exactly same as real trade interface
Saturday, July 22, 2006
Efficient Market Theory
Recently I read StockCharts.com's Stock Analysis Overview, which is part of their free Chart School Educational Information. I've been reflecting on the concepts presented therein and it's helped me understand the principles behind much of what EduTrades, Inc. (Teach Me To Trade) teaches. As noted, I'm new to stock & option trading and I'm doing all I can to soak up more information and opinions. Although it's not the only thing TMTT teaches, technical analysis is certainly paramount to TMTT's system of trading. Technical Analysis should be incorporated into any investment strategy for trade entry and management, but it's absolutely essential to being a Professional Trader.
The overview is a presentation of theories that are the basis of a trading or investment system designed to "beat the market." There are scores of people on wall street and around the world that are attempting to do just that. It seems logical that the way to beat the market is to exploit anomalies that exist at any given point in time. So how do you know what's anomalous? This is one area where technical analysis excels. If your technical analysis leads you to believe that a particular security is overbought or oversold, you can enter a position to prosper from the anomaly. Now that sounds all well and good, but it does require accepting Strong-Form "Efficient" Market Theory as a foundation.
Simplistic as it may seem, strong-form theory states that everything you need to know about the company is reflected in its current price because that's the value the market has dictated. Technicians look to trends and patterns in the chart & volume to make money on overbought or oversold stocks. For an efficient market to work, investors need to know all relevant information, including news and fundamentals about the company; investors must also have the ability to act (or react) to such news as quickly as possible. Essentially the price will continually correct itself as news and company information is made available to the public.
The other theories for and exploiting anomalies include the semi-strong form and the weak form. The weak form of the market dictates that the fundamental information behind a stock determines its actual value. The discrepancy between the current price and the expect value based on your fundamental analysis is the anomaly that we can exploit. For example, if your fundamental analysis leads you to believe the stock is underpriced relative to it's value, you'd be bullish on the stock and seek to profit as the trading price approaches the value that you've determined from your fundamental analysis.
Although I don't think this approach is worthless, there are many times the price of the stock does not react the way you might expect. When good news comes out about a stock, this system dictates the price should increase, but there are numerous examples of the exact opposite happening if not nothing (no increase) at all. Even if you were a fundamentalist who whole-heartedly subscribes to the weak-form market theory, knowing a good technical setup can certainly benefit your bottom line.
The most interesting theory (yet the most worthless for the basis of a trading or investment system) is the semi-strong form of the market, aka the "random walkers." This theory basis itself on price corrections happening (much like the strong-form theory), but that the only way to profit from such price corrections is to know the news ahead of the public at large. The idea behind this is that, although all known information available is reflected in the current price, there is inevitably information that is not public (think insider trading). Without such insider information, the markets behave in a rather chaotic, unpredictable way. Thus making the ability to "beat the market," a near impossibility without insider information. I don't believe this is the only way to beat the market, however I do believe a certain level of insider trading does exist. I say this only based purely on human nature; I'm not so much an idealist, nor so naive that I believe everyone is honest and forthcoming all the time, especially when they stand to profit from withholding such information.
Granted, I'm new to all this, but it seems the market has become more efficient as the delivery of news and the ability to act on that news has become more immediate (and cheaper). Therefore, in today's world of up-to-date news available at the click of a mouse, and the ability to act on that information with similar speed and ease, we have a more efficient market than we've had in the past. It also seems realistic to expect that the markets will become more effecient and possibly more predictable. Consider if everyone is using the strong-form (effecient) theory to determine their trade entry & exit; in such a situation, the stock should exhibit a normalized, semi-predictable behavior. Of course this could all just be in my imagination as I conceptualize how trading & the markets work.
The overview is a presentation of theories that are the basis of a trading or investment system designed to "beat the market." There are scores of people on wall street and around the world that are attempting to do just that. It seems logical that the way to beat the market is to exploit anomalies that exist at any given point in time. So how do you know what's anomalous? This is one area where technical analysis excels. If your technical analysis leads you to believe that a particular security is overbought or oversold, you can enter a position to prosper from the anomaly. Now that sounds all well and good, but it does require accepting Strong-Form "Efficient" Market Theory as a foundation.
Simplistic as it may seem, strong-form theory states that everything you need to know about the company is reflected in its current price because that's the value the market has dictated. Technicians look to trends and patterns in the chart & volume to make money on overbought or oversold stocks. For an efficient market to work, investors need to know all relevant information, including news and fundamentals about the company; investors must also have the ability to act (or react) to such news as quickly as possible. Essentially the price will continually correct itself as news and company information is made available to the public.
The other theories for and exploiting anomalies include the semi-strong form and the weak form. The weak form of the market dictates that the fundamental information behind a stock determines its actual value. The discrepancy between the current price and the expect value based on your fundamental analysis is the anomaly that we can exploit. For example, if your fundamental analysis leads you to believe the stock is underpriced relative to it's value, you'd be bullish on the stock and seek to profit as the trading price approaches the value that you've determined from your fundamental analysis.
