Journey into Wall Street

market timing tools that follow trend and momentum are flawed

2011-09-25T14:08:00.000-07:00

MTR Investor Group Members,

We would like to inform you of some recent changes and new features on the website.

There is a new menu item called Market Analysis. This new feature includes our Economic Timing Model, charts that measure the performance of stock market sectors, industries, Global ETFs, Commodities, Forex, and Energy. All the sectors including Commodities and Forex are based on ETFs and ETNs that any investor can trade in a regular or IRA account.

Looking towards the future we have additional plans for lists of stocks and ETFs making 52 week high/lows, over-bought/over-sold lists and more.

With these changes we have also decided to take the stock market timing model (MTR-TM) off line for a period of time. Automated market timing models such as MTR-TM that follow trend and momentum can issue some false signals at times; this is more evident in a sideways market. We are in the process of reviewing the algorithm for the model and hope to launch it again.

Thank you,
MTR Investors Group

Shadowtrader Core Sector List

2011-09-13T12:18:00.000-07:00

Core Sector List
Although Shadow Trader analyzes many different sectors and may call trades from any of them, there are 16 sectors which are watched more closely and reported on often throughout the trading day. On any day when one or more of these sectors is moving strongly in either direction, there will more than likely be trade calls for stocks from within these sectors. The core list is as follows: Banking, Biotech, Broker-Dealer, HealthCare, Pharmaceuticals, Gold, Homebuilders, Insurance, Internet, Oils, Oil Services, Retail, Semiconductor, Software, Transports, and Utilities. The tickers on the thinkorswim platform are: BKX, BTK, XBD, $HCX, DRG, GOX, $DJUSHB, IUX, $DJUSNS, XOI, OSX, RLX, SOX, $DJUSSW, $DJUSIT (or $TRAN), UTY.

reversal day - if you're not out of this, get out of this

2010-11-09T17:49:00.000-08:00

http://www.stockmarketmentor.com/public/2808.cfm

don't just buy the pullback, buy the bounce

2010-11-09T17:44:00.000-08:00

http://www.stockmarketmentor.com/public/2808.cfm

but when you are looking at this, you've got to refer to the weekly chart and keep in mind what you're wanting to do.

why is this weekly chart bullish..?

Because it's coming out of a multi-month consolidation.

it's the consolidation that matters, not the move higher. the longer the consolidation, the more real the move.

so be near term bearish, and longer term bullish.

how to read "Better Volume" indicator

2010-11-08T23:23:00.000-08:00

http://www.youtube.com/watch?v=1di9HmucXzg

priceless on calendars

2010-08-13T15:39:00.001-07:00

There are several misconceptions about Calendar spreads in your analysis.

And it sounds like with the money management rules you just described that a strategy like Vertical spread might be a better fit for what you are trying to accomplish.

Long Vertical spreads can be
delta positive or delta negative
theta positive or theta negative
vega positive or vega negative
... depending on which strikes are used in your vertical

Short Vertical spreads can be
delta positive or delta negative
theta positive or theta negative
vega positive or vega negative
... depending on which strikes are used in your vertical

More importantly, the money management rules you described can be applied to Vertical spreads but won't work well with Calendar or Diagonal (because of nuances about Calendars and Diagonals and misconceptions about them in your post).

Until you learn what you are missing, it would be risky for you to jump into Calendar spreads. Things you are missing in your understanding are the things that will blindside your trades and leaving you wondering why they don't seem to work.

RUT sounds good in theory and works great in Paper Money, but there is a reason pros don't use RUT either. In fast markets you can get hurt fast on RUT and may not be able to get filled during a fast market (when you are most likely to want a quick fill).

IWM, on the other hand, keeps trading well even during fast markets (easy to get in or out, and Bid-Ask spread stays tight on IWM even in fast markets). 2008 crash days and flash crash day earlier this year IWM and SPY kept trading well and their B-A spreads stayed tight even when the market was crashing).

For examples of what pros who have been trading for 20-30 years use in their accounts, look at Tom Sosnoff's real money accounts in any of the Wednesday TOS chat archives. Look at the [large] size of his different accounts and notice the symbols he trades. You'll see SPY, IWM, etc but over about 9 years of Wednesday TOS chats you will not find an archive with Tom's real money account with SPX, RUT, etc.

The same is true if you go to a TOS Option Planet class (not sure if they are doing those free classes any more) and see the instructor's real money account. (All TOS instructors are ex-floor traders from pits like OEX and SPX, but they trade from a computer with SPY, IWM, etc).

Whether you imitate pros who have been doing this for decades or whether you create your own path is your choice. Only you know what's best for your account and what will work best for you.

Whether you use SPY and IWM or SPX and RUT, it's worth noticing OEX and SPX pit traders who lived in those pits for decades versus what they choose to trade now that they are trading from computers.

--------

One of the nuances your money management strategy isn't taking into account is that of max gain for a Calendar spread. If IV rises, max gain on the Calendar will become higher. If IV drops, max gain on the Calendar will become lower and could possibly drop low enough max gain is a loss on the trade.

Play with changing IV on either TOS Trade tab (using Mark and Theo Price as your columns, then change date to expiration and try raising and lowering IV). Mark = today's value and Theo Price = adjusted value should your adjustments to date, underlying price, and/or IV change.

Or you could play with changing IV on TOS Analyze tab to see how the picture changes when IV rises or falls against your Calendar spread.

Tom N on Options Risk & Sheridan Mentoring

2010-08-07T13:46:00.001-07:00

i want to hang onto this post by Tom Nunamaker - re risk (and Sheridan Mentoring)

Hi Scott,

While it’s true I’m doing Dan Sheridan’s IT stuff and some other things like building PowerPoint slides for Dan, I was a student of his first in 2006. I had experiences with a few other educators and I’ve only been a retail trader. While I can’t speak for the other firms, I can answer your questions about Dan’s program. I don’t want this to sound like a commercial so I’ll discuss pros and cons to Dan’s mentoring program.

DISCUSSION

To me, the absolute most important thing with trading is to keep your losses under control. (It’s the same with gamblers) Options have been around for decades and people have tried just about every combination possible with them. There’s likely nothing new that hasn’t been done before. People might come up with creative names, like Tarzan Loves Jane, Condagonals or some new “secret sauce” but all they boil down to are combinations of basic strategies. It’s what you do after you put the trade on that matters (unless you’re in the camp that doesn’t do any adjustments)

Read Michael Catolico’s paper. It’s great stuff. He is reacting to the market and keeping his risk under control at all times. We teach similar things with Sheridan Mentoring. Mark Sebastian, one of Dan’s mentors, has a blog www.option911.com where he had an interesting article about how market makers use UNITS to keep from going out of business. In that article, Mark has a great point:

In every trade there are 3 scenarios:
1. Being right
2. Being wrong
3. REALLY being wrong

Notice how this keeps you in business if the market has one of those seven standard deviation moves. RISK CONTROL.

After risk control, the big thing you need imo is some kind of community for long term support. TheOptionClub is great. For many, it is totally sufficient. The discussions here are interesting and thoughtful. Dan’s mentoring program has a few other benefits.

For Dan’s Mentoring Program:

PROS

1. A large community of traders all trained to a similar level of experience (Dan started mentoring in 2004 and we have lots of students still active from those early classes) Over 400 students login to our website daily and that number grows each month.

2. Trading Groups. These groups meet weekly and exchange ideas, go over trades in trouble, share their research with each other etc. All at the student-to-student level.

3. Live and recorded access to all new WebEx sessions. Mentoring students have access to ALL webex files. Mentoring sessions, “paper traders”, special guests, portfolio classes and even the short courses Dan does! Nothing is held back.

4. The website (hey.. I built and maintain it so I think it’s a PRO J ). I’m constantly trying to improve the website. While I’m a developer, I’m also a retail trader so I look at our website with a retail trader’s eye of “what would help me”. Because we’re small, it’s usually possible to incorporate suggestions to the website fairly easily.

5. No Secrets. We don’t promise the moon. All we promise is trading is hard work, we will help you learn it and help support you but you have to do your part too. Nothing is hidden. All mentoring students have access to everything we do.

CONS

1. Price. $6500 is a lot (it was for me anyway). I spent $3000 on two or three day seminars at OptionEtics and had pretty much zilch support afterwards. If you put $6500 with lifetime support in context with a $3000 seminar with no follow up, it was an easy decision for me.

2. You have to work! It takes work on your part to learn how to trade. This is no different with Dan or anyone else’s course. Don’t let anyone tell you its easy.

3. Scheduling. Our mentors teach primarily during the day. If you also work, scheduling can be a challenge for some.

4. Printed Materials. To be honest, they could be better. We are a small company and haven’t spent tons of money to pretty stuff up. We focus on the content primarily on mentoring sessions and online classes. We do have a trading manual, but it’s a collection of basic guidelines to start you off. None of the experienced students use it that I’m aware of.

I was a professional military pilot with the USAF. We didn’t teach people to fly jets by giving them a book and saying go for it. It was a LOT of hands on training in the jet. That’s what any good educational program will help you with. Having an experienced trader look over your shoulder and show you what you did right and wrong with your LIVE trades. Paper trades don’t count. You HAVE to do live trades. It’s the only way to really “get it in your bones” as Dan says.

Dan’s program is one of many. You have lots of choices which is great. Do your homework, talk to current students and research your decision if you think you need a bit of over-the-shoulder help. Until/If you make that decision, TheOptionClub is a great place to hang out and learn. Don’t be afraid to ask questions.

HTH

Tom Nunamaker

Sheridan Options Mentoring

rw entry & exit on tza

2010-07-25T22:34:00.000-07:00

rw entry & exit plan:

rw: 15 min MUST BUY signal - when moving average trio "aligns"

2010-07-16T14:11:00.001-07:00

rw topping candle pattern

2010-07-16T14:08:00.000-07:00

a doji, followed by a narrow range body with topping tails suggests that momentum to the upside is waning (here).

7-13 video 2 the three classes of divergence

2010-07-14T00:22:00.000-07:00

pay attn to the macd centerline in the 15 min timeframe

2010-07-14T00:20:00.000-07:00

you want to be paying attention to the macd in the 15 minute time frame. if its above the centerline, you look at the chart and more than likely, you're in an uptrend. (ron walker)

rw: I LIKE the 15 minute chart because they tend to shift momentum - in sync - with the histogram more often than not.

shadowtrader hunting for plays

2010-07-13T19:56:00.000-07:00

Good morning, traders. During our review of sectors last evening, our goal was to select from the healthiest sectors which are usually found near the top of the ShadowTrader Sector Trend Score list. From this group, we were looking for the one with the highest probability of continuing higher with the least overhead resistance.

Beginning from the top of the ST Trend Score list, we immediately eliminated TOB which has had a higher close for seven consecutive days and OSX which has been up six of the last seven days. $DJUSCL has same sized bodies lining up which indicates indecision by the market and UTY is not far from prior highs after 5 consecutive days higher. XTC made a bullish reversal bar yesterday, but is currently right in the middle of the recent price range.

This left us with two sectors near the top of the i>ST Trend Score list, DRG and HCX. Both sectors showed some promise of what we were looking for. Both charts had consecutive bottoming tails that marked a pause after a nice rise higher. However we could only select DRG because unlike HCX, it was coming off a higher-low and had limited resistance overhead.

Let's go to the daily chart of DRG below.

We have marked the higher-highs (HH) and higher-lows (HL) on the chart above to illustrate that the pharmaceutical index is trending higher from it's May, 2010 low. If this ascending swing pattern stays intact, DRG will extend the current leg higher past the most recent higher-high. In fact based on the limited resistance, price could conceivably move up to 300 before overriding selling pressure begins.

The next step in our work last evening was to view the charts of all pharmaceutical names

One of the issues is the Merrill Lynch Pharmaceutical ETF (PPH). The chart is showing a great bullish setup and the ETF is perfect for those that want to trade the entire sector as opposed to individual stocks within the sector. trading over $20.00 with average daily volume of 500k or more. From this group we chose the four trades listed in today's Bulls and Bears section as the best long ideas.

We plan to enter one or more of these positions today, so for those following us in the ShadowTraderPro Swing Trader Model Portfolio, please stay alert to your email inbox.

an exercise with those "channel zones"

2010-07-08T22:46:00.000-07:00

df: do this for a month...

when a stock comes into one of these trading zones, BUY ONE SHARE. Then hold it until one of two things happens...

1) you can sell it at the upper zone (for a profit), or

2) a month goes by.

