When the market accommodates, trend trading can be highly lucrative. The trick, of course, is to divine the market’s often fickle moods. Tina Logan sets out to help the trader identify and exploit the “good times” in Profiting from Market Trends: Simple Tools and Techniques for Mastering Trend Analysis(Wiley, 2014).
The book is divided into two parts. The first, trend development, has chapters on trend direction, trend duration, trend interruptions, early trend reversal warnings, and later trend reversal warnings. The second part, putting trend analysis to work, deals with the broad market, bull markets, bear markets, and monitoring the market trends; it also includes a case study of the current bull market. Throughout, the text is illustrated with TC2000 (Worden Brothers) charts.
Let’s look at the chapter on early trend reversal warnings to get a sense of the book as a whole. Logan summarizes the warnings in a table. In an uptrend they are: a bearish climax move such as a key reversal or an exhaustion gap, bearish divergence, failure to break a prior peak, change of slope—rising trendline, break of tight rising trendline, approaching a strong ceiling, and bearish candlestick reversal pattern. The warnings in a downtrend are the reverse. (more…)
Archives of “Options strategies” tag
rss10 Words For Traders-Must Read
1. Call options. If you truly have conviction, buy long dated call options as volatility tend to be under priced for long maturities.
2. Short selling. It is harder to short sell than most think, and almost no one is good at it. One hurdle is the drift, but there are countless more.
3. Romance. You’re clearly better off to marry someone in management than to marry the stock.
4. Dip buying. The successful buys on dips and vice versa, it follows that the unsuccessful do the opposite.
5. Market. Everyone is always bearish on the market, only the super successful dares to be bullish/naive.
6. Story. Human brains are hard wired over thousands of years to build stories around your beliefs/thesis.
7. Flexibility. The super successful are always ready to change their mind/direction. Go from long to short or from short to long.
8. Art. Stock picking is as much art as science and very rarely are the smartest the best at this game.
9. Top-down. Local knowledge remains under appreciated. The top down guys ends up shorting the best companies and vice versa.
10. Management. Always invest with the best in class management, however you are better off with a good end market and bad management than the other way around.
Bitter Truth :Why Traders Lose Money in Market
- Traders miss a trade setup, then take it late in the move. Chasing a trade is rarely a good decision. Buy right or sit tight.
- Traders buy a dip before it really reaches a good risk/reward setup.
- Traders buy a dip before there is any sign of a reversal.
- Traders wait for the perfect moment and end up with no setups.
- Traders hold onto opinions after price action has proven them wrong.
- Traders are stopped out of ordinary price action because their stop losses are too close, and their trades aren’t given enough room to breathe.
- Traders perpetually short uptrends and buy downtrends, missing the easy money and creating losses.
- Those that spend more time trading than studying will have their money taken by traders devoted to learning.
- Caring more about personal opinions than price action is the best way to donate money to the market.
- Holding onto a losing trade because you don’t want to take the initial loss, is a great way to turn a small loss into a big one.
10 Bad Habits of Trader
- They trade too much. The edge that small traders have over institutions, is that they can pick trades carefully and only trade the best trends and entries. The less they trade, the more money they make, because being picky gives traders an edge.
- Unprofitable traders tend to be trend fighters, always wanting to try to call tops and bottoms. They eventually will be right, but their account will likely be too small by then to really profit from the reversal. Money is made by going with the flow of the river, not paddling upstream against it.
- Taking small profits quickly and letting losing trades run in the hopes of a bounce back, is a sure path to failure. Profitable traders understand their risk/reward ratio; big wins and small losses. Being quick to take profits while allowing losses to grow, is a sure way to blow up your trading account.
- Wanting to be right more than wanting to make money will be a very expensive lesson. A trader who doesn’t want to take losses will most certainly balk at reversing his position because it signifies personal failure. A profitable trader is not afraid to get on the right side of the market to start making money.
- Unprofitable traders trade too big, and risk too much to make too little. The biggest key to profitability is to avoid big losses. Your wins can be as big as you like, but the losses must be limited.
- Unprofitable traders watch BLUE CHANNELS for trading ideas.
- Unprofitable traders want stock picks, while profitable traders want to develop trading plans and systems.
- Unprofitable traders think trading is about being right. Profitable traders know that profitability is about admitting you are wrong quickly, and being right as long as possible.
- Unprofitable traders don’t do their homework because they think there is a quick and easy route to trading success.
- Unprofitable traders #1 question is how much they can make if they are right, while the profitable traders #1 concern is how much they can lose if wrong.