Although I don't think this approach is worthless, there are many times the price of the stock does not react the way you might expect. When good news comes out about a stock, this system dictates the price should increase, but there are numerous examples of the exact opposite happening if not nothing (no increase) at all. Even if you were a fundamentalist who whole-heartedly subscribes to the weak-form market theory, knowing a good technical setup can certainly benefit your bottom line.
The most interesting theory (yet the most worthless for the basis of a trading or investment system) is the semi-strong form of the market, aka the "random walkers." This theory basis itself on price corrections happening (much like the strong-form theory), but that the only way to profit from such price corrections is to know the news ahead of the public at large. The idea behind this is that, although all known information available is reflected in the current price, there is inevitably information that is not public (think insider trading). Without such insider information, the markets behave in a rather chaotic, unpredictable way. Thus making the ability to "beat the market," a near impossibility without insider information. I don't believe this is the only way to beat the market, however I do believe a certain level of insider trading does exist. I say this only based purely on human nature; I'm not so much an idealist, nor so naive that I believe everyone is honest and forthcoming all the time, especially when they stand to profit from withholding such information.
Granted, I'm new to all this, but it seems the market has become more efficient as the delivery of news and the ability to act on that news has become more immediate (and cheaper). Therefore, in today's world of up-to-date news available at the click of a mouse, and the ability to act on that information with similar speed and ease, we have a more efficient market than we've had in the past. It also seems realistic to expect that the markets will become more effecient and possibly more predictable. Consider if everyone is using the strong-form (effecient) theory to determine their trade entry & exit; in such a situation, the stock should exhibit a normalized, semi-predictable behavior. Of course this could all just be in my imagination as I conceptualize how trading & the markets work.
Wednesday, July 19, 2006
Trading P.I.T. Session 4
Tonight's Trading PIT class with Bill Keevan was about Ratio Backspreads. We covered both the Call Ratio Backspread and the Put Ratio Backspread. This is a credit trade where we are expecting a strong directional move in the stock. However, if the stock moves against you, you still come out ahead. Let me give you a moment to think about that. If you are dead-wrong on the direction the stock is going, you can still make money. Isn't that a nice trick? There is a downside: if the stock just consolidates and doesn't move either direction before the options expire, you stand to lose money.
This strategy involves simultaneously Selling an In-The-Money (ITM) Call (or Put) Option and using the credit to Buy 2 or more Out-of-The-Money (OTM) Calls (or Puts). There is a lot you need to know about the Options in question in order to make this trade work for you. Again, this is one of those times I can't really tell you a lot about how to structure the order, you'll need to take the class so that I don't reveal the proprietary entry & exit criteria.
I have created an Excel template for a evaluating a Ratio Backspread. It allows you to quickly evaluate the entry criteria, by comparing 3 ITM contracts to 3 OTM contracts and allows you to change the number of contracts to Buy and Sell. Unless you have taken the class, you may not understand how to use it, even if you have taken the class, you may not know how to use it. I just created it to help me evaluate Ratio Backspreads for myself. If you're interested it can be downloaded by clicking here.
This strategy involves simultaneously Selling an In-The-Money (ITM) Call (or Put) Option and using the credit to Buy 2 or more Out-of-The-Money (OTM) Calls (or Puts). There is a lot you need to know about the Options in question in order to make this trade work for you. Again, this is one of those times I can't really tell you a lot about how to structure the order, you'll need to take the class so that I don't reveal the proprietary entry & exit criteria.
I have created an Excel template for a evaluating a Ratio Backspread. It allows you to quickly evaluate the entry criteria, by comparing 3 ITM contracts to 3 OTM contracts and allows you to change the number of contracts to Buy and Sell. Unless you have taken the class, you may not understand how to use it, even if you have taken the class, you may not know how to use it. I just created it to help me evaluate Ratio Backspreads for myself. If you're interested it can be downloaded by clicking here.
Coaching Call Week 5
This week Rob reviewed both chapters 4 & 5 with me. Chapter 4 is on trends, chart reading, and Moving Averages, whereas chapter 5 is on Stochastics & MACD. One point Rob drove home with me is that secondary technical indicators, such as Stochastic & MACD are used for confirmation of our position on a stock, not as a deciding factor. Something like evidence to support your position, but that your stance on a given stock is based on the current chart, looking for trends and support & resistance.
Today, for some unknown reason, we had trouble with NetMeeting so he was unable to connect to share my desktop like we have done in previous sessions. Perhaps my cable Internet provider was having trouble or something.
While we were working on getting NetMeeting to work, I managed to ask a question I should have asked earlier. I asked Rob about why, in his opinion, do 85% of traders quit within 6 months of trading? This was something he informed me of on our very first introductory call (see: Coaching and Catches). His answer was that most lack the discipline to improve and make it as a trader. I drilled into that statement a little for a clarification about what is meant by being a disciplined trader. In essence: maintaining a watchlist, waiting for the best opportunity to make the trade, and managing the trade. I can see how this isn't the easiest thing. For those of you who think this is "easy money" well... think again. You can't just do this as a hobby or casually. It requires a lot of time, effort & concentration.