You do that a couple of times and you will say "Hey, that trading thing.. it kinds makes sense.."

a better way to trade in a channel

2010-07-08T22:22:00.000-07:00

df: when a stock is dipping down to bounce off of a channel bottom. don't put on your trade in anticipation of the bounce. but rather wait for the bounce and for the stock to come back towards the middle just a little bit. like after the 2nd line.

here's another look at the channel. remember, we buy on the BOUNCE !

the market is so volatile these days, he is using ZONES instead of lines.

the "must buy" triple moving average signal

2010-07-07T20:24:00.000-07:00

when you see the bullish realignment of the moving averages. Which shifts gears from a stage one to a stage two - you want to play that. It's called a "must buy" signal.

you want to go long (or short) the moment that 10 and the 20 are above (or beneath) the 50 , but your stop is just behind the last minor low or high.

this is a view using the 15 minute time frame: (source video)

ron walker's 65,90,12 macd

2010-07-07T18:29:00.000-07:00

look how it pretty well nails the uptrend and the downtrends, as it crosses above and below the center line.

he got the settings from Martin Pring who uses them in the 60 min timeframe. MP thinks the standard settings are best for weekly timeframes.

http://www.youtube.com/user/chartpattern#p/u/1/4I0q13vbSpY

sndk dragonfly doji

2010-07-06T19:29:00.000-07:00

df: when you get a dragonfly doji at the end of a move down, it is a strong reversal. but when there is not strong follow through to the upside, then chances are that the reversal will not hold.

bidu consolidating under the 50

2010-07-06T19:26:00.000-07:00

df: when you see these stocks consolidate under the 50 dma, plus the 50 dms is headed down, plus the 20 is headed down, plus price, is headed down: that 's a bearish configuration.

aapl is under distribution

2010-07-06T19:18:00.000-07:00

df: look at how the last 11 days, there are all dark candles. meaning that the price closed lower than it opened. and look at the volume. on those two "up" days, the volume was lower than average. and look at the down days, there were a few that were way above average. plus, the ma of the volume is going up... this is a stock under distribution.

ffiv - still holding its trendline

2010-07-06T19:10:00.000-07:00

df: ffiv is still holding its support trendline. and as long as it continues to do so, all is well. but it will get broken by a broad-market selloff. but asl opng as it holds, it's still a "buy on dips." Note that it's holding above its 50 day MA.

gold and other gappy things

2010-07-06T19:08:00.000-07:00

df: look how gappy gold is. like most other commodies are. like most adrs are. why? because they trade when you and i are sleeping. so it's tough to trade gold, but easy to buy and hold if you have a multi year timeframe.

chopping around a key level

2010-07-06T19:02:00.000-07:00

1040 is a really key level. and prices are going to chop around above and below it for a while.

the russell is the canary in the coal mine

2010-07-06T18:58:00.000-07:00

df: the russell's kind of like the canary in the coal mine... cause when the small cap stocks are getting sold off in a weak or sort of non-committal environment, you KNOW there's some distribution going on out there. That's what's really happening.

markets that gap and remain static

2010-07-06T18:39:00.000-07:00

df: markets that gap and remain static or hover at that high level - do not bode well for the bulls. Markets that gap and then finish the day strongly - they don't just gap and then remain static. They gap and run. They keep going.

elder impulse system

2010-07-06T18:26:00.000-07:00

The Elder Impulse System is a trading system that was created by Alexander Elder and is featured in his book, Come into my Trading Room. The beauty of the Impulse System is that it only uses two indicators, a 13-day exponential moving average and the MACD-histogram. The moving average is used to identify whether the trend is up or down, while the MACD-histogram determines whether bullish or bearish momentum is present.

Here are the guidelines according to stockcharts.com:

Green Price Bar: (13-period EMA > previous 13-period EMA) and (MACD-Histogram > previous period's MACD-Histogram)

Red Price Bar: (13-period EMA < previous 13-period EMA) and (MACD-Histogram < previous period's MACD-Histogram) Price bars are colored blue when conditions for a Red Price Bar or Green Price Bar are not met. The MACD-Histogram is based on MACD(12,26,9).

from ron walker - thechartpatterntrader.com

there's no rush to get into a stock beaten down in price

2010-07-06T18:06:00.000-07:00

df: There's no rush to get into a stock that you THINK is at a great price. Because the first pullback is going to take you to the previous bottom, where it will then hit resistance in the form of overhead supply, and price will probably turn back down.

if you wanted to get into this stock, you would wait until it starts to come back and starts to print higher lows and higher highs

Ron Walker - the extreme point rule - selling the bearish DI cross

2010-06-23T22:09:00.001-07:00

AG thoughts on Discipline and Systems Development

2010-06-15T12:51:00.000-07:00

To take your twelve cents' worth and put it in a nutshell:

1. Scope.
Goals (long term) and objectives (strategic targets) and key results (measurable and quantifiable.)

2. Resources
Access to skills, equipment, budget.

3. Time
Compelling events, deadlines, financial plan.

Some will recognize the three governing factors of project management. I think you could apply these three factors to any project from building the Pyramids to being a proficient trader. Few people ever seem to achieve either. Of course, the limiting factor is primarily psychological, but there's also issues of resources and (mistaken) priorities.

In my observation, people arrive at the notion of automated trading systems either to learn to trade (usually as one step in what is -- or will be -- a long line of failed attempts) or with the hope that automation will solve problems in their current trading (which usually pertains to discipline.)

While I think trading is easy -- damn easy -- it's very hard to overcome the psychological discipline challenges. So being profitable as a retail trader is actually damn hard. Developing an automated trading system is even more difficult because it requires the trader to have intelligence and technical knowledge as well as discipline. Without a solid foundation in analytical methods, without a strong understanding and working familiarity with trading operations and without the faculty of clarity of thought, the expedition into building automated trading systems will likely be futile.

I would encourage the novice trader and the seasoned practitioner alike, to focus their efforts on first "programming" his or her self to be as rigid and disciplined as a robot -- and use that discipline to put money in the bank before embarking upon far longer journeys into the realm of software developer and statistician where they might become trapped in the fate of rolling a square-sided trade up the slope of an infinite bell-curve.

Trading the Daily ADX - The Extreme Point Rule

2010-06-09T13:43:00.000-07:00

by ron white

The directional movement indicator is a powerful tool for spotting shifts in market momentum. A buy signal is given when the positive directional indicator ( DI) crosses above the negative directional indicator (-DI), and conversely, when negative directional indicator crosses above the positive directional indicator a sell signal is generated. When the market is trendless the DI lines crisscross back and forth, which can generate false signals.

Solely following the DI and -DI cross signals by themselves can lead to whipsaws and overtrading. Steven Achelis offers a solution to this problem using the ?extreme point rule? in his marvelous book, Technical Analysis From A To Z. Achelis points to the creator of the directional movement system J. Welles Wilder, and his simple trading rule, to help prevent whipsaws and reduce the number of signals that a trader acts upon.

The extreme point rule requires a trader to mark the extreme price point the day in which the DI and -DI cross. According to Achelis, the extreme point is highest of point of a session when DI crosses above -DI and is the lowest point of the session when -DI crosses above DI. Buy or sell signals are triggered when prices move beyond the extreme point.

murthy - been there, done that

2010-06-03T13:26:00.001-07:00

"In investing, there is no holy grail other than the one you fashion for yourself."

And there in lies the biggest conundrum ... all the other things that Vikas and you mention will take care of themselves if you know that. Kind of in an infinite loop, isn't it?

You work hard, get a good (real) education, real job, make some money.
Then you find out how to make this money multiply - enter the wonderful world of trading oops investing.
Then you think that you are smarter than everyone else
Get a bunch of indicators, tweak them (if someone uses 2 SD, use 1.8, if others use 10MA, use 9, etc.)
Then mysteriously they stop working, you wonder why?
Then you go and sign up with the Van Tharp's of the world and figure out the problem was always YOU (you should have listened to your spouse/significant other all along :-)).
Then you try to figure out how to fashion things for yourself - what works for me.
All along your account balance is getting depleted.
Then you realize, damn it, I was good at what I was doing and making a decent living.
And then you get back to your grind, get a real job (or try to) - you may be wiser, but you are older too.

Been there, done that.

There are a bunch of people telling us to follow them to the riches and a bunch of others telling us that the problem is YOU (us).

And everything is for "educational purposes" :-).

Good luck - be safe. Keep your hard earned money.

Murthy

What Are the Price Patterns of the S&P Saying?

2010-06-02T20:11:00.000-07:00

Price patterns represent human behavior and they are psychological road maps of future price direction. Right now, the Standard & Poor's 500 is churning through a head and shoulders reversal pattern in the 60-minute time frame (Figure 1), sending a message of warning to price pattern traders who trade financial instruments that mirror the S&P 500.

Topping patterns form when people refuse to pay more for a stock once it reaches extended levels. As the stock overheats, holders of that stock get nervous and sell. Meanwhile, short sellers eager to place their bets against the prevailing trend pile on. As prices fall back to support, the “Johnny come latelies” show up, feeling this is their big buying opportunity. Their emotional behavior temporarily props prices back up. The emotional actions of both bulls and bears create patterns on charts as prices bounce back and forth like a furious tennis match as the bulls and bears fight for control.

A head and shoulders top forms on the 60-minute chart being confirmed by technical indicators and a bearish alignment of the moving average trio.

The appearance of a head and shoulders pattern on a chart usually signals that a security or index is undergoing distribution (Figure 1). The pattern begins to form once price climaxes after a strong rally with high volume. The rally is followed by a minor recession to complete the left shoulder. After that, euphoria carries prices to another new high on relatively strong volume. But a reaction causes price to fall back again somewhere near the previous minor low that completed the left shoulder. A third rally occurs, but price can't muster the strength to reach the height of the head. Finally, prices decline in a third recession down, sending it back to the prior area of support, forming a neckline and setting up a lower high and right shoulder. A third decline sets in, sending prices back to the neckline of support. If a slew of buyers don't come riding to the rescue at support, supply overcomes demand and the stock dives. Once the price breaks through the neckline, the pattern is completed.

We can focus our microscopic lens on the 60-minute chart of the S&P 500 for a close up of a nicely developed head and shoulders top (Figure 1). When April came to a close, prices had an intraday move back down toward the previous support level near 1183, putting in a lower high and the last leg down necessary in order to complete the right shoulder of the pattern. The stage is now set for prices to come to a screeching halt and make a U-turn.

A bearish harami forms when a bearish red bar's real body remains inside the trading range of the previous long white bar. The following bar gapped lower and confirmed the pattern. The next rally couldn't clear gap resistance.

There are a couple of effective tactics to help time the precise entry of this pattern. The first opportunity came when a bearish divergence set up on the hourly chart (Figure 1) after prices came to a peak to form the top of the head.

Figure 2 shows that a bearish harami pattern set up on the daily chart at that time, which was confirmed the very next session as price gapped down, forming an elongated bearish candle. A trader can go short once the lowest point of the first candle in the harami pattern has been violated, with a stop just above the most recent high. Combining the negative divergence on the hourly chart with the bearish candle pattern on the daily chart offers traders a timely short entry point.

Even though the S&P 500 rallied the following two sessions after that, there wasn't enough strength to clear the gap resistance made that confirmed the bearish harami pattern (Figure 2). The two-day rally allowed for the right shoulder to set up on the hourly chart, which brings us to our second possible entry point.

A bearish engulfing pattern appears when a small white candle is followed by red candle that completely engulfs it. The black dotted line marks the low of the engulfing candle. Two bars later, the pattern was confirmed by another candle that printed a low below the dotted line.

The second opportunity to sell short presented itself on the hourly chart when a reversal occurred shortly after the right shoulder peaked. Figure 3 showcases the bearish engulfing candlestick that printed on the 60-minute chart. The black dotted line marks the pivot point that is used as a trigger point to implement the trade. Should an intraday candle be completed with prices below the dotted line (the low of the engulfing candle), the trade will be triggered. In this case, the pattern was confirmed shortly after the open of the following session, the day after the pattern appeared, when a red bar sliced below the low of the engulfing candle.

The third opportunity came a few bars later when a bearish alignment of the moving average trio, the ten-, 20-, and 50-period exponential moving averages (EMAs), occurred on the hourly chart (Figure 3). A bearish alignment occurs when the moving averages roll over together, featuring the ten-period EMA below the 20-period EMA, with the 50-period EMA above them both. A short sale can be taken the moment the moving averages snap into a bearish alignment.

Both price and technical indicators should be used to predict price movement. Indicators must always support all price patterns. Note that the moving average convergence/divergence (MACD) (12,26, 9), the relative strength index (RSI) (14), and the stochastic (14,3,3) not only validated the bearish price pattern, but they also gave timely sell signals of their own (Figure 3). Each one of those indicators put in a lower high on the hourly chart when the right shoulder formed, being in agreement with price, thereby corroborating what price was telling us. If you glance back at Figure 2, you will see that those same indicators confirmed the bearish harami pattern in the daily time frame.

Less aggressive traders can wait for the S&P 500 to penetrate the neckline of the price pattern. The actual trigger for the head and shoulders pattern comes when prices crash through the neckline. If prices collapse through the neckline, the pattern will be complete and the bears will take control. But in this case, there is a possibility that the pattern may be classified as a complex pattern with two left shoulders. Should prices bounce at the neckline, it could set up another right shoulder. The validation of the head and shoulders topping pattern will signal lower prices to come in the days ahead, sending a message to many long positions to get while the getting's good. RonWalker of TheChartPatternTrader.com

ron white: The 6 Phases that Define a Bull and a Bear Market

2010-06-02T18:00:00.001-07:00

Warning Phase: Close below the 50-period MA. Close above the 200-period MA. The 50-period MA is above the 200-period MA.

Distribution Phase: Close below the 50-period MA. Close below the 200-period MA. The 50-period MA is above the 200-period MA.

Bearish Phase: Close below the 50-period MA Close below the 200-period MA The 50-period MA is below the 200-period MA.

Recovery Phase: Close above the 50-period MA Close below the 200-period MA The 50-period MA is below the 200-period MA

Accumulation Phase: Close above the 50-period MA. Close above the 200-period MA. The 50-period MA is below the 200-period MA.

Bullish Phase: Close above the 50-period MA. Close above the 200-perod MA. The 50-period MA is above the 200-period MA.

chartpatterntrader.com

how to plot a symbol on a lower study in thinkscript

2010-05-27T10:19:00.001-07:00

You can add volatility indexes to your chart such as VIX, RVX etc if one is a reasonable indicator for your stock

declare lower;
plot data = close("RVX");

how to graph a stock's intraday IV in thinkscript

2010-05-27T10:17:00.001-07:00

Q: Does anybody know if it is possible to graph a stocks IV on a 5 minute chart in TOS? I'm able to do it in the Prophet charts, but only on the daily, not down to the minute range

A: Open the ThinkScript code for ImpVolatility study and copy it

Then create new ThinkScript and paste what you copied

Final step is to tweak the code from hidden on intra day to visible on intra day

If you need help, email ThinkScript@thinkorswim.com

MC on his approach

2010-05-27T09:54:00.001-07:00

I can't point exactly to any dramatic changes that have happened. The particular examples you reference each happened in unique environments. Complexity usually is more pronounced when I make mistakes along the way and have to get either a little more aggressive or just a little more creative. What's been consistent over the last decade or so, at least, for me is the utter "non-conviction" I have tried to develop in my trading (i.e. I don't care where things are going, I only want to profit from a bunch of possible scenarios). Further I continually try to develop ways to get to a situation where I own "free" options regardless of where they happen to be relative to underlying price.