10 Options Trading Pitfalls To Avoid
- The first question to ask in any option trade is how much of my capital could I lose in the worst case scenario not how much can I make. You can lose a high percentage of the capital you have in an option trade so keep it small in comparison to your total account size. I suggest never risking more than 1% of your trading capital on any one option trade.
- Long options are tools that can be used to create asymmetric trades with a built in downside and unlimited upside. The leverage is already there, if you position size correctly based on the normal amount of shares you trade you will stay out of a lot of trouble with losing a lot of money.
- Options should only be sold short when the probabilities are deeply in your favor that they will expire worthless, also a small hedge can pay for itself in the long run creating a credit spread instead of a naked option with unlimited risk exposure.
- Understand that in long options you have to overcome the time priced into the premium to be profitable even if you are right on the direction of the move.
- Long weekly deep-in-the-money options can be used like stock with much less out lay of capital to capture intrinsic appreciation in the underlying stock.
- The reason that deeper in the money options have so little time and volatility priced in is because you are insuring someone’s profits in that stock. That is where the risk is: the loss of intrinsic value, and that risk is on the buyer of the option contract.
- When you buy out-of-the-money options understand that you must be right about direction, time period of move, and amount of move to make money. Also understand this is already priced in.
- When trading a high volatility event that potential price move will be priced into the option, after the event the option price will remove that volatility value and the option value will collapse. You can only make money through those events with options if the increase in intrinsic value increases enough to replace the Vega value that comes out. This is why it is so hard to make money when holding options through earnings, the move is already priced in and that extra value is gone the next morning the options open for trading.
- Only trade in options with high volume so you do not lose a large amount percentage of money on the bid/ask spread when entering and exiting trades. You have to find those few option chains that have the liquidity to trade with spreads measured in cents not dollars. A $1 price difference in the bid/ask spread will cost your $100 to get in and out of a trade on top of commissions. Also be aware that the best liquidity is in the front month at-the-money options and option chains get more illiquid as they go deeper in-the-money or out-of-the-money this has to be considered in a winning trade because you might have to roll the option to a more liquid contract. Most options chains can’t be traded due to the fact that they are just not liquid enough.
- When used correctly options can be tools for managing risk by limiting capital at risk exposure and capturing huge trends, used incorrectly they can blow up your account.
Scott Nations, The Complete Book of Option Spreads and Combinations-Book Review
If you trade options, you’d do well to have Scott Nations’ Complete Book of Option Spreads and Combinations (Wiley, 2014) in your reference library. It’s an intermediate-level book that explains the structure of more spreads than most people will ever trade but that they should understand nonetheless. A case in point: a conversion or a reversal, a combination that is rarely executed as a package but that “a smart retail trader might end up having on.” (p. 209) It’s better to know in advance what this position is and how to deal with it.
There’s an abundance of information available online about option spreads and combinations, and Nations of necessity covers much of the same territory. But he proceeds more analytically, and he deals with issues that most online descriptions ignore, such as ways to mitigate wide bid/ask spreads. Take, for instance, the long call condor. Nations looks at an AAPL call condor that, using midpoint pricing, costs 18.87 and that, buying on the ask and selling on the bid would cost 0.63 more. What if we were to replace the in-the-money call spread “with something that’s out-of-the-money and has bid/ask spreads similar to the bid/ask spreads of these other out-of-the-money options?” That is, what if we sold a put spread with the same strikes instead of buying that call spread—and again sold at the bid and bought at the ask? Instead of paying a 0.63 penalty, we now pay only 0.27. This “new, magical structure” is an iron condor. (pp. 201-202)
In eleven chapters this book deals with vertical spreads, covered calls, covered puts, calendar spreads, straddles, strangles, collars, risk reversal, butterflies, condors and iron condors, and conversion/ reversal. Every strategy is encapsulated in cheat sheets and, more importantly, is illustrated with examples, complete with tables and figures. Here, for instance, is the graph of a vertical spread he analyzes, which includes the probability of profitability—something he explains how to calculate on the previous page.
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10 Winning Points For Traders
Understand the psychology of the trade: never believe you are smarter than the markets as the markets will always win.
- Acquire the knowledge on how the markets truly work then test and retest your ideas and concepts until you feel confident.
- Develop a working knowledge of what types of entry and exit orders work best.
- Understand how to manage risk by employing the use of options strategies.
- Pick a strategy that matches the market conditions.
- Manage the strategy. You should always know what your next reaction point will be and what prompts you to take it.
- Watch what moves. To be successful, you have to become a media hound.
- Integrate fundamental, technical, and sentiment analysis into a real world trading approach that enables you to best understand market performance.
- Specialize in one sector and one strategy at a time.
Give yourself the winner’s edge by always continuing to actively pursue the learning process.