After a review of the chapters we looked through some of the stocks that I have in my Hotlist and the position I currently have open on a Paper Trade. I was a little embarrassed for the position I currently have open on a paper trade. Although the trend looks good, it's volatile, cheap and trades thinner than normally preferred. Has the feel of an amateur trade. It's not something I'll repeat in the future, especially given that it's a bullish trade on a decently trending stock, but with the market bearish. I may be being to hard on myself though, but I don't plan to trade something like this again in the future, paper or otherwise. I'm learning, so mistakes are inevitable. This trade may work out, however I'll consider it luck more than skill if so.
Next week we'll be reviewing Chapter 7 and I'm to continue maintaining my hotwatch list, watchlist in general and to continue to paper trade.
Today, for some unknown reason, we had trouble with NetMeeting so he was unable to connect to share my desktop like we have done in previous sessions. Perhaps my cable Internet provider was having trouble or something.
While we were working on getting NetMeeting to work, I managed to ask a question I should have asked earlier. I asked Rob about why, in his opinion, do 85% of traders quit within 6 months of trading? This was something he informed me of on our very first introductory call (see: Coaching and Catches). His answer was that most lack the discipline to improve and make it as a trader. I drilled into that statement a little for a clarification about what is meant by being a disciplined trader. In essence: maintaining a watchlist, waiting for the best opportunity to make the trade, and managing the trade. I can see how this isn't the easiest thing. For those of you who think this is "easy money" well... think again. You can't just do this as a hobby or casually. It requires a lot of time, effort & concentration.
After a review of the chapters we looked through some of the stocks that I have in my Hotlist and the position I currently have open on a Paper Trade. I was a little embarrassed for the position I currently have open on a paper trade. Although the trend looks good, it's volatile, cheap and trades thinner than normally preferred. Has the feel of an amateur trade. It's not something I'll repeat in the future, especially given that it's a bullish trade on a decently trending stock, but with the market bearish. I may be being to hard on myself though, but I don't plan to trade something like this again in the future, paper or otherwise. I'm learning, so mistakes are inevitable. This trade may work out, however I'll consider it luck more than skill if so.
Next week we'll be reviewing Chapter 7 and I'm to continue maintaining my hotwatch list, watchlist in general and to continue to paper trade.
Tuesday, July 18, 2006
Master Trader Session 6
This evening was the last of six Master Trader Sessions with Matt Gildea. I was just a little late to the start of this class. I had my cat fixed today and the vet was very slow to bring my Wannabe back to me. I ended up waiting 15 minutes for them to bring her out. Needless to say that was frustrating and made me 8 minutes late to my class! When I joined the meeting I came in on him demonstrating Order Entry in OptionsXpress.com
After the order entry we reviewed some current setups and talked about order management, especially stop management. Matt showed us several home builders' charts as they've been a terrific sector to short during the past few months.
After looking through these current market items, we looked at some essential Market Gauges. We began with the "Original Formula" Volatility Index (VXO, $VXO, ^VXO, often just pronounced: vix). This seems to be one of the most powerful leading indicator gauges at our disposal. For much of the past 5 years this has been an excellent tool to measure market sentiment. The best part is it really has demonstrated itself to be a fairly consistent leading indicator of market direction. However, more recently, although it hasn't been completely wrong, it just hasn't given the kind of clear signals it has shown in the past. Since general market sentiment affects stocks, this is a very powerful tool to aid in our decision of an individual stock's direction. Compare the VXO to the DJI, S&P, Nasdaq for the past five years for yourself and see what patterns emerge. Notice how the VXO hasn't moved as dramatically in the more recent past and how the market has similarly not has as dramatic a movement following the VXO's movement?
Although the recent volatility index range has been a bit muted it still follows as a leading indicator if you squint with one eye and turn your monitor sideways. No, just kidding, I was checking to see if you are still paying attention. It seems that all indicators must be continually reevaluated for their applicability to current market. Although this may seem to invalidate them, I think we'd be throwing the baby out with the bathwater if we took that approach. By keeping an open mind to a different interpretation of these indicators, we can still find use of these to aid our decision making on any given position. I may be reading too much into this, and the above account isn't exactly echoed from what I've been taught. It's my own interpretation of what has been presented to me. You've been warned.
After looking at the vix, we went through some guidelines on managing a gap open on our setup as well as how to manage gaps on our open positions. Some of this information requires that you are able to be in front of your computer making market decisions in realtime during the opening minutes of the market. Not exactly day trading, but certainly some strategies involve a similar discipline.
We then turned our attention to Relative Strength & Weakness stocks. Determining relative strength & relative weakness for a given stock is yet another way for us to support our opinion on a stock's direction. This is a multilevel filtering technique we apply where we compare the stock to the market as a whole (an index, such as the S&P 500), and the specific sector. It does make sense that you'd want to put your money into the strongest performers of a given sector that is ideally the strongest performing sector at that point in time (or reverse that for bearish or short-sale). I think this is a very important aspect that I will include in my analysis of an individual stock. It's not the easiest thing to analyze, but I think the benefits far outweigh the time cost.