If anything, what I continue to learn is more about myself and the weaknesses in my own psyche that become crystal clear when I see them reflected in the trade structure I construct. I can be saying out loud that I think price will go up but if I look at what my position says and if it isn't consistent with my expressed opinion, I am confronted with a strange paradox that makes me reign in my trading (until I can figure why my actions were different from my intentions).

The old saying is "everyone gets what they want from the market" and when I can see that what I want from my positions isn't consistent with what I think I want, then I have to start a little self-analysis to figure just what the heck I'm doing. Maybe a little too confessional here, so I'll stop

MC on "how to learn to trade"

2010-05-26T10:03:00.001-07:00

While the ultimate goal in trading is to make money there are a slew of fundamental performance tools and techniques that I can say need to be drilled into anyone wanting to learn this game. Earlier you used chess as a corollary but any performance activity can be used as a metaphor for trading: tennis, hiking, poker, and on and on. If you pick up an advanced book on chess and try to understand it - or worse toss it away simply because it doesn't show you in simple terms "how to be a grandmaster" - then the same kinds of frustration are likely.

I've been trading for 25 years and I'm still learning. I also, by this time, do a bunch of stuff automatically without stopping to think about all the whys and wherefores or even if it is the best play to make. It takes an extraordinary teacher or coach to be able to convey little league basics through major league nuanced strategy. In fact if there was someone who claimed to do this they'd be lying. Unfortunately I don't think I've ever seen any structured program or book that carefully takes a new trader straight through to a winning professional. To make matters worse, the new trader doesn't get the benefit of little league to start to learn the fundamentals: every trade you actually execute is like facing the best pitch of a major leaguer.

So how does someone learn? I'd say get some kind of tool that allows you to simulate trades in accelerated time and do the exercises thousands of times. The goal should be to win on balance and that means trying to find a way to win on every single trade. You have to literally make trades (simulated or real) to learn how to trade. And you have to either be very good at self-monitoring what you are doing or you have to get a more experienced coach to give you feedback.

The mechanical tools are always pretty basic: learn synthetics, get an option risk graph tool that incorporates multi-leg trades, and then play with variations. Just learning how to dissect using butterflies is a great skill to develop but, like learning how to develop a proper batting swing or mastering all the moves of a middle game in chess, skill development is necessary but not sufficient for successful trading. Because the odds are so extreme against most retail traders, it will always take something beyond skill development to turn someone into a profitable trader.

Jake's rules

2010-05-25T18:53:00.000-07:00

[SB]: I am a successful day trader and Jacob Bernstein has been key in my success. I have built numerous successful systems based on his principles from his books. Here are ten of the cardinal rules from this book:

1. Do your home work. You need to be prepared for all your trades through each stage of the cycle from the set up, to trigger to follow through. Keep your charts up to date, watch your signals, trail your stops to lock in profits, keep to your stop losses. Most importantly decide on your system before you start trading do not make up rules as you go. Study how systems performed in the market and then follow them in real time.

2. Focus and specialize. Pick only a few stocks or markets to trade and become an expert on them. Understand their time of day action, volume, price range, and risk parameters. Do not be a Jack of all Trades and master of none.

3. Be consistent. You must be consistent in your application of methods. Work the same schedule each week. Follow the same systems take the same stop losses. Trading is a business and must be ran with the same discipline as a business. Be consistent to give your methods a chance to work. Once you have back tested and proven your system has worked do not abandon it when you you have a few losing trades. Even the best systems can easily have six consecutive losing trades. Aim for an average win per trade.

4. Trade with sufficient capital. You must have a minimum of $25,000 to day trade, $30,000 is preferable to be able to withstand draw downs. Your chances of success increase with the more capital you have to begin with. You must have enough capital when you start to be able to withstand your initial losses while learning to trade.

5. Don't trade any stock or futures contract that scares you. You must be comfortable with the amount of risk you are taking on in any trade to be able to make good decisions under the stress and pressure of trading.

6. Avoid reacting to news reports unless you have used specific triggers. Do not chase the market after news is reported unless you have a system for doing that. Generally the people that buy the rumor or expectations and sell the news are successful, not the people rushing in after the news is reported. The news is usually expected and priced in.

7. Avoid internet chat rooms. The vast majority of these are filled with novices and people trying to pump or dump their holdings. I have found no value in these over the years either.

8. A day trade is a day trade. One of the riskiest things you can do is carry a losing day trade into the next day. This one rule has saved my thousands of dollars. You must cut your losses no matter what before the closing bell each day.

9. Do not combine time frames. Stocks move in different directions within different time frames. A day trader must take his signals at the daily level regardless of what larger time frames tell him or her.

10. Your big money will be made in the big moves. Traders must understand that on average 80-90% of their profits will be made on 10-20% of their trades. It is important to have a large enough stop loss to allow your trade to be successful but to cut your losses when your system says to. Also it is crucial to allow your winners to run by using trailing stops to lock in profits. You must have a limited down side with an unlimited upside, that is what will cause you to be a winning trader more than anything else.

Unless a trading method is 100% objective in its rules and implementation, your odds of success will be limited. Success in day trading is limited by the emotional responses that are born from subjective decisions. This book explains the psychology needed to be a successful day trader and gives many strategies and systems to get you started in the day trading game. This book will also help day traders that need to begin to win on average. I highly recommend.

Murthy on Butterflies

2010-05-21T20:42:00.000-07:00

Noman,

Long Butterflies (and short condors) are vega negative positions. Vega negative emans, the position value increases with reducing volatility. A long call/put or long calendar are vega positive positions - their value increases when volatility increases (all else remaining somewhat similar).

What does higher volatility actually mean? Let me illustrate:

If an underlying is at 100, and the volatility is 10% - it means that the underlying is expected to be between 90-110 after a certain time interval.

Let's say you now buy a butterfly at 90/100/110 when the vol is 10%.

Now in the first case, say, the vol reduces to 5%. Then the range would be 95/100/105. Since this is within your range of your fly, your fly value increases.

Now let's say the vol increases to 20%, now the new range is 80-120. Is it still within our fly's range? No! Which means now at the expiration, it has a good chance of being OUTSIDE your fly's range - hence the fly value reduces!!

Again, this is a simplistic example, but hopefully makes the point.

Plus the effects of theta on the fly is not as dramatic - so even though the underlying's price came to the center of the fly, the vol increased - which means at the (June) expiration, it still has a shot at expiring outside the range of the fly.

This is exactly the reason you have to know what tool to use with options! If I had similar opinion (that the underlying would be bearish), I would have placed a calendar (if I also predict that the vol also would increase), or use a vertical spread.

One other note on the fly - the reward/risk ratio is theoretically very attractive, however if the vol was at its minimum and the price was at the center, you would only see big profits on literally the last day of expiration. Even on the last day of expiration you would probably realistically get 50-75% of the total reward. Many retail traders are attracted to this "low risk, high reward" characteristic of a fly.

Having said that your returns from percentages perspective are still good - 0.70 risk and it is now value around 1.15 (I don't remember what your underlying was, but that's not important). That is over 50%.

BTW, you said the the vol would be canceled in "spreads" - it is actually "vertical spreads" - not all spreads.

Hope this helps you and/or others.

"With stock you can lose only one way, but with options, you can lose in multiple ways." So you have to know what you are doing!

Good luck.
Murthy
(posted-to-marketstudent)

van tharp quickie - Simplicy is one of the two keys to making money

2010-04-19T15:15:00.000-07:00

Only about 5% of the world's traders and 20% of the world's investors consistently make big money. In many cases, what these winners do is not complex. In fact, simplicity is one of the keys to making money.

One of the biggest secrets of successful trading is finding a trading system that fits you. In fact, after interviewing enough market wizards to write two books, Jack Schwager concluded that the most important characteristic of all good traders was that they had found a system of methodology that was right for them.

(from a Van Tharp email ad)

the mechanics of reality

2010-04-13T19:13:00.000-07:00

from tim knight's slope of hope blog

For those not familiar with what The mechanics of reality with regards to the stock market is the following is for you:

Remember the moment you take a trade you are at the mercy of the market and have no control except when to sell. If you are not willing to take the risk and are not willing to pay that price do not take the trade.

Remember the mechanics of reality with regards to the stock market states a stock can only do one of three things: Up, Down, Nowhere. The moment you hit the enter button you are at the mercy of the market therefore the only control you have is when to sell/cover. You can't manage your gains as you have none to manage initially. Knowing this in advance it allows you to stay in outcome, that being you will either:
1. Make a gain
2. Wash
3. Get stopped out at a loss
Remember the market IS the boss. IT is going to do what IT wants to do.

NOTE: By the way all web services, research reports, brokerage reports, fund managers etc. live in this realm. ,we ALL do. We don't care who you are this is the reality of the markets. It doesn't matter who or what you subscribe to -- not one of them can get past this reality. Do yourself a favor and ingrain this in your head. No matter how hard you try you can not get away from this.

In addition to that?

Remember the moment you take a trade you are at the mercy of the market and have no control except when to sell. If you are not willing to take the risk and are not willing to pay that price do not take the trade. IF you are willing to take that risk know full well the end result could be a loss. That said make sure that portfolio management trade size is used accordingly. With any position you may take make sure that should something go awry the amount of total impact to your account does not devastate your acct. Try to stick to a 5% position That's the key to portfolio management, not biting off more than you can chew.

converting from covered call to diagonal

2010-04-07T10:47:00.000-07:00

>Hi T,
>
>I had looked at that and yes it is considered a synthetic covered
>call. I have found it locks up a lot of capital, but I find it
>hard to find enough premium to make it worthwhile on the short.
>
>I have traded diagonals and calendars more. I am curious if you
>are targeting certain historical volatility or IV as part of the
>formula. Calendars I shoot for conservative 15% return and exit.
>
>S
------------
S & the group,

I typically use ETF's as the underlying, not as much premium I know
but a lot less risk and I don't have to get into a lot of detailed
research on individual stocks. I start out looking at things as a
covered call with somewhere around a percent and half premium per
month if not called with the intention of holding the underlying for
several months, rewriting or rolling calls each month. Then I look
at 9 months or more out and see if a Diagonal will work, again with
the intention of rolling out every month.

Below is as trade I currently have on MDY. I had been holding the
ETF and doing covered calls then changed to the diagonal last
December. Note, when converting from CC to Diagonal I selected a
longterm call with a delta between 80 and 90 and used the delta to
adjust the position size to be equivalent to the original covered
call position I was in.

12/21/2009 -$33,578.25 BTO 7 Jan2011 85 Calls @ 47.95
12/21/2009 $946.72 STO 7 Jan 134 Calls @ 1.36
1/15/2010 -$630.00 BTC 7 Jan 134 Calls @ 0.90
1/15/2010 $1,381.48 STO 7 Feb 137 Calls @ 2.00
2/5/2010 -$44.13 BTC 7 Feb 137 Calls @ 0.06
2/5/2010 $441.76 STO 7 Feb 130 Calls @ 0.65
2/18/2010 -$2,603.23 BTC 7 Feb 130 Calls @ 3.70
2/22/2010 $686.76 STO 7 Mar 138 Calls @ 1.00
3/16/2010 -$3,693.48 BTC 7 Mar 138 Calls @ 5.25
3/16/2010 $981.70 STO 7 Apr 146 Calls @ 1.41

Current value of position = $42,051.50

As you can see I've had to add cash to the position when rolling out
due to the run up of the underlying ETF but I have solid gains in the
long leg that more than makes up for it. To date the annualize
internal rate of return is 81.7% (per EXCEL's XIRR function)

Now I'd like to take back out a some of the cash I've had to add in
by rolling up the long leg for a credit as follows:

STC 7 JAN11 85 @ 62.70
BTC 7 APR 146 @ 2.60
STO 8 JAN11 100 @ 48.20
STO 8 MAY 149 @ 2.15

This gives me a credit of $5230 while also increasing my position
size from 7 contracts to 8. My question to the group is; "Does this
sound like a good move?" The only reservation I have is that the
spread on the longer term call is pretty wide but I've been pretty
consistent with getting fills in the middle of the spread.

BTW., I've used this same strategy with SPY and more recently XLF &
IYR but with smaller positions.

Thanks for your comments.
------
tom, have you read my paper in the file section of this group on diagonals? i never all new money as my position is increasing and my short calls go in the money. i sell enough leaps to cover the cost. ie i sell when the market is high. i add and replace those leaps when the market is down. ie i buy when the market is low. i also don't trade 10:10 ratio. that way my leaps appreciate more than my short calls so my overall position continues to increase even if the underlying is 20% above my short call strike...drj
-----------
Bob,

I go out at least 9 months for the long side and chose a strike with
a delta beween 80 & 90. The time decay of the long leg will be a lot
less than the short side.

Don't be concerned about having to buy back the short side when the
underlying moves up. The gains you have in the long leg more than
make up the difference. (see the example I just posted). Just keep
enjoying the ride up. You will want to bail sometime after there is
less the 6 months left on the long side.
-T
----------
tom, i do it always with most time value, ie atm. i LOVE when i see my short calls itm, the more the best. since i sell ratios based on leap delta my leap long calls always appreciate more than the short calls and i make profit not only from my short call premiums but also from my leaps. as i mentioned in another post as market increases i cover my short calls by selling leap calls. i replace those leap calls when the market has a correction. (read my paper)....drj
---------

list of stocks for short put selling

2010-04-07T10:46:00.000-07:00

I do not scan for myself. I have access to a lot of Bank of America / Merrill Lynch institutional reports. This information comes from some of those reports.

The first list on the Russell 1000 I showed was based on selling at least 5% premium and having a minimum of 5.5% upside return. To get these conditions they are usually selling the first OTM strike, which is usually what you would call the closest to ATM strike.

The Technically attractive stocks to "buy-write" list are "buy rated stocks that have constructive to positive technical chart patterns with attractive levels of premium". Here they are usually selling farther OTM calls than on the Russell 1000 list. The month they sell varies from stock to stock (varies from Jun to Jan in the list I showed, most being July or August).

I am not advocating that one use these lists to enter covered call positions on these stocks. I am presenting it as a possible source of stocks with "juicy" options that you can use to sell premium. This could be for put selling (if you are neutral or bullish) or for selling call spreads (if you are bearish). You could use for covered calls if you wanted. Sell the ATM or OTM calls if you are neutral to slightly bullish. Or you can sell ITM calls to give yourself more downside protection.

J.
----

joey-h's journey

2010-03-01T10:39:00.000-08:00

JoeyH to OClub
Jack,

Unfortunately it has been a long misguided journey for me and over the last ten years that I have been at it has not really paid off for me as well as I would have hoped. It was not until that last few years that the proverbial light bulb was lit and I started to understand what it really takes to run a trading business. The unfortunate part is I suffer from extreme analysis paralysis and can not seem to really get anything down on paper that I could consistently follow to become profitable (I have been profitable every year but you can't really grow an account when your best year and worst year is single digit returns).

I, like MANY other people went through (and still going through) all the classic stages of learning the skills required for trading.

1. Blatant refusal to be believe other people when they tell me that the trading service providers won't help me make a million dollars out of my meager $5,000 account balance.

2. Thinking that using every indicator under the sun will some how give me an edge over everyone else.

3. Trying to invent a Holy Grail system that works consistently every year, in every market, and in every market condition

4. Thinking that taking on a little more risk won't blow up my account because I am some how different than everyone else and the emotions that I am feeling are not really fear and greed.

5. Instead of focusing on a few instruments to trade and focusing on a few strategies I jump from one "hot" stock to another and have tried everything from covered calls to double diagonals.

6. I could probably go on forever here but then we would be missing the point :-)

So here are the rules that I think everyone can agree on:

1. Keep it simple

2. Use Position sizing - I have read Van Tharp's Position sizing book and great book if you want a TOTAL picture on money management but for options on equities I can save you some money. 1% or 2% max risk (you can use more if you are not ultra conservative like me).

3. I have heard 70% for positions and 30% for adjustments and that probably works just fine but again my fear of losing large amounts of money holds me to the 50%/50% mark.

4. Use some sort of technical analysis (I am sure this one will be debated until the cows come home but this is my opinion) - statistics are a funny thing... some times they are right and sometimes they are wrong.. .but you want to at least know that you are seeing the same picture as everyone else. Even though Van Tharp can show examples of a coin flip trading system making money over the long terms.

5. Focus on a few trading vehicles and really get to know them... paper trade them for a year or more if you have to. I am following IWM, OIH, TLT, EEM, DIA and SPY.

6. Focus on no more than two or three trading styles until you are consistently good at them. - I have currently abandond all directional trading and now use calandars and butterfly's (when beta weighting these positions the fly's offset the calandar vega so the over all portfolio is a little less volatle.) I like theta decay but this may not be for everyone... it is fairly boring.

that is all I have time for today... if any one out there has two cents then please post away.

thanks,

Joey

wise peter

2010-02-27T00:38:00.001-08:00

With regard to the ShadowTraderPro Model Portfolio, we began this week by reviewing the monthly S&P 500 Index (SPY) chart with the idea that if the index could close the month above 112.31 (which is the 50% Fibonacci retracement level of the study drawn from the high during 10/07 to the low during 03/09) it would be an undeniable indication that the SPY would be primed to cut through the limited resistance between 112.31 and the 61.8% Fibonacci level at 122.98. As it stands on this last day of trading in February, the SPY is 1.64 points or 1.48% beneath the 112.31 level so it is unlikely the index will close this month above this key level. This isn't to say that it can't happen in the near future, but until it happens, we won't risk more capital to the long side beyond the $42,000 we currently have committed. We may sell and replace positions, but committing just under half of our total capital of $100,000 is enough risk for the current choppy environment .

Our highest priority now is to protect gains in current positions (ASIA and MAC) to prevent our other positions which are currently near breakeven levels (CRL, MS, RIMM) from turning into losers thereby eroding the gains of our winners. We intend on doing this by being quick with a sell order for any position with even a remote indication of starting a sustained move against us. If the market moves higher and takes our stocks with it, bravo, but we are going into trading today with just over 1% gain for the week (including the closed trades in RIMM and RKT) and we simply will not feel apologetic for closing out any position that threatens this.

After today's close, we will go into this weekend with the "edge" of our work ethic and the commitment to scanning the charts of every single stock trading over $20.00 with volume higher than 500k. This will provide us with a fresh perspective and new opportunities for next week, so even if we take the extreme measure of selling all five of our longs today, we know there are plenty of opportunities waiting for us next week. We recommend that each of our subscribers adopt this non-apologetic and committed mind set with regard to their own trading.

If there was anything that yesterday's price action reminded us of was that around every proverbial corner of the stock market is something waiting to trip us up. We are not in the type of market that allows us to squeeze the last point out of any trade. Take profits when you have them.

fw - get a life!

2010-02-27T00:34:00.001-08:00

Friday, February 26, 2010, Prescott, Arizona, USA

Get a life - at least on weekends!

Perhaps it is the fact that we are always "into" the next month's expiration cycle by the time the current month comes to a close, or some other odd quirk of time fate, but the months seem to go by faster than the weeks, the weeks faster than the days, etc... For example, next week is already the second week of the March expiration cycle, even though February is just about to come to a close. To perfectly exhibit how strange our mind works, we actually remember the last Friday of the month of February some 25 years ago, when a nearby OEX market maker said "How can it be the last Friday in February when yesterday was just the first Monday?" Huh? As we questioned his logic and calendar capabilities, we thought "and this guy is a math genius with several big-name university degrees?"

Those trading floor days were about as different as they could be from the way we struggle-through our current life style, although we are still completely involved in the marketplace. But instead of making a market or handling customer orders - we now place them. Standing in the world's most active trading crowd, in those days of our youth, was an incredibly exciting and enriching experience - yes, in more ways than one. Another near-by trader once said "it is like we are in high school - except we have lots of money." And that was exactly the case. While we were tested both physically and mentally for the entire trading day, there were Fridays when we actually wished the week would continue on for another trading day or two! No, not because it was necessarily any "fun", but it was so incredibly profitable, and during certain market "runs" it would have been nice to have more time to reap the benefits.

These days are slightly different (ya think?), we no longer have to pay total attention on a second-by-second, tick-by-tick basis, and would never even think of wishing for a longer market week! In fact, as a customer, not a market maker or floor broker, we can now enter orders that require very little attention until the last two weeks of the near-term cycle, and that is exactly what we do (although we do sometimes intra-day scalp the futures around our position). Positive theta, relatively delta neutral trades are the ones seen most in our accounts, and if they do have a bias, it is because of some personal reason, but still carry only a small amount of directional risk. And, thanks to our over 33 years of investment experience, we can, at any time of the day or night, simply make a note of the underlying prices (equity and futures), and know with a relatively close degree, how our positions are doing.

So, today, being just the first Friday of the expiration cycle, we will check the early morning futures, and if they have a "gap" in either direction (they don't), we might make a trade. Then we will see if any of our equities have some bid-ask discrepancy or are trading "big" in early market action, and if not, after the swimCoach session, we might pay attention to something else. We have learned to have a life outside of the market, and after all of the years that we were so totally focused on it, our other worldly endeavors are merited and well earned. An article or two may be scribbled at some point today, as we are still trying to catch up after our trade show trips, and we will certainly answer some emails, but after that, who knows? Have a great weekend - maybe it'll start today.

"If a man insisted always on being serious, and never allowed himself a bit of fun and relaxation, he would go mad or become unstable without knowing it.”-- Herodotus

FHW

shadowtrader entries & exits

2010-02-26T10:54:00.001-08:00

February 23, 2010

Company: AsiaInfo Holding, Inc. (ASIA)
Action: Buy the stock
Shares: 300
Price: 23.63
Stop: 22.34
Target: 25.47

Trade Explanation: As described in today's ShadowTraderPro Swing Trader, ASIA has touched an ascending trendline and horizontal support level. We have bought 300 shares of the stock.
-----
February 26, 2010
Company: AsiaInfo Holding, Inc. (ASIA)
Action: Sell the stock
Shares: 300
Price: 23.34
Stop: n/a
Target: n/a

Trade Explanation: ASIA is not following through higher on yesterday's bullish engulfing pattern. We sold the stock taking a 3% gain in 3 days.

hint!

2010-02-24T23:54:00.001-08:00

As for the ShadowTraderPro Swing Trader Model Portfolio, four of the five long positions we currently hold showed excellent strength yesterday. However one of the stocks, AsianInfo Holdings, Inc. (ASIA) didn't respond as well to the broader market's rise. If the stock continues to meander or looks to be on the move lower, we will respond quickly by cutting the position.

rvd on "know your options volume!"

2010-02-24T22:18:00.001-08:00

I think Bill is correct but Im not sure it always means more risk in so many words.

Take for example a move up in the SPY of 30% in one week, wow.

You could;
A. put on a call vertical 90/91 with a 1 to 3 risk to reward ratio.
Or
you could;
B. put on a 90/95 call vertical and with some good timing also could get a 1 to 3 risk to reward ratio

Now A. has max profit of (100 - purchase price), say $70 or so and B. has max profit of (500 - purchase) price.say $300 or so.

They both have same $2.00 commission!!!!

They both have a 1 to 3 risk to reward ratio and assuming the trader who trades
the 90/95 has a bigger account balance, then they would both have the same risk effect relative to the account balance.
The only thing that changes is the dollar value of the profit and loss, which is only one aspect of the risk.
Of course B. is similar to trading the RUT, but RUT is twice as big still, it would be like
a 10 point strike on the IWM or SPY .

Main point as long as the spread is comperable due to high volume, then the commissions are less.
HOWEVER the RUT does NOT have similar volume as the IWM, which again is not as high as the SPY, which is surpassed only by the QQQQ.

So chances are good any savings in commissions on the RUT will eventually be lost when you NEED to get a fill and the market makers know it.

And YES TOS instructors taught me that years ago in a large lecture.

Same with SPX sometimes. And especially MNX, OEX.

Always check option volume!!!

frank-walsh if i were bullish...

2010-02-23T10:49:00.000-08:00

- Did anyone say "lemon?" At the same above mentioned east coast trade shows, and for obvious non-automotive reasons, the name Toyota (TM) was mentioned almost as much as Apple (AAPL) and Google (GOOG*). "But you are contrarians..." we remember one booth visitor in Orlando telling us (with the stock trading near $80) as we watched the giant automaker's price fall off a cliff, "why not buy a call or a call spread?" the same inquisitive retail trader asked. We simply responded that if bullish we would probably prefer to sell an out-of-the-money put vertical, but usually didn't like trying to catch a falling knife - or car! (whats-frank-thinking?)

options trading strategies

2010-02-20T20:36:00.000-08:00

Marko
Your last session was tremendously productive because it focused on one subject, and the mechanics. There is another subject that it would be great to treat in as much depth, and that is strategy selection. If I am trading the income side of my portfolio I have a number of weapons – condors, flys, calendars etc. What happens to me now is that I spend a lot of time trying one strategy at a time, and often finding lousy P&L because I am not smart enough to systematically say things like “This looks like a VIX spike, this is a good time for butterflies”, or whatever. A systematic top-down approach for deciding where the best opportunities are likely to be would be good, and neglected by most of the books.
Thanks
------
Hi Bill,
I use this link, http://www.theoptionsguide.com/option-trading-strategies.aspx, as a quick reference.
Good trading,
Dave
-----

This is helpful – thanks – but I’d also like some discussion. Let me tell you where I am trying to get to (I can almost hear Dan Sheridan saying “This is a business!!”)

My preference is to focus on a few indexes and ETFs so I don’t have to worry about company risk (I have a daytime job, too). I’m inclined to delta neutral trading to generate income, and I am inclined to be as quantitative as I can, but realizing that this is a craft (Dan talking again). The human mind is a lot better than a computer at recognizing subtleties if it can train itself within a systematic structure, so the focus on a limited number of underlyings is the structure. (There is a radio add that says that you can’t become successful by doing 1,000 things, but by doing 12 things 1,000 times. In my experience, that is true). So I pick instruments to trade. Not too many – maybe 8 tops (here again, I’m sure Marco has an opinion). Then I track them – price, volatility, support, resistance, channeling behavior etc. I lay some kind of quantitative structure over my tracking – what is high vol for this instrument?. This way I come to conclusions about what strategies work best with this instrument at this time – and why. The “and why” is important, because having a set of rules is important, but understanding why the rules are there enables us to adapt to new market conditions.

So I am trying to develop an intuitive opinion on a limited set of instruments that is supported by data. I don’t expect anyone to give me a set of rules, but it would be nice to discuss how to generate these rules.

It would also be nice if we, as a group, could focus on a core set of underlyings and discuss how to trade them over time. This reasoning could then be transferred to other instruments.

Bill

gregs best way to set up stoploss orders for options

2010-02-19T20:24:00.000-08:00

This is my current best-practice-way to put in stoploss orders on options. In this example, it's a MANually priced stop, here $1.50. The stop type is BID. So this stop will not be live until this option gets a BID of $1.50.

Let's think this through. We are short these puts. We have received money from their sale, and now we want them to decrease in value. But we do want to have some protection in case we are wrong. So we put in this order to buy back if the puts rise in price to $1.50

And what do you think will be higher... the price that buyers want to pay (the BID) or the price that sellers want to charge (the ASK)? So if we set our stop to get triggered when "something" gets to $1.50, what will get there FIRST, the bid or the ask?

the ask. so let's not tie in our stop to the ask. And like wise, don't tie it into the MARK. If there is a wide spread between the bid and the ask, and then a goofy buyer bids a real high price cause he really wants the stock , that bid will momentarily skew the midpoint (the MARK) higher. So the stoploss could trigger on spread shenanigans verses real market action.