Matt Gildea then spoke about what the daily routine of a professional trader is. You may have already picked up on this being a discipline that requires daily attention, but this point really can't be stated strongly enough. This is not something that you can expect to get tremendous results by doing it as a hobby, there is a daily routine that you really requires some time. You must be aware of the current market environment, pay attention to news reports, maintain your watchlist, continually be looking for new positions to open and manage the existing positions. It probably means a couple hours a night with some attention paid to the market just before it opens and ideally checking on your open positions as the day progresses to evaluate if any of your stops should be updated.
After having all this information spinning around in my head, it's going to take some practice to get it all down. Right now I'm moving a little on the slow side in terms of analysis & finding trades that I'd want to put my money into. I'm practicing the daily ritual with my paper trades, but there is quite a lot of analysis and things to consider. Patience and keeping a cool head seem to be vital to success.
After the order entry we reviewed some current setups and talked about order management, especially stop management. Matt showed us several home builders' charts as they've been a terrific sector to short during the past few months.
After looking through these current market items, we looked at some essential Market Gauges. We began with the "Original Formula" Volatility Index (VXO, $VXO, ^VXO, often just pronounced: vix). This seems to be one of the most powerful leading indicator gauges at our disposal. For much of the past 5 years this has been an excellent tool to measure market sentiment. The best part is it really has demonstrated itself to be a fairly consistent leading indicator of market direction. However, more recently, although it hasn't been completely wrong, it just hasn't given the kind of clear signals it has shown in the past. Since general market sentiment affects stocks, this is a very powerful tool to aid in our decision of an individual stock's direction. Compare the VXO to the DJI, S&P, Nasdaq for the past five years for yourself and see what patterns emerge. Notice how the VXO hasn't moved as dramatically in the more recent past and how the market has similarly not has as dramatic a movement following the VXO's movement?
Although the recent volatility index range has been a bit muted it still follows as a leading indicator if you squint with one eye and turn your monitor sideways. No, just kidding, I was checking to see if you are still paying attention. It seems that all indicators must be continually reevaluated for their applicability to current market. Although this may seem to invalidate them, I think we'd be throwing the baby out with the bathwater if we took that approach. By keeping an open mind to a different interpretation of these indicators, we can still find use of these to aid our decision making on any given position. I may be reading too much into this, and the above account isn't exactly echoed from what I've been taught. It's my own interpretation of what has been presented to me. You've been warned.
After looking at the vix, we went through some guidelines on managing a gap open on our setup as well as how to manage gaps on our open positions. Some of this information requires that you are able to be in front of your computer making market decisions in realtime during the opening minutes of the market. Not exactly day trading, but certainly some strategies involve a similar discipline.
We then turned our attention to Relative Strength & Weakness stocks. Determining relative strength & relative weakness for a given stock is yet another way for us to support our opinion on a stock's direction. This is a multilevel filtering technique we apply where we compare the stock to the market as a whole (an index, such as the S&P 500), and the specific sector. It does make sense that you'd want to put your money into the strongest performers of a given sector that is ideally the strongest performing sector at that point in time (or reverse that for bearish or short-sale). I think this is a very important aspect that I will include in my analysis of an individual stock. It's not the easiest thing to analyze, but I think the benefits far outweigh the time cost.
Matt Gildea then spoke about what the daily routine of a professional trader is. You may have already picked up on this being a discipline that requires daily attention, but this point really can't be stated strongly enough. This is not something that you can expect to get tremendous results by doing it as a hobby, there is a daily routine that you really requires some time. You must be aware of the current market environment, pay attention to news reports, maintain your watchlist, continually be looking for new positions to open and manage the existing positions. It probably means a couple hours a night with some attention paid to the market just before it opens and ideally checking on your open positions as the day progresses to evaluate if any of your stops should be updated.
After having all this information spinning around in my head, it's going to take some practice to get it all down. Right now I'm moving a little on the slow side in terms of analysis & finding trades that I'd want to put my money into. I'm practicing the daily ritual with my paper trades, but there is quite a lot of analysis and things to consider. Patience and keeping a cool head seem to be vital to success.
Monday, July 17, 2006
First IB Paper Trades
Sunday night I identified 2 stocks that looked like they had a reward:risk of > 2:1 and set up the trades on my Interactive Brokers Virtual Trading (paper trade) account. They've given me 1 million dollars in the account and I don't know if I can change the amount or not. I've considered reducing it to what I'll really be trading with for the most accurate virtual experience, but have not yet found if or where I can configure the "funding" of my virtual account.
The first stock I set up for shorting dropped down just enough to fill, only to increase enough to stop me out for a small loss. No big deal, looks like it was going against me anyway, so may as well just get out.
The second looked like a decent setup but normally would not have been filled today because it didn't drop below the entry threshold. However, because I didn't know how to set the conditional activation of the stop-loss I ended up long on a stock that I wanted to short! Oops!!
This is why we practice with paper money, right? I know it's not a mistake that I'll repeat and I have since located the conditional aspect of an order. The ability to set conditions on the order is considered an advanced feature that Interactive Brokers "hides" early on to simplify the interface. Rather than just panicking and closing out the position, I decided to protect from it dropping below a certain threshold where it seemed to have found some intra-day support. Hopefully tomorrow it will inch up back to where I falsely entered the long position.