I could find a better way to put in these orders, but this is it for now.

leavitt brothers list of etfs

2010-02-17T22:11:00.001-08:00

http://www.leavittbrothers.com/reports/list-of-etfs.cfm

tos ways to send orders for spreads

2010-02-16T18:12:00.000-08:00

Newbie question

Hello everyone. My name is Sam and I've been lurking for a few weeks and learning a lot from everyone's posts. I have been paper trading on thinkorswim and have been doing quite well, so I decided to try it with real money. However, I've been having a great deal of difficulty getting my vertical orders filled at market. In TOS paper money, if the volume is 1000+ for the day, I can fill an order in seconds, but with real money, several minutes go by without filling. My strategy is somewhat dependent on nearby prices, so by then the market has changed and I have to cancel. Any ideas on why this is happening? Is this normal for the "real world"?

Thanks! Sam
--
Hi Sam. With TOS the best-practice is to set your limit order at the "mid" price. The TOS order screen shows you a price continuum with "mid" and "nat" (natural) price and a purple arrow showing where the price currently is.

We always go for the "mid" price (which is half way between bid & ask) because it shaves a few cents which adds-up to real savings over time. Just cancel/replace with the new "mid" price if it moves. I usually wait about 5 mins to see if it fills before I cancel/replace.

Now spreads and other combo orders sometimes take longer to fill because the market maker has to deal with them manually a lot of times. So if you have the flat $1.50/contract special commission rate for OptionClub members (email scott@thinkorswim.com to add it to your acct), then you don't really care about placing a vertical order (which saves on the ticket charge which we don't have), and you could place separate orders for each option.

Those single option orders will get filled automatically by computer especially if you set your limit price at mid or 1 penny past mid price. Just make sure you fill the long option first, then the short option second so you don't go naked in your account.

There is an advanced order called 1st triggers Sequential, where you can set the order for the long first, and then when that fills, it will fire off the second order for the short. Since you have no ticket charge, it's the same commission for you either way. So this is another secret to get quicker fills.

Super Puts?

2010-02-16T01:10:00.001-08:00

Subject: [MarketStudent] New to the group, with a question
From: R.E.C
To: MarketStudent

Folks,

I am fairly new to the group and appreciate the option experience that
you all have. I am very interested in developing my technique on iron
condors and other mechanisms for income generation. Another technique
that I came across is the protected buy-write, or calendar collar (buy a
long-dated put and buy-write against it). I heard about this on a
webinar presentation by John Brasher, callwriter.com. They refer to it
as the SuperPut.

The up side seems to me that it locks your down side risk. Down side is
that it can take 3 months of call writing to recover the cost of that
put. Looks like it can generate 3-5% per month on the stock position.
So, over the span of a year you could see 9*3-5% (assuming 3 months to
recover the cost of a LEAP put) or most optimistically 28-45% return.
Even if you cut that by 1/3 to remove "marketing optimism" that could be
a 10-15% return with insurance against a catastrophic loss.

So, a few questions:

1. Anyone trade protected buy-writes/calendar collars/SuperPuts? What
has been your experience on their performance and management?

2. Any opinions on the callwriter.com service? Anyone use it? If so, is
it worth the money?

Cheers,
Ray
----------
From: Marko

hi Ray,
welcome to our group.
here are a few thoughts regarding your message:

covered calls are a bullish to neutral strategy with little downside risk protection.
covered calls are a stock picking game. .
so here is a question........
If you are really good at picking stocks then why limit your upside with a short call ?

regarding the minimal amount of downside protection that a cov call provides, a collar is a reasonable alternative, but so is a vertical spread. Either way is the identical risk profile.

long dated options (and especially leaps) are generally over priced and thin to trade,
therefore you will pay too much to get long and have a tough time to close at a fair selling price.

there are 1001 (probably more) covered call services out there. they all want you to buy some education that is readily available for free else where.

Brashers site has lots of stuff to buy.
I would suggest signing up for the free stuff to see how that works out before committing cash.
Brasher might be a great guy and an awesome option strategist. I really have no idea. But covered calls and collars are beginner strategies and there is a ton of free education out there readily available. As you might discern, I am a bit skeptical.

slow and steady is a good way to learn the trading business.
stick with Market Student

good trading
Marko
__._,_.___

From: JohnC

Those "super puts" are just a synthetic calendar spread. Why bother with the stock (super puts strategy) when you can just use options?

If you already own the stock and want to keep it, then the "super put strategy" may be worth doing.

John

----------
From: AG

I think you answered your own question. There are some clever "position trading" techniques -- most, if not all of which have been documented for years. So some company coming along and saying they've "invented" something or giving it a marketing moniker like "super puts" is continuous problem ... there's seemingly a lot of hucksters out there selling variants on condors or butterflies and declaring themselves unique and "nobody does this" ... people get suckered into thinking they need to pay some "guru" for what is already in a book for $50 off Amzn. Sheesh!

Keep in mind the cost of these more complex trades -- unless you're trading in size (1000+ shares on $100+ underlying) then the commish on "onesies and twosies" contracts will draw on the percentages in these techniques. When I've experimented with my own techniques on underlyings that had lost value and fallen into the $20-40 range, a combination of unappealing greeks and the relative costs made them torturous.

It's important to understand that these are statistical trades -- just taking sniper shots here and there will yield unpleasant hit/miss ratios. You need to trade these positions continuously to a strict discipline or they will appear unprofitable. It's not quant trading, but there are metrics governing the yields on the option prices. I've traded positions on four underlyings for a couple of years and variously shifted my trading plan many times as I "zeroed in" on a viable program. I can only advise others to trade on paper across multiple consecutive expirations before venturing to risk cash. And don't think of 2008 as a "black swan" (as an excuse) ... think of it as a necessary contingency planning data set. : ) In short: have stops and don't second guess a 7% draw-down or change your plan, just accept the rule of the market and accept your loss. A wise trader once said: "the first loss is the least."

Adam
__._,_.___

Attachment to Results Part Two—holding or adding to a loser

2010-02-13T19:36:00.001-08:00

by Jason Alan Jankovsky

For the most part, almost all losses can be traced back to the same root problem. By losses, I am not referring to the usual and reasonable winners-versus-losers results successful traders have; I don’t mean “a particular loosing trade”. In this case I mean a consistent and net loosing result that occurs over time. The inability to cut losses is the symptom; the actual problem is a variation of the same theme basically all the time. Most significant or consistent losses are a result of some form of attachment to results on behalf of the trader. Not placing initial stop-loss orders, holding losing trades past a reasonable time, overtrading, etc. are all symptoms of an emotional attachment of some sort. In those cases, the trader simply cannot “let go” and exit the market. Nothing says that you have this problem louder than holding or adding to a loser.

In the case where a trader feels compelled to add to a losing position, the problem is actually a more severe manifestation of attachment. In the case of a loss getting larger than originally intended or several small losses all adding up to a large cash debit; the problem is a lack of discipline or a denial of the actual net order-flow. In the case of adding to a loosing trade the attachment is now a more internal conflict inside the trader and shows a dramatic form of inflexibility.

In this case, a trader is unwilling to see objectively and the cash loss is ignored while at the same time risk exposure is willingly increased. All other common sense concerns that at any other time a trader would agree were in the best interest of his account are completely discarded. The trader is actively participating in his own demise. Somewhere inside the trader there is a conflict and that conflict has nothing to do with market price action or the net order-flow. It has to do with the trader’s own unwillingness to protect the account, his “need” to be right, his hope that “the market will come back” or any other justification process that particular trader has to hold a losing trade in the first place. But instead of holding a loser past a certain point, in this case the trader actively increases his risk.

If we stop and use a clear head when we trade, what benefit do we receive by willingly increasing our risk and our cash loss? There is no benefit whatsoever as far as our long-term trading success is concerned. Why then do some traders add to losing positions?

The psychology behind “Never add to a loser” is very simple: Don’t throw good money after bad. The only way you or any trader could be in the position of holding or adding to a losing position is if there was a failure to define the risk before the trade was done in the first place. Rather than accept a reasonable loss and learn the lesson that loss has to teach you the trader, the trader now makes a conscious and deliberate act based not on the fact of the net order-flow but on the trader’s own emotional need for something. That need may be to get back a loss, a need to fight with the market, a need for the market to pay a profit, a need to make a car payment or any number of little ways of saying the same thing. In the case of adding to a loser the trader is complicating the process of cutting a loss by making his situation more difficult and this act is based on something the market doesn’t have any knowledge of to begin with: The trader’s own emotional need.

Remember, the market only moves because of the net order-flow imbalance. Once you have executed and are now in a position, you are no longer in control of the net result to your equity. If you are not on the correct side of the net order-flow as far as your chosen position is concerned, your account will accrue a cash debit until you liquidate; or the net order-flow turns in your favor. If the net order-flow never turns in your favor it is possible you could run out of margin funds before the price action stabilizes. By doing anything other than liquidating you are increasing the risk that you will suffer ruin. Adding to a losing position is actually pyramiding your loss! As an intelligent individual, how ridiculous does this sound to you? What trader would willingly put himself in the poorhouse at a geometrically faster rate?

As a serious trader looking to master your game you cannot afford to allow emotional or perceived psychological needs to influence your willingness to protect yourself. The reason you must never add to a loser (under any circumstances) is because the probability of being on the correct side of the order flow has already become evident due to the open-trade loss you already are holding. You are on the loosing side to begin with, you haven’t seen it right and that FACT alone, in and of itself says “liquidate”—nothing else. Failure to liquidate means a bigger loss. Adding to the loser means an even bigger loss. How is that in your best interest? Ask yourself exactly what is the reason you feel the desire to add to an existing loss. If you take a step back and think it through, the reason will most likely be some form of emotional attachment to the trade results and some form of unwillingness to do the right thing. Adding to a loser is a symptom of a bigger problem the trader has; no real control over his feelings or emotions. A trader in that position is an accident waiting to happen.

Some traders make the mistake of defining a “loosing trade” as a factor of cash debit. By that I mean, an entry execution followed by a liquidation execution and the two prices marked into the trading account is a net minus dollar amount. I think it is far more beneficial for you to re-define your concept of a loss to include more focus on the issue of personal discipline.

If you find yourself executing into a market for some reason and on further evaluation of your actions you come to the conclusion that you are doing the wrong thing for you personally; you need to liquidate to exit the market immediately. If you have broken a trading rule, if you have done a trade because of something you normally wouldn’t trust as an indicator, if you have emotionally wanted a profit, etc. you are most likely taking more risk than you otherwise would have. Ruthlessly liquidating to protect yourself is your best option; even if the trade had an open trade profit at that point. A “loosing trade” is any trade done for any reason if your personal discipline has been broken to make that trade.

Once you re-define a loosing trade from the point of view of your personal discipline and not a change in your cash balance you now are in a position to learn what you need to learn from your first loss—how to effectively participate on the right side. The issue of adding to a loser is never in question because you aren’t trading from a financial focus to begin with. You are trading from the focus of discipline to do the proper thing all the time. You will not be tempted to add to your loser because you will have cut the loss by liquidating. You can always get back in so there is no need to hold something that isn’t working and certainly no need to make matters worse by adding to something that isn’t working.

At the basic core level, making this rule work is admitting to yourself you need something to control your emotional bias as it creates your urge to action. You need to confront the possibility that you personally have a “something” somewhere in your thinking and that particular little something has nothing to do with successful trading. When that particular little something shows up for trading today, you have already decided that you are not going to break your discipline today. The urge to add to a loser is a signal to liquidate because something is not right with me today. If something is not right with you the trader that has nothing to do with market structure or where the net order-flow is. If you aren’t seeing it correctly today that is clearly shown by an open trade loss to begin with. At that point you liquidate. Adding to or holding a loser demonstrates that you are not in the right frame of mind to profit today. The only difference between the two types of execution is the trader’s depth of attachment to the trade.

This article is an excerpt from the book by Mr. Jankovsky titled “Trading Rules that Work: 28 Essential Lessons Every Trader Must Master” published by John Wiley and Sons

marko - on setup & adjustment

2010-02-12T08:33:00.000-08:00

I like Verticals & I like apples, but could use some suggestions on adding down side protection;

Attached find Risk Profile & Price Chart for one of my trades: AAPL 165 / 170 PUT

I entered this trade on 2/8/10 for a .53 credit

I'd greatly appreciate rules, suggestions for adding insurance or other comments

Thanks

Migo1
-----
Why do you want to "add protection"?

Has your outlook on AAPL suddenly changed?

If not, no protection needed.

If you are now bearish on AAPL for some reason, then just take the trade off. It looks like it is marking at a profit.

John
-----

John,

My market bias is not changed, as per the price chart, I entered this trade strategically with an upside bias. In fact I feel quite confident.

Regardless of depth of analysis and justifications (fundamental or technical) predicting is always subject to Chaos or acts of Randomness.

To quote a Guru; Credit trades eat like birds and sh_t like elephants and the latter attracts black swans. Black swans can take lead to max loss pretty quickly so I was interested in exploring methods to protect against that. Perhaps there aren't any?
-----
Migo,
One thing I want to encourage you to do is open up your price slices and look at the greeks... your trade being a put vertical for a credit (also referred to as a bull put spread) is going to have + delta, - gamma, + theta, -vega.
Use this information and play with possible adjustments to determine how you want to be positioned. try adding different adjustments to see if you like what they do to the greek positioning.
for example if you like the positve theta and -vega aspects, but are uncomfortable with the -pos delta try adding some short call verticals.

So if it is the pos deltas that you are uncomfortable with, there are many ways to reduce those. Each method of reducing pos deltas will have other effects on other greeks that you may or may not desire. So you have to play with the trade... TOS analyze is a wonderful tool for this exercise.

here are a few ideas to play with. try :
adding some fotm (cheap) mar puts
add some fotm apr, or june purt
add a mar / apr put calendar
add some mar 75/70 put verts
etc

another thing to consider in the future when setting these up:
try doing the vertical skipping a strike. that way you set yourself up for an easy adjustment of rolling one of the contracts either up or down a strike to tweak the greeks with minimal complications.

hope this helps some
good trading and good luck
Marko
marketstudent yahoo group

tos margin policy on butterfly and condor variants

2010-02-11T10:15:00.000-08:00

M. Clev. writes: By the way, I found out why my mentor uses the term "naked option" when dealing with Broken Wing Butterflies. It is because Think or Swim treats them as such. Here is proof, from an email I received from Think or Swim earlier today:

If you adjust your butterflies so they are even, the margin requirement on the short spread or the naked option falls off.

Now we all know that if it is a "spread" it is not "naked", but Think or Swim treats them as such because their "clearing house" requires margin for the "naked leg" so that the Broken Wing Butterfly is no longer treated as a spread trade.

Here is more info on this subject, directly from Think or Swim:

Butterflies must now have equi-distant strikes intervals, have a balanced number of contracts, and the same expiration date
For example:
+5 Calls 25 strike
-10 Calls 50 strike
+5 Calls 75 strike

These previously allowed variations will not be allowed and the margin requirement will be calculated by the short spread alone.:
Strikes are not equidistant:
+5 Calls 25 strike
-10 Calls 50 strike
+5 Calls 65 strike
Or
Contracts are not balanced:
+6 Calls 25 strike
-10 Calls 50 strike
+4 Calls 75 strike

Iron Condors must have the same number of contracts, may not have overlapping strikes, and must have the same expiration date.
For example:
+5 Calls 25 strike
-5 Calls 20 strike
+5 Puts 50 strike
-5 Puts 55 strike

This previously allowed variation will not be allowed because the contracts are not the same. After the contract size is adjusted to match, the margin required for the condor will be calculated using the wider spread. The remaining spread’s margin requirement will be held separately..
+10 Calls 25 strike
-10 Calls 20 strike
+5 Puts 50 strike
-5 Puts 60 strike

Double Diagonals will not be allowed and the margin required will be on both call and put side.
With this said, the uneven butterflies in your account are only being held as a long spread and a separate short spread, in some cases, short naked options.

We are currently appealing these rules. The system has not been adjusted to reflect these changes because of the appeal.

Word to the wise...

2010-02-07T23:44:00.000-08:00

Word to the wise...
from: http://avidano.blogspot.com/2008/09/key-to-trading-success-is-emotional.html

The key to trading success is emotional discipline admit mistakes and take losses quickly, to be a successfully trader you have to be able to admit mistakes the person who can easily admit being wrong is the one who walk away as a winner.

No trading plan is the basic feature that divide losing traders from winning traders, no trading plan will generate, lack of confidence, fear of loss (freeze), and poor execution.

The crowd: always wrong (at turning points) if everyone is certain that something is about to happen it won't.This is because generally most people who say that the market is going up are fully invested and have no additional purchasing power, which means that the market is at his peak.
When people predict a decline they have already sold out so the market can only go up when all the selling has been done the market can only go up.
In order to take advantage of capitulation you have to harness your fear--you cannot make your decision based on opinions or feeling, becouse like a magnet you will be draw to the philosophy and fears of the majority you need to master your own emotions and not be controlled by them must be trading indipendenly of the distress of others.

Do not expend emotional energy on situation over which you have no control, don't' worry about what the market is going to do you have absolutely no control over that, worry about what you are going to do (in response to the market) if it gets there.
Focus on those thing you want the least to happen and what your response should be, its human nature to hesitate you have to know what you are doing when the market gets out of line, because always has in the past and always will in the future.

Ask what would the insiders be doing in a market like this?
Be patient wait for the opportunity; no one has to trade every day.
Be sure to have a good reason for every possible trade you make.
When your risk to reward isn't good enough (3 to 1) do not make the trade, do not play maybe.

Define high probability trades low risk opportunity (high probability -low reward).

Define how much you are willing to loose before entering a trade, write it down.

Think trades through: predetermine profit /loss/ exit points before putting a trade on;
write it down, plan the trade then trade the plan; plan to win.
Do not figure out what to do on a spur of the moment: write down a contingency plan for every possible outcome, have a contingency plan ready to limit losses when wrong, a plan to get back into a trade if you are stopped out, and a plan for getting out the winning trade.
Maintain absolute discipline to the plan no exception; the best day trader are on auto-pilot “in the zone” and just like a seasoned pilot they operate without emotions using a well defined protocol.

Rigorously define the short selling specific plan for limiting infinite losses, write it down and stick to it.
Scale into a position (50%) trade smaller size for comfort zone and a more unemotional trade and more control, take large position only when you have a high degree of confidence and hold such a position long enough to realize most of the potential.
You don't have to be right the majority of the time but you do have to take advantage of the situation when you are right( 10% of the trade accout for 100% of profitability).

Danger of leverage-- premature liquidation, never make a bet you can’t afford to lose, you can't win if you trade at a leverage size that makes you fearful of the market.
When you have a large position you should cut your bet size quickly unless the position starts making money right from the start and then you should automatically put you stop loss to break even, when trading large you should have a short fuse in regard to cutting losses.

Always have reserve cash for when a great trade comes along.

Buy on extreme weakness sell on extreme strength (with the strong hand)when the public comes in with the order to buy you sell to them , when they came in with the orders to sell you buy the stock from them.

Do every thing in the market opposite to your snap conclusion and contrary to what appear logical, and you will probably make money consistently: when you feel good you should sell when you fell terrible you should buy (what feels good is often the wrong thing to do, if it fells good don't do it).
In the beginning this is true but as you condition yourself for the abnormal response you became skilled then your gut became right --when you fell good you actually should go long when you fell bad you should actually sell-- that is the point when you have reach competency as a trader, successful strategies often require doing what most people find instinctively uncomfortable, do what right not what is comfortable, natural (logical) instincts will often mislead in trading.

You must have the ability to implement your ideas despite averse conditions, there is no opportunity in the market that is not an adverse condition situation the ability to think clearly when other are in panic is an indispensable element of a successful traderInvest without emotion to avoid bad decisions.

If you are unsure about a position just get out, getting out of trades quickly when wrong is the key to successIf the market isn't acting right don't try to get out at break even after commission.

Do not get attached to any position.

Don't chase a stock up, let it came to you, no stocks goes up on a straight line (moving averages)Don't chase a stock down to short it, instead wait to bounce up a bit before committing (moving averages).

Do not try to pick the exact bottom or topExit when profits objective are meet, catalyst fail, stock fail to respond as anticipate stock fail to respond with predefined length of time (time stop) market behavior doesn’t confirm to expectation get out.

Novice focus on when to get in and forget when to get out.
Do not let profits turns into a loss- protect your profits and principle-get out of winning trades, once you have a reasonable paper profit on a trade; move your stop so that it doesn't turn into a loss.

Be totally flexible admit when you are wrong-- exit or take the other side, be ready to make snap decisions, change your mind quickly.

Cut losses short 7% or less don’t be afraid to take a loss when wrong (take small losses) taking losses when wrong is the first critical step to market success and wiser trading, cutting losses is the hardest part of trading.

People generally will choose a sure gain over a lottery with a higher expected gain, but they will shine a sure loss in favor of a even worst lottery as long as the lottery gives them chance to came out ahead.

The more you lose in a trade the less objective you became, exiting a losing trade quickly clears your head and restore your objectivity.

Containing losses is 90% of the battle –with stop losses, reducing position, selecting low risk position, limiting the initial position size, time stop, violation of trade’s premises.

Every trader must be willing to take small losses, if you are not willing to take small losses or don't have the discipline you shouldn't trade.

Holding to a losing stock can be a mistake even it bounce back, if the money could have been utilized more effectively elsewhere.

When in losing streak, you must change the direction of bad trading by first shifting to neutral-- you must stop- (hope will destroy your portfolio) trade smaller, concentrate on being profitable consistently, make little profits, make little profits…make little profit --when coming back do not start by trying to make a killing; swing singles consistently do not go for riskier home run, consistency is far more important than making a lot of money.

Do not trade scared, trading scared makes you much more likely to loose, scare money never wins.

Remain confident the opportunity never stops-- confidence is essential to a successful traderStart each day from last nigh close not your original cost.

Analyze past trades for possible insights, early failure does not preclude long term success as long that one is receptive to changeProfit is not real till it’s realized, paper losses are real(money management), put same profit away in a different account regularly not for trading.

Keep a daily diary.

Plan to put 1-2 hours daily outside market hours learning to be a better trader and keeping up with the marketWatch the market averages for distributions days every day.
Do not hold over earning.

Do not short a stock that has gaped down on the opening unless it makes a new low after 10.am, likewise do not buy a stock that has gaped up on the opening unless it makes new high after 10 am.
Is not weather the news is good or bad, but how the market perceives it, always go with the market.
Luck = hard work + discipline + opportunity.

Long term trading success is achieved through consistency: 1) control the emotions 2) follow the rules.
Rule number 1: first preservation of capital, don't loose money,
Rule number 2 don't forget rule number 1,
Ask not what is the potential profit I can realize on a trade, but rather what is the potential loss I could suffer? the key to building wealth is to preserve capital and wait patiently for the right opportunity to make extraordinary gain.

Do not have bias either long or short because of positions held in the portfolioDo not get or give tips.

Get rest, exercise, adequate sleep and food.

Do not take big losses.
After entering a trade get the stop to break even level.

Develop your own philosophy of trading.
Always play the market first, then the stocks.
If you change the way your brain perceive a situation you will change the way it will respond to that situation, emotional detactment to the market, the feeling regarding an open position..., imagine the trade from already been in it, effective training strategies need to be automatic the trader must know what to do with out second guessing.... think you are in control of the trade , you can end it instantaneously.

Psychology of Trading by: Jason Alan Jankovsky

2010-02-07T21:33:00.001-08:00

Psychology of Trading
Posted By: Jason Alan Jankovsky
http://www.traderslog.com/jankovsky.htm

As we have discussed before, this discussion forum is to explore the psychology behind the success or failure to trade successfully. As most traders with any experience know, the ability to “call “ the market is relatively easy in comparison to getting properly positioned within the market, and taking the most amount of money from your observation; that is where the real work of lasting trading success really lies. All of us have found the actual bottom or top of a significant move but failed to capitalize on that opportunity for one reason or another.

This month, I would like to address one of the more common trading errors. Everyone has made the error of overtrading at some point and many continue to make this error despite knowing they have this problem. Just knowing you have a propensity for a trading problem is half the battle but more importantly, you need skills and tools to correct your trading error. One of the more critical skills to develop in my view is to stop and confront the problem of overtrading.

Overtrading is a symptom of a deeper psychological problem which I like to call attachment to results. All traders have a certain degree of results they are pursuing in the markets; that is not the problem. The markets exist to exploit inequalities (real or imagined) in the supply and demand of something or financial instruments. It is a good thing to see an opportunity and assume the risk for the potential that is there. Once that action has been taken the only question is whether or not that inequality you perceived is an actual event that is unfolding over time. Between the time you execute for an entry and the time you liquidate for an exit; the markets will be moving. That movement is where the issue of attachment to results translates into your personal results.

Attachment to results can actually be expressed two ways depending on your personal psychology and trade method. The first way is holding losers and the other way is overtrading. We will discuss the issue of holding losses at a later time but the net effect on your equity is the same whether your problem is holding losses too long or you overtrade. Attachment to you results is the bedrock problem behind either overtrading or holding losses. In the case of overtrading, it represents the psychological need for immediate results (or positive results) without the corresponding willingness to allow time to pass. I think it is safe to say that a certain amount of time is required for any trading style to generate a gain and the unwillingness to let the required amount of time to pass comes out in the markets as constant execution over some timeframe.

If you use an hourly timeframe to pick your points of entry it is safe to assume that more than one hour must pass in order to determine if your executed trade has potential as you see it. Should the market move against your position that is to be expected, it is unreasonable to assume you will “buy the low” or “sell the high” every time you trade. As the market moves, if you are attached to your results, that movement means something to you. It is personally helping or hurting your equity. As your account balance changes from open trade equity, your focus narrows down to how this is affecting you personally. Most traders with this problem now seem to forget the high degree of study, preparation and thought they invested into picking that spot to execute. For some reason, the long-term fundamentals are forgotten, the technical studies are re-evaluated in real time, the protective stop order might be moved and the limit order to take the gain is moved closer to the market. Or any number of things. Then this trader executes to exit the market. Prices remain near their entry or advance. Attachment to results now says “You are missing it! You were right!” and this trader now executes again for an entry. As prices return to the first entry price, this trader again has a small open-trade loss; again the trader’s attachment says the trade is not going to work. This process may repeat itself several times over a short period of time, especially if the market is advancing in the intended direction. The problem is not the market price action; the problem is the attachment to results imposed by the trader creating an urge to action that is not consistent with normal ebb and flow of most market action. The trader has failed to allow time to pass and let the market do what it is going to do. During a major price advance or decline that was properly observed, this trader has small gains or even net losses when his just sitting tight for a period of time would have resulted in a nice gain.

Solving this problem is a factor of learning patience as well as adapting your thinking to better fit with the market you trade. I have observed from working with many developing traders that if they have the problem of overtrading, the simplest solution is to impose a new set of rules on their execution that allows time to pass. I have a very common sense based method that I would encourage you to try for yourself. Simply turn your screen off; the assumption here is that the market will do what it will do whether you watch it or not. The problem is not the market price action, the problem is attaching meaning to that action and executing. If you can’t see the price action, you can’t execute. So the first thing we do is impose the rule: After you execute you have to turn the screen off for at least one bar of your time frame as a minimum.

In most cases, several bars are needed to either confirm or deny a trade potential is developing so often the trader must sit in front of a dark screen for several hours. The market is still moving, but in this case, the stop is also still where it was originally placed, the limit is still where it was placed and the trader cannot reevaluate the trade nor do anything except wait. During this time I also require the trader to write out in as much detail as possible exactly his hypothesis for the trade. This keeps the trader focused on the critical thought required to do the trade as opposed to how the tic-by-tic price action is affecting his equity. After enough time, this self-imposed isolation develops into patience to let the trade work. At some point, the trader will no longer need to be “in the dark” and he has the skill to simply sit still and let the trade work.