Tonight, after going through my Hotwatch list I couldn't find any trades that looked like high enough reward:risk ratios to bother so I didn't enter any new paper trades. I'll be paying attention to that second stock that I accidentally went long on to see if I can exit with only a small loss or possibly even a gain.
The first stock I set up for shorting dropped down just enough to fill, only to increase enough to stop me out for a small loss. No big deal, looks like it was going against me anyway, so may as well just get out.
The second looked like a decent setup but normally would not have been filled today because it didn't drop below the entry threshold. However, because I didn't know how to set the conditional activation of the stop-loss I ended up long on a stock that I wanted to short! Oops!!
This is why we practice with paper money, right? I know it's not a mistake that I'll repeat and I have since located the conditional aspect of an order. The ability to set conditions on the order is considered an advanced feature that Interactive Brokers "hides" early on to simplify the interface. Rather than just panicking and closing out the position, I decided to protect from it dropping below a certain threshold where it seemed to have found some intra-day support. Hopefully tomorrow it will inch up back to where I falsely entered the long position.
Tonight, after going through my Hotwatch list I couldn't find any trades that looked like high enough reward:risk ratios to bother so I didn't enter any new paper trades. I'll be paying attention to that second stock that I accidentally went long on to see if I can exit with only a small loss or possibly even a gain.
Sunday, July 16, 2006
The Fresno Paper Trades
Remember those dozen stocks that my father and I identified as possible shorting candidates when I was in Fresno? Well, I got to thinking: what if I entered the trade and managed it (stop-loss) as I've been taught. This meant going through the charts on each of the dozen that we had on our watchlist, plugging the numbers into the spreadsheet that Matt Gildea gave out as part of the 2nd Session of Master Trader to evaluate the reward:risk ratio. Out of the 12 stocks that had good technical setups, 6 had a favorable reward:risk ratio of > 3:1 at the time.
I was really interested in the untainted, unadulterated truth about how effective this trading system is, and therefore made these back-dated paper trades based only on the information the stock was giving up to that time. That is, I didn't look to the future to make the decision. That would ruin the results, and although it may be good for my ego, it certainly wouldn't do much for feedback on my system of trading.
Following the system, 3 (CLE, CPKI, CNB) out of the 6 were stopped out for meager gains, one probably would end up being a very small loss given the disparity between the Bid and the Ask. Obviously there's a problem with stocks that begin with the letter C, so I'll avoid them in the future ;-). One more (EBAY) would have been stopped out for a nice gain of 6.75%. I actually re-entered trades on EBAY, CLE, and CRL because the re-entry looked good, and am currently holding those in addition to the remaining 2 (PLL & STN).
The bottom line is it averages out to roughly 3% (on amount risked) in 2 weeks using straight stock trading (not options). A very promising beginning to my paper trades. I'm now current and will not be back-dating any of my paper trades in the future. I placed 2 trades on my Interactive Brokers account, which will hopefully be filled tomorrow. Now that I don't have the ability to see the future direction of the stock, the truth will be unavoidable. Along with the truth I can tailor my trading style to suit my risk tolerance as I get a feel for actually entering and maintaining my (paper) trades day in and day out.
I was really interested in the untainted, unadulterated truth about how effective this trading system is, and therefore made these back-dated paper trades based only on the information the stock was giving up to that time. That is, I didn't look to the future to make the decision. That would ruin the results, and although it may be good for my ego, it certainly wouldn't do much for feedback on my system of trading.
Following the system, 3 (CLE, CPKI, CNB) out of the 6 were stopped out for meager gains, one probably would end up being a very small loss given the disparity between the Bid and the Ask. Obviously there's a problem with stocks that begin with the letter C, so I'll avoid them in the future ;-). One more (EBAY) would have been stopped out for a nice gain of 6.75%. I actually re-entered trades on EBAY, CLE, and CRL because the re-entry looked good, and am currently holding those in addition to the remaining 2 (PLL & STN).
The bottom line is it averages out to roughly 3% (on amount risked) in 2 weeks using straight stock trading (not options). A very promising beginning to my paper trades. I'm now current and will not be back-dating any of my paper trades in the future. I placed 2 trades on my Interactive Brokers account, which will hopefully be filled tomorrow. Now that I don't have the ability to see the future direction of the stock, the truth will be unavoidable. Along with the truth I can tailor my trading style to suit my risk tolerance as I get a feel for actually entering and maintaining my (paper) trades day in and day out.
Thursday, July 13, 2006
Trading P.I.T. Session 3
Tonight's Trading P.I.T. class with Bill Keevan covered the Straddle/Strangle option strategy. This is a neutral debit strategy where you make money if the stock moves either up or down. Without covering the specific guidelines TMTT teaches for entry and exit, the basic idea is that you buy a Put and a Call before expected volatility in a security. Of course if you think really hard about stock behavior, you may be able to predict increased volatility around specific, predictable events. I'll let you think about which events repeatedly produce such an increase in volatility so you feel like you've earned the answer.
This strategy is one where you can make money, typically 100% of what is at risk in the trade. However, if the stock does not move, you stand to lose money. It's important to make a distinction between how much is risked versus the total cost of the trade. We won't be risking the total cost because we'll only be holding the Call & Put for approximately 1/4 of their expiration time. Hence, if the stock's volatility decreases and it just consolidates or trades sideways, we will primarily be risking the decrease in value of the Options due to lower volatility. Option value is derived from volatility, so if there is a decrease in volatility the value of the options that we've purchased will also decrease. Theta decay (time decay) will also account for some of the money at risk.
I know this sounds fantastic, right? Make money no matter which direction the stock goes!?! It is a very cool trade, but let me tell you that there are a number of aspects that you need to pay attention to in order for this trade to work, and if you don't know the guidelines you can easily spend too much on the trade relative to the reward. You can also set yourself on a biased position instead of a neutral position. If you wanted to put yourself in a biased position, there are better trades to capture a directional move. As you would expect about pretty much any Option Strategy, you need to pay attention to the Option Deltas. This is a volatility trade and you must also take Implied Volatility into account. Also, like most trades, you need to take a look back into the history of an underlying security to help forecast the future to ensure your success. TMTT gives very clear guidelines for what the Net Delta should be for an ubiased position, as well as entry criteria based on Implied Volatility.
Tonight's class helped point us to some resources for identifying potential stocks to trade using a Straddle or Strangle Option Strategy. This isn't the easiest concept to grasp, but it shows just how powerful and flexible Options can be. I look forward to trading a Straddle/Strangle soon, but it seems this class was just a little late for taking advantage of this trade this quarter, however I will be looking for a current setup for this trade and hope to find one that will work for a paper trade. Stay tuned, it's starting to get interesting, isn't it?
This strategy is one where you can make money, typically 100% of what is at risk in the trade. However, if the stock does not move, you stand to lose money. It's important to make a distinction between how much is risked versus the total cost of the trade. We won't be risking the total cost because we'll only be holding the Call & Put for approximately 1/4 of their expiration time. Hence, if the stock's volatility decreases and it just consolidates or trades sideways, we will primarily be risking the decrease in value of the Options due to lower volatility. Option value is derived from volatility, so if there is a decrease in volatility the value of the options that we've purchased will also decrease. Theta decay (time decay) will also account for some of the money at risk.
I know this sounds fantastic, right? Make money no matter which direction the stock goes!?! It is a very cool trade, but let me tell you that there are a number of aspects that you need to pay attention to in order for this trade to work, and if you don't know the guidelines you can easily spend too much on the trade relative to the reward. You can also set yourself on a biased position instead of a neutral position. If you wanted to put yourself in a biased position, there are better trades to capture a directional move. As you would expect about pretty much any Option Strategy, you need to pay attention to the Option Deltas. This is a volatility trade and you must also take Implied Volatility into account. Also, like most trades, you need to take a look back into the history of an underlying security to help forecast the future to ensure your success. TMTT gives very clear guidelines for what the Net Delta should be for an ubiased position, as well as entry criteria based on Implied Volatility.
Tonight's class helped point us to some resources for identifying potential stocks to trade using a Straddle or Strangle Option Strategy. This isn't the easiest concept to grasp, but it shows just how powerful and flexible Options can be. I look forward to trading a Straddle/Strangle soon, but it seems this class was just a little late for taking advantage of this trade this quarter, however I will be looking for a current setup for this trade and hope to find one that will work for a paper trade. Stay tuned, it's starting to get interesting, isn't it?
Wednesday, July 12, 2006
Coaching Call Week 4
Today Rob and I began with a review of the trend concepts explained in Chapter 4 of the manual. We'll talk more about trends next week. We spent most of our time refining my watchlists. We broke down the Bulls folder into 3 subcategories: Waiting For Pullback, Setting Up (Pullback Started), Hotwatch (Risk/Reward & Candle). There are two additional subcategories to the Bulls category that we will eventually use: Buys (It's time to buy today) and Long (stocks I own). Rob explained what criteria constitutes where to place each. I'd say it's fairly obvious from the naming, but I'll breakdown the criteria a little to disambiguate ;-).
- Waiting For Pullback: We missed the most recent swing low and are waiting for the stock to pullback down to an area of support where we can enter.
- Hotwatch (Risk/Reward & Candle): We may be able to enter a trade on this as the stock is looking like it has come down to a level of support, but need to analyze the risk/reward and see if the setup makes sense for our target price (where the last swing high was).
- Setting Up (Pullback Started): These are stocks that are not quite ready for the Hotwatch, but have begun to move off their swing high.
- Buys (It's time to buy today): Our reward:risk is at least 2:1 and we should put in our stop limit order for controlled entry (along with a stop-loss) and hope to get filled today.
- Long (stocks I own): Stocks that have been filled that we should be watching to adjust our stop-loss and otherwise manage.