Next month we will talk more about attachment to results as it comes out when you hold losing positions. In the meantime, if you have a tendency to overtrade; try this method. I think you will be surprised at how fast you learn to let your trades work.

the 5 principles of thinking in probabilities + I am a consistent winner

2010-02-07T14:17:00.001-08:00

The 5 principles of thinking in probabilities:
1. Anything can happen
2. You don't have to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
5. Every moment in the market is unique.

I am a consistent winner because:
1. I objectively identify my edges.
2. I predefine the risk of every trade.
3. I completely accept the risk or I am willing to let go of the trade.
4. I act on my edges without reservation or hesitation.
5. I pay myself as the market makes money available to me.
6. I continually monitor my susceptibility for making errors.
7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.

taxes - the $3k loss limit

2010-02-04T07:17:00.001-08:00

The $3K loss limit is applied to net losses after capital gains in the years subsequent to the year in which a net capital loss is reported for the first time. Sounds a little confusing but the way it works is that if you have say a $25K loss, in year one it will not take over 8 years to deduct it at 3K per year. It could but here's how it really works.

In year one you take the first 3K, reducing the carryover to 22K. In the second year if you have 15K in capital gains then you take 15+3 or 18K subtracted from your 22K and you carryover 22-18 or 4K. In year three you have say $10K in losses, then you are taxed on only 10-4K or 6K. I posted this just to clarify how that 3K works..It seems to me the trader tax deduction is also valuable for deducting the full cost of subscriptions and seminars and software or hardware while the individual doing trading on the side can only deduct those costs in excess of 2% of the AGI or adjusted gross income.........Joel in TOClub

---

I agree with Joel, but remember. If you have ANY stocks with a very low basis, mart to market will require you to recognize the profit in the year of election. In other words, if you have CMI at $5.00 a share and you elect mark to market because you have a large paper loss in some stocks, you will have a huge gain in CMI even though you did not sell it.

Good luck. I am electing trader status this year for the first time and not selecting mark to market election.

CS comments on Declaring Trader Tax Status

2010-02-03T19:21:00.000-08:00

I looked into declaring trader status a few years back and actually read the tax court cases. A lot of folks think it sounds like a great thing to do and get really excited about it.

When it comes to the financial markets, the IRS considers each taxpayer to be an investor as opposed to a trader for tax purposes. This means that you pay capital gains taxes on any profits and that you have limited ability to deduct losses. Some people make trading their livelihood as opposed to a method of investment. If this describes you, then you might quality for trader tax status.

The primary benefit of being a "trader in securities" is that you get to treat your trading activity as a business. This means that you can take a deduction for money you spend on things like trading seminars, trading software, data feeds, trading books, etc. They are simply considered reasonable business expenses.

Any profits you earn are not considered profits but are considered income. This means you treat profits as ordinary income, deduct your reasonable business expenses from that income, and pay income tax on the difference. Unlike an investor, if you take a loss for the year it is considered a business loss and you can deduct it against other ordinary income; e.g., income from your day job.

Here's the rub. If you have a day job you probably do not qualify as a trader in securities. The tax court cases that I read provide no clear line of demarcation between those who satisfy the IRS requirements for being a trader in securities versus being an investor. My reading suggests to me that the IRS and the tax courts are very skeptical about retail traders and look very closely at your day-to-day activity.

If you're putting on an iron condor each month, maybe trading a few calendars or some covered calls you probably will not pass muster. They want to see substantial trading activity on a daily basis throughout the year. They want to see you treating trading like a business. My guess is that anyone who files an election to be treated as a trader in securities triggers a red flag with the IRS, especially if you are also showing W2 income on your returns.

Here's another thing to consider. The hobby loss rule can also come into play if you are not generating profits from your trading. If you are losing money one year to the next the IRS may challenge the deductions under the hobby loss rule, arguing that you do not have a reasonable expectation of profit and are engaged in a hobby. They will look for things like whether you have written trading plans or whether you're routinely changing from one strategy to the next on apparent whims.

My conclusion was that for most people trading options at a retail level the trader in securities election is going to be more trouble than it is worth. For the small group of us that develop the skill, acquire the capital base, and choose to make trading our full time profession it may then make sense to pursue the election. Even then I would encourage anyone to seek competent advise from a reliable tax lawyer or CPA firm that has experience in this area.

ChristopherSmith
The Option Club.com

jan 31 2010 major indexes - a confirmed break in trend

2010-01-31T19:18:00.000-08:00

we have a confirmed break in trend, as the market has closed a daily bar beneath a key support area. this level of support will probably act as resistance.

however, BEWARE! in the beginnings of a falling market, the vix rises and we have sharp volatility to the upside and to the downside. It is tricky and frustrating for those that try to get short early.

with these trendlines broken we have to look to prior lows for support

peter will comb thru sector indexes and etfs and look at likely support areas to take a counter-trend bounce to the long side. This is his strategy for the time being.

ask the shadow: how do YOU trade stocks with dividends?

2010-01-31T18:56:00.000-08:00

Dear Shadow,

Howdy! While watching and listening to your Shadow Trader weekly video today, I was intrigued to hear that you are long some stocks because of their dividends. I believe one of the stocks you mentioned was MO.

My questions are: as you normally swing trade with tight stops, what is your rule of thumb for your long stocks that pay dividends? Do you continue to use tight stops or do you give your long stocks some wiggle room in case of gap downs from day to day? I too love a stock that pays out a decent dividend and in the past, I've set my stops tight and then lost the stock due to the occasional gap down and the stock stopping out.

Thank you, Suzanne Hawthorne from Dallas, TX

Good question, DallasGal. An interesting conundrum you have there. To me the rule of thumb is that when trading dividend paying stocks you want to constantly reinvest the dividends that you receive so that your money is enjoying the power of compounding. Without that, you are losing one of the greatest benefits of this type of investing.

That being said, the answer is a simple yes that you have to put the stop out a lot wider. What I like to do is to establish a range in the stock where I will be a buyer. If I get a dividend and the stock is inside of this range, then I will be willing to pick up more shares regardless of price. Preferably cheaper rather than more expensive but you get in where you can. The range should have some sort of technical basis and clearly reference strong support areas where you are confident that if the stock violates those levels, its time to go, regardless of the yield.

Note the areas that I have annotated in the MO chart above. I've been picking up shares of this since the high teens. The two green circles represent the lowest areas where I would maybe begin to think of an exit if they were violated. The upper circle is clear trendline support and the lower one is a prior high area which was the starting point for the most recent advance. Anywhere between here and the circles, I continue to be a buyer.

there's no such thing as a quadruple top

2010-01-31T18:52:00.000-08:00

a wise old trader adage is that there is no such thing as a quadruple top. Usually as the price hits that level for the 4th time, it goes through.

You can view supporting indicators like RSI to get more hints about it's momentum.

how to trade the darvas box

2010-01-31T18:47:00.000-08:00

purple box means the low was established 1st. yello box means the high was established 1st.

first thing you want to look for a little established trend. Then you trade the breakout. if your trend is up, and when you get a breakout to the top of the box, you go long. if the little trend is to the downside and then if it breaks out down, you go short.

your stop can be 1/2 way inside your "base" box, or at the bottom of it, or just below it.

STOPS: If your stop is 1/2 the height of the box, then your target is also 1/2 the height of the box. If you are using the full height of the box, then your target is also the full height of the box.

never trade with the belief that the market is wrong

2010-01-29T18:25:00.000-08:00

one of the things you can do to ensure this, is to always enter into securities upon breaks of trendlines, when the actual trend has proven to us that it has changed.

Because when you do that you're not out there like a dodo trading on the belief that the market is wrong.

Let the market tell us when it's going to be turning. We as traders or investors should never-ever decide "where the bottom is" or "this is as far as the swing will go" etc.

what u can & can't do in an ira

2010-01-29T00:49:00.001-08:00

11:37 greg.in.marin: Hello. Is there a way to go short stock or sell naked puts or calls in an IRA account? Perhaps if it's cash secured? (thanks)
11:38 Ross: you can sell naked puts and you can sell call credit spreads as well as buy puts but you can not short stock of any kind in an IRA
11:40 greg.in.marin: just to clarify, i cannot sell naked calls?
11:40 Ross: nope and no short stock of any kind
11:43 greg.in.marin: alrighty. thank you Ross. I will make this a STICKY in my trading notes. No short stock sales, no short naked calls. short spreads are fine. I can sell naked puts, but they will be cash secured, correct?
11:46 Ross: correct
11:50 greg.in.marin: thank you Ross. Have a nice afternoon.
11:59 Ross: anything else let us know

christophersmith on commissions

2010-01-28T07:40:00.001-08:00

It's probably worth taking a moment to explain the history and the reason behind the $1.50 commission deal with TOS...

That commission rate is a "no questions asked rate." You tell the guys at TOS that you're with TheOptionClub.com and you get the rate. That's true whether you're funding accounts with $3,000 or $300,000. It doesn't matter if you execute 10 trades a day or 10 trades a year. You get the rate. This is the same rate they offer their Investools clients.

The reason I asked them to do this is because members of this group were trading a lot of multi-legged spreads like iron condors, broken-wing butterflies, etc. The discussions about those trades on this board concerned me because people who were learning how to trade them were trading what I thought was dangerously large size and when I raised that as an issue the response was that they needed to trade large size to pay for the commissions.

That struck me as absurd. Risk a large portion of your portfolio while learning to trade options because you're too cheap to pay the commissions? And folks were losing sizable chunks of capital because they got themselves into positions that started losing money and they did not have a plan or an understanding of how to manage the trade.

I spoke with Scott Sheridan at TOS and I think I tried contacting the folks at OptionsXpress around the same time. I either did not get a response from OX or they were not interested. What I asked for was a commission schedule for our group that did not involve a minimum or a ticket charge, and that would allow members to trade 1 or 2 contract multi-legged positions without a "commission penalty." In other words, the cost of putting on the trade would be proportionately the same whether you traded a 1 contract position or a 100 contract position. My hope was that people would scale back their size, learn to trade with limited amounts of capital at risk, and scale up over time as their experience and success allowed.

Is $1.50 the best you or I can do? No.

As you increase both your account size and your trading volume you will have the ability to ask for and receive further discounts on your commissions. Many of the members here have seen their commissions reduced when they have asked. But, if you've got a $3,000 account and you trade sporadically it is a tougher sell.

Is $1.50 too much? It depends...

If you are trading routinely and with size it is probably a bit pricey. I would push to get a $1.00 per contract, if not less.

Reducing commission costs is like a company increasing its profits by reducing its bottom line expenses. They are still making / losing the same amount of money, they're just giving up less to expenses. If your trading is consistent and profitable, shaving .50 off the cost of each contract bought and sold means that you keep that extra .50 which is$1.00 on a calendar spread and $2.00 on each iron condor traded. Trading a 100 contract position? It adds up.

If you are just learning how to manage a position and you're trading the remnants of what used to be a $5,000 account...commissions are not your problem. I have never seen a trader who made or lost money because of their commissions schedule. You can make money at $1.50 per contract. You can learn to trade options at $1.50 per contract. But if you're finding that the difference between profitability and taking a loss is 50 cents or even a $1.00 on a contract, then your time and energy is better spent on refining your trading practice.

A bit more insight here...

Experienced, successful traders don't require much in the way of hand holding. They have their occasional call to the trade desk, but they know their business. Inexperienced traders need help. They don't know how to use the trading platform. They don't know how to execute a trade. They're scared and unsure about what happens if they're assigned on a short option. They have trouble breathing when a trade gets sideways on them and they're trading a bit more size than they should be. They tend to ask a lot of questions. AND THEY SHOULD! They're just learning after all...

But, when a new trader picks up the phone and calls the trade desk or the customer service number a live person needs to answer, hold their hand and help them. When you're learning, that's worth 50 cents.

If it wasn't I would send everyone to Interactive Brokers. They're commissions are the lowest out there and their executions are as good as you're gonna get. But, if you go there you had better know your business because you won't get a lot of help. When they're only taking .70 on a contract they don't have the time to care about you, your $3,000 account, or that 2 lot that's now in the money.

ChristopherSmith
The Option Club.com

Vikas' favorite Dr. Brett posts for 2009

2010-01-26T13:36:00.001-08:00

Dear all, as some of you are aware, I am a big fan of Brett Steenbarger's blog which focuses on a heavy dose of psychology and short term trading tactics.

Over the last few days, he has come up with 4 different posts which contain links to his best posts in 2009.

Here are the four links:

http://traderfeed.blogspot.com/2010/01/trading-psychology-best-of-traderfeed.html

http://traderfeed.blogspot.com/2010/01/trading-psychology-best-of-traderfeed_11.html

http://traderfeed.blogspot.com/2010/01/trading-psychology-best-of-traderfeed_17.html

http://traderfeed.blogspot.com/2010/01/trading-psychology-best-of-traderfeed_23.html

If you have already gone over these, then please ignore my post.

Just in case you haven't been to Brett's blog, I would highly encourage you to have a look at some of the posts using the links above.

I am very hopeful and reasonably confident that these links will help each one of you in different ways (regardless of what & how you trade).

Happy reading!!!

Cheers Vikas

Some freebees for the newbies and beyond

2010-01-26T08:27:00.001-08:00

Some freebees for the newbies and beyond.

1) Actionable daily options reports/suggestions from S&P: www.cboe.com/LearnCenter/SP_Reports/default.aspx

2) Actionable weekly options reports/suggestions from ivolatility: http://www.ivolatility.com/roller/page/trader

3) Daily report on unusual order flow/volume/events by trade-alert: whatstrading.com

4) Unusual option activities: crimsonmind.com

5) Daily premium values and program trading by indexarb: indexarb.com

6) Daily option report by IB: http://individuals.interactivebrokers.com/en/p.php?f=daily_analysis

7) Option analysis/charting software OptionOracle by samoasky.com

8) And the best of all: paper-trade of the ThinkOrSwim platform: thinkorswim.com

Enjoy-- bbn

jack / ragu adjustment ideas

2010-01-23T14:25:00.001-08:00

Subject: Sat meeting (The other option group.

We are fortunate to have an excellent trainer in the Dallas area – Ragu. His website is www.deltheta.com (I think. J ) Yes, that’s it, I just checked.