Tuesday, July 11, 2006
Master Trader Session 5
Our second-to-last session of Wealth Intelligence Academy's Master Trader live online course taught by Matt Gildea began with a review of our last session from 2 weeks ago. If you recall, we looked at the Bull Pullback Long and the Bear Rally Short. Included in both the first time I took the class and on the retake (due to technical difficulties with the first class), were descriptions of how a short sale works. If the selling short is still a difficult concept, take a look at my Master Trader Session 4 posts. Hopefully one of the two descriptions will clear it up for you.
Entering a trade is only half the battle, possibly the easier half. After all, you can get fairly clear signals on a chart that sets up a good entry for a high probability trade, but what signals can we use to get out? If we don't get out at the right time, we can easily give back all our gains. In previous sessions we've talked about setting our stop loss at the prior day's low as a way to manage the trade. This is a fairly effective management strategy, but often times we'll get stopped out short of the full move because we don't give the stock enough "wiggle" room. Loosening up our stop (stop-loss) will give the stock a bit more freedom to continue the trend, but will also expose the position to greater risk. It's always a balancing act between reward and risk. The cool part about taking control of your trades is that you can tailor your trading style to agree with your risk tolerance.
Managing the trade is also more dynamic than entering the trade. Consider a particularly strong day's movement where the stock increases nearly half of the move that we expect -- say it moves up $3 and our initial target is for a $6 total increase. If we stick with the stop-loss at the prior day's low we leave a lot of room to lose the gains we just picked up. In this case, we probably want to adjust our stop up a little tighter to lock in those gains. Even if we get stopped out, at least it will be for a reasonable profit.
One strategy for exiting the trade is to do so in 2 stages. In the first stage we will likely close out half of the position we hold while we let the other half "ride." If we're not interested in a Position Trade, we may choose close out the position entirely. Naturally this means we'll set our stop a bit tighter for the first stage.
We were given the following strategies for Stage 1 (Swing Trades):
After looking at the exit strategies we looked at a the following additional setups: High Base Breakout, Low Base Breakdown Short, Ascending (Descending) Triangle Breakout (Breakdown), and the Symmetrical Triangle Breakout (Breakdown). These are similar to the Pullback Tactics we've already studied, but are more of a consolidation pattern compared to the Pullback Long or Rally Short. I will offer this additional clue: the 2/5 EMA crossover often yields good results when applied to one of these consolidation tactics.
If you're finding all this confusing, don't worry, I'm leaving out a lot of details. If you're truly interested, signup for the class and get the full story instead of my generalized digest version. Tell them Mark Jones sent you... Are you reading this TMTT/EduTrades? I want a commission! ;-)
Entering a trade is only half the battle, possibly the easier half. After all, you can get fairly clear signals on a chart that sets up a good entry for a high probability trade, but what signals can we use to get out? If we don't get out at the right time, we can easily give back all our gains. In previous sessions we've talked about setting our stop loss at the prior day's low as a way to manage the trade. This is a fairly effective management strategy, but often times we'll get stopped out short of the full move because we don't give the stock enough "wiggle" room. Loosening up our stop (stop-loss) will give the stock a bit more freedom to continue the trend, but will also expose the position to greater risk. It's always a balancing act between reward and risk. The cool part about taking control of your trades is that you can tailor your trading style to agree with your risk tolerance.
Managing the trade is also more dynamic than entering the trade. Consider a particularly strong day's movement where the stock increases nearly half of the move that we expect -- say it moves up $3 and our initial target is for a $6 total increase. If we stick with the stop-loss at the prior day's low we leave a lot of room to lose the gains we just picked up. In this case, we probably want to adjust our stop up a little tighter to lock in those gains. Even if we get stopped out, at least it will be for a reasonable profit.
One strategy for exiting the trade is to do so in 2 stages. In the first stage we will likely close out half of the position we hold while we let the other half "ride." If we're not interested in a Position Trade, we may choose close out the position entirely. Naturally this means we'll set our stop a bit tighter for the first stage.
We were given the following strategies for Stage 1 (Swing Trades):
- Upper Channel Line: Draw in an upper channel line along the peaks and when the stock moves into the "retail" price either tighten up the stop or simply close the position.
- Reversal Candle: Look for one of the many reversal candle patterns and tighten up the stop or close.
- Prior Day Low: Probably the simplest management strategy -- simply update your stop at the end of each trading day.
- Prior Resistance: If there's significant prior resistance we may want to close as the stock comes into an area of prior resistance. This could simply be our initial target for the move and it may be wise to tighten up our stop to squeeze it for the reward we originally sought to capture.
- Swing Low Violation: If the swing low drops out of the trend it may be a good time to close.
- Daily MACD Divergence: If the MACD crosses itself we may be seeing the end of the trend.
- Major Resistance: If we find the stock in an area of past resistance, especially tested resistance, we probably want to exit.
- Weekly Reversal: Weekly reversal candlestick patterns may be an indicator for a timely exit; however, you're probably better off managing this off the daily chart, follow the normal swing lows and adjust the stop.
After looking at the exit strategies we looked at a the following additional setups: High Base Breakout, Low Base Breakdown Short, Ascending (Descending) Triangle Breakout (Breakdown), and the Symmetrical Triangle Breakout (Breakdown). These are similar to the Pullback Tactics we've already studied, but are more of a consolidation pattern compared to the Pullback Long or Rally Short. I will offer this additional clue: the 2/5 EMA crossover often yields good results when applied to one of these consolidation tactics.
If you're finding all this confusing, don't worry, I'm leaving out a lot of details. If you're truly interested, signup for the class and get the full story instead of my generalized digest version. Tell them Mark Jones sent you... Are you reading this TMTT/EduTrades? I want a commission! ;-)
Wednesday, July 05, 2006
Trading P.I.T. Session 2
Session 2 of the Trading P.I.T. with Bill Keevan was all about vertical spreads. We primarily focused on the Bull Call Spread because a vertical spread is a vertical spread, whether it's a Bull Call, Bull Put, Bear Put or Bear Call. Along with a recap of delta and how it affects option pricing Bill introduced us to Gamma also.
Gamma is often referred to as the second Greek. Second, of course, to Delta. Where Delta is a value that represents the change in option premium relative to the price of the underlying security, Gamma is a value that represents the rate at which the Delta will change. This can be described as the rate of change of the Delta. Delta captures the rate of change of the premium and Gamma captures the pace of the change.
Bill didn't spend a whole lot of time focusing on Gamma, instead we looked through practical applications and some spread setups against live market data. We already covered the basics of the Bull Call (Vertical) Spread and in Trading P.I.T. Session 1.
Gamma is often referred to as the second Greek. Second, of course, to Delta. Where Delta is a value that represents the change in option premium relative to the price of the underlying security, Gamma is a value that represents the rate at which the Delta will change. This can be described as the rate of change of the Delta. Delta captures the rate of change of the premium and Gamma captures the pace of the change.
Bill didn't spend a whole lot of time focusing on Gamma, instead we looked through practical applications and some spread setups against live market data. We already covered the basics of the Bull Call (Vertical) Spread and in Trading P.I.T. Session 1.
Coaching Call Week 3
Rob Craig and I had our weekly call. This week we adjusted my historical chart settings in The Trade Center software. We switched the timeframe from 6 months to 1 year and adjusted the Moving Averages so my colors will match the standard coaching color scheme. After making the adjustments we looked at some bullish trending stocks. Unfortunately there aren't that many in the current market.
To identify the bullish stocks we used some select Trade Seeker scans and then looked at the chart (no secondary indicators) and took 1-5 seconds to identify if they look like a good trend. My assignment is to get 20 to 50 of these strongly trending stocks into my watchlist. Of course, bullish trending stocks aren't that common at the moment, and it seems silly to trade against the market. As much as I understand the motivation to start with the simplest direction (bullish) in order to identify trends, I'd just assume start with bearish setups given the current market conditions.
To identify the bullish stocks we used some select Trade Seeker scans and then looked at the chart (no secondary indicators) and took 1-5 seconds to identify if they look like a good trend. My assignment is to get 20 to 50 of these strongly trending stocks into my watchlist. Of course, bullish trending stocks aren't that common at the moment, and it seems silly to trade against the market. As much as I understand the motivation to start with the simplest direction (bullish) in order to identify trends, I'd just assume start with bearish setups given the current market conditions.
Tuesday, July 04, 2006
Happy Independence Day!
Great news greeted me when I returned home to Los Angeles. Chase has issued a new card to me (see: Chase Called) that has a limit of $15,500 with a 0% APR for 15 months! I guess it was worth getting through to Volkswagen Credit to get that additional loan on my credit history! Now I'll be able to balance transfer the current debt and save a ton of cash that I can put towards my brokerage account. By the way, my Interactive Brokers account is setup. Look forward to reading about that adventure soon. Until then, enjoy our Independence Day!
Monday, July 03, 2006
Update From Fresno
A friendly update from my parent's home in Fresno, where my father and I extracted a stump from their backyard (pictured on the right... notice the row of tomato plants in the buckets: BLT anyone? yum!). If you're wondering what removing a stump has to do with Trading, well... nothing. However, while I was there, my father (& partner) and I went through several Bear Rally Short setups together. He's been studying with the OnDemand courses and we took the opportunity for a meeting of the minds on some stocks.We started with the results from a few Swing Module searches in Trade Seeker. We paired down the initial list of ~ 250 stocks to 32 that we think should be on our watchlist. Of those 32, it appears that about a dozen look like the current setup may work. As you can imagine, it took quite some time & effort to go through all those charts to check the setups. With some additional practice, I'm sure we'll get faster and fortunately we won't have to build up a watchlist from scratch, which certainly should expedite this process in the future. Now that I have a list of stocks that look like they have a nice setup, I'll spend some additional time analyzing the sector and take a peak at the Fundamentals in order to choose the best.
The market has seen a bit of a hickup in the normal ebb & flow due to the Fed announcement and the holiday, so I'll only paper trade a small part of my virtual cash; I plan to treat my virtual trading account exactly as I would my real money... Otherwise, how useful is it in preparing for actual trading?
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