He talked about adjustments. There are only 5 reasons to make an adjustment:

1. To lock in a profit

2. To reduce costs

3. To reduce risk

4. To change break even (I added this one, not Ragu’s rule)

5. BUT the new trade has to make sense. (Don’t place a trade as an adjustment if you would not place it as an opening trade.)

Calendars.

Delta neutral (+/- 5 delta). Adjust if Delta changes 10-15%.

Check roll value (not necessary if trading near month calendars).

If it gaps, consider closing OR closing half and buying at new price level. (I looked at entering a new trade at new price level but that would have doubled my risk w/o increasing my profit potential. I had not considered selling half and buying half at lower strike. L )

Adjusting a long stock:

Bt @ $100, now @ $80, how about a back-ratio spread – buy 1 80 c and sell 2 100 c. BE is lowered to $90. (Have not changed cost or risk, assuming you do not have to pay for the spread.) You are not naked, your short calls are covered by the long call and the stock.

Adjusting a long call:

Stock at $50, bt 50 c for $1. Stock goes up, call doubled:

1.) Sell half, if still bullish

2.) Close

3.) Sell $55 call against

4.) Sell ½, buy $55 put ATM

5.) Turn into calendar, sell two current month, but next month

Stock drops?

1.) Sell 2 $55 puts. (Look at risk graph, if stock recovers, you’ll have time to unwind.)

Someone suggested “Option Trader’s Handbook” for adjustments.

Ragu showed how you could have rode AAPL from $80 to $200+ just using a 5-20 SMA cross, no sell signals. J

Peter Reznicek A-Team

2010-01-21T08:31:00.000-08:00

how to enter on a bounce

2010-01-20T20:33:00.000-08:00

Above is the daily chart of Alpha Natural Resources (ANR). The stock has formed a declining wedge over the past seven days. Yesterday it fell out of the wedge to the downside, but it ended the day as a false breakout. Yesterday's trap of short traders could be the catalyst that pushes the stock to a breakout of the wedge to the upside. The blue dotted line on the chart illustrates that price reversed yesterday off prior highs and now provides a level that we can now place the stop beneath.

A more aggressive trader could enter a long trade when the stock trades just over yesterday's high as listed in today's Bulls and Bears section. A more conservative entry would be a break over the top of the descending wedge.

shadowtrader trailed stop up

2010-01-14T21:14:00.001-08:00

faustos computer / tos chat 1/13/10

2010-01-13T13:55:00.001-08:00

TO CREATE SCREEN ON YOUR COMPUTER SIMILAR TO FAUSTO COMPUTER (click on Watch lower right of this chat window to see Fausto's computer)
* Go to Trade Tab
* look on right for square, wrench, symbols, double square in circles icons
* click on the square and then click on the 3rd or 4th square on the left of the grid that opens
* click on red-yellow-blue boxes and change each one to Red
* click on tiny dot to left of symbol box and select Gadgets
* top gadget is Level 2
* middle gadget is time sales
* lower gadget is Chart

fausto - stock scanning:

black swans to the upside

2010-01-13T11:41:00.001-08:00

Sorry, but check out the date on the Nasdaq 02.01.2001, and 03.01.2001.

The Nasdaq opened at 2341.28, closed at 2128, opened the next day at 2087, and then closed at 2528.

Additionally, the Nasdaq has jumped from one day to the next by 10% or more 6 times, and jumped more than 5% 64 times.

This is exactly what I mean when I talk about Unknown Knowns. We "think" that it has not happened, act on it as if it never happened, and then are surprised as heck when it actually does happen. Real black swans in my opinion rarely happen on the stock market.

Christian
--------
And this is where statistics "lie". Most of us use normal distribution and conclude that a move bigger than 3 standard deviations seldom happen. However, the data below shows that it happens more frequently than we statistically anticipate.

Even in the bear market of 2008, there were 11 days in that year when the market went up by more than "normal". Enough to wipe out (or hit your black swan stops) the bears.

This is exactly the reason why risk management is important - everyday (say at the end of the day), one should know what risk your portfolio can handle if such an event happens the next trading day.

And this is where most of the "high probability" trades taught by the experts fail - my opinion.

Good luck.

mc on pedal to the metal

2010-01-11T13:59:00.000-08:00

Well with Livermore, he just kind of had a premonition and shorted the market. Then as the news of quake began to ripple across the tape he pounded the market even more. by the time the full devastation of the disaster was absorbed, analyzed and priced in the market he was buying his shorts back in and pocketing millions. I guess we need to learn how to trade – and trade big and fearlessly - into uncertainty and sign up for a clairvoyance class.

As an aside, this is exactly what is confounding about markets. The human brain through evolution has learned how to survive by doing almost exactly the opposite of what is required to succeed at trading. For instance, I live in Chicago and regrettably every winter comes an inevitable snowstorm. Most drivers will of course slow down, or avoid driving altogether, during a blizzard. This seems prudent and just good sense. however, in trading, during a figurative financial blizzard, the ones who wind up with all the chips are those that press the pedal to the metal and disregard everyone else spinning out of control. So just as black swans are inherently unpredictable, another key aspect is that they are even more difficult to profit from: only a few lunatics out there make a killing.

Joey on options newbies

2010-01-08T13:30:00.000-08:00

The funny theme that I hear from newbies is "show me the money, lets get rich" and the overwhelming response from people that have been at it for more than a few years is "study, practice, start slow".
So, I wanted to give an example of what this is all about and has taken me around five years of tuition paid to the market to learn.

I am an electrical engineer by trade... I went to school for four years (more like six) to get my undergraduate degree, studied for MANY hours on dreadfully boring math, thermodynamics, statistics, etc. Graduation day came and I landed a job... time for some real world work and a paycheck. I quickly realized that after all the studying I still do not really know how to design an electrical circuit because all the classes leave out how to use the tools, software, the fact that the theory does not look the same as the practice when you try to apply it the the project that has to be completed yesterday. I have been an electrical engineer for thirteen years and can honestly tell you I am still studying and learning new technologies and it will probably never end.

So it is funny that people hear stories of all the cool things that happen while trading the markets and want a piece of the action because it is glamorous and for the most part the rookies are full of greed. I know this is true because I am cut from the same wool and can honestly say the psychology is the most difficult part to learn and get around when it comes to trading. I am an electrical engineer and have been at it for a few years, I have confidence that I can come to work and do my job and do it well, that does not make me a good trader. After five years of real money and ten years of dabbling in the markets, and reading, studying, and reading and studying I am still blindly crawling around with out confidence.

Depending on your objectives, this can be a full time job and you should treat it as such. When you go to work you don't expect to be promoted to CEO over night; it takes hard work, dedication, a little intelligence, and a good network of mentors to guide you. In the words of Van Tharp - trade smart and trade what you believe.

Joey

ShadowTrader 5 & 15 minute rule

2010-01-07T23:23:00.001-08:00

STOCKS THAT GAP UP OR DOWN THROUGH OR VERY CLOSE TO STOPS:

When stocks gap up or down through or very close to stops, ShadowTraderPro uses what we call the “gap rule” to exit the position. In the same vein as the way that we often use price clearing first 5 minute or first 15 minute bars to determine “real” strength or weakness, we are not exiting positions on mechanical stops at the open because we know from experience that stocks often gap and reverse immediately and we don’t want a GTC stop to be unnecessarily triggered. The rule of thumb is this: If a stock gaps down below the stop that has been established, wait for the first 15 minutes (up to 9:45am EST) to trade before doing anything. Then place a new protective stop just under (adjust this amount for the volatility of the issue) the low of that first 15 minutes of trade. Reverse this entire scenario for shorts.

If a stock opens close to the stop but not below it and trades down through the stop within the first 5 minutes of trade, then we use the “5 minute rule”. Again, we are not out of the position on the original stop, but rather will let the stock trade for a full 5 minutes (until 9:35am EST) before taking any action. Once 9:35 has elapsed, we place our new protective stop just under (adjusting the amount for the volatility of the issue) the low made in that first 5 minutes of trade. Reverse this entire scenario for shorts.

ag on books for options newbies to read

2010-01-07T23:00:00.001-08:00

The "right" curriculum or even a reading path is something of a moving target -- there's passage of time, so, for example, I have the '05 book by Saliba, but is '09 book might be more applicable given the crash or it might have lost its edge (I'd bet on the former.) I've certainly been updating my library in '08 and '09. And there's the "cash cow" syndrome where a powerful, succinct and quite brilliant author like Augen could easily have put his collected works into one book, but instead has three unparalleled books (all "advanced" reading) which I would recommend to any option trader.

There's a good-sized shelf of excellent material, but a quick scan of Amazon shows hundreds and hundreds of titles from authors I've read or at least heard of, but would argue against (eg. Fontanills) and there's some excellent "experience" books like Schwager ("New Wizards" is no doubt another cash-in/cash-cow on his early "Wizard" books interviewing great traders, but might well be worthwhile given the '08 crash and ongoing depression/recession) as well as "foundation" books like McMillan (required reading, in my opinion.) So it's hard to say where to start. I'd also read Van Tharp for the business planning and psychology of the business and the game. An essential component to any good business plan.

I'd recommend "Fooled By Randomness" and "Evidence Based Technical Analysis" as necessary for the more "philosophical" preparedness (and the recurring phenomenon of encountering "new" things like analysis techniques or trading schemes that seem to make trading a slam-dunk, but once you've read back through the first half of the last century, you come to realize there's nothing new under the sun (including the sun worshippers and moon gazers, etc.) You might read "Far from Random" to counterpoint those two and read Black Swan and perhaps, if you have a head for mathematics and analysis, Dynamic Hedging by Taleb. By first reading about the history of trading, you will more quickly recognized the charlatans and the bunk and realize you don't need to spend hundreds or thousands on training course events or spoon-feeding education vendors (education has become the boom and boon and boondoggle of the retail trader industry.)

There's about four to six weeks of reading and perhaps a full year of study, research, practical application, practice and skills development. I think if you buy one, I'd say McMillan, and study it thoroughly, practice using an excellent paper money practice platform (nothing is better than www.thinkorswim.com) you should be confident to look at any trade or position and be able to simple "think" in terms of the option consequences in a matter of say two months of obsessive work. : )

It's a difficult thing to recommend specifically because some books are excellent in the context of the desires and abilities of the trader -- someone pursuing Elliott Waves with Prechter is going to admire different books (and surely some people trade very well with EW, but many fail to make it happen, so I'm reluctant to encourage novice traders to take on the hoary, old chestnuts.)

Equally well, I think it's poor advice to point directly to the "instant gratification" sources like www.wallstreetteachers.com ... they sell a handful of CDs, at least two of which are easily applied and beneficial, but their overall proposition is unwieldy and, again, I hear a mixed bag of success and frustration when talking with their customers.

I've seen many of the free seminar/chat sessions at thinkorswim and I think they're more meaningful and give a novice trader a "true" feel for trading and a good beginning down the lifelong path of being a student of the market. Whether someone becomes a price and volume ("tape reader") or a deep technical scientist or (as is very popular in recent years) a combination of fundamental analyst and technical trader, there's many walks to this business of becoming a retail trader.

I find option trading to be a limitless intellectual challenge and helluva of mind game with ample adrenalin in your veins once you're into hand-to-hand combat with a beast that will always be many times your size and rarely if ever makes a mistake. Just remember to get some walking in every day, try to eat regular meals and get a good nights' sleep -- these are the early pitfalls of new traders. : )

All that said! One of the reasons I joined a few new places to read other people's advice was to learn what people are reading and what they recommend, so I'm not suggesting I've got definitive authors -- just a few good ones that have helped me along the way and I look forward to reading what others have open.

Cheers, ag

Gold vs Commodities Index

2010-01-07T18:54:00.001-08:00

Gold vs Commodities Index

Written by SteveJohnson on Dec-27-09 5:04pm
From: http://the-gold-market.blogspot.com/2009/04/gold-vs-commodities-index.html

If you've been reading my blog regularly you have probably figured out that I like not only gold, but also silver. I call this blog the gold market because I see gold as something of a symbol of preserving your wealth against fiat currencies that are being devalued. But gold is not the only precious metal I invest in, and not the only commodity I invest in.

Right now we are in a commodities bull market that began in 1998 or 1999. The average length of a commodities bull market is 18 years, giving us plenty of more time to position ourselves to profit from it. Many think that the commodities bull market has ended, but what we are seeing is a mid-bull market correction. The current prices of commodities in general are extremely low, so now is an opportunity to buy.

I continue to buy gold, but during the current slump in commodities prices I am buying a lot more of other commodities than of gold. The main reason is simple: they have dropped in price while gold hasn't (speaking in general times). At the time of writing, gold is trading at $887.48 per troy oz. That is about the same as June of last year. Compare that to the Reuters-CRB Index (CRB stands for Commodities Research Bureau) that tracks the price of commodities in general, is way down, around 40% down. This is because of reduced economic activity as a result of the global economic recession. Gold has held relatively steady during this time as it is seen as a safe haven during economic crisis. So even though gold has dropped down from its highs, it is not as good of a buying opportunity as other commodities right now. In fact, when economic activity starts picking up again I think that gold will initially drop because it will lose some of its safe haven image, and we'll have a better buying opportunity at that time. Gold will continue to go up much higher when people realize how much the government has debased the currency, but this will be later on. Right now other commodities are cheaper and offer better opportunities for gains.

So what am I buying? Well, of course I love silver, because it has many of the benefits of gold as "real money" that can not be debased, but it is also much more of an industrial metal than gold. That's why the current industrial slowdown offers a great buying opportunity for silver. There is also a lot of data to show that silver supplies are much more limited than most people are aware of, and when shortages become apparent, the prices will skyrocket like crazy in the coming years. I am snatching up as much physical silver as I can afford to buy.

But I am also putting money into a diversified commodities futures fund, so that I can invest in commodities in general. This fund allows the managers to both short and long different commodities, so it normally goes up even when commodities have dropped, because the managers are shorting commodities. But due to the extra risk in that (they could make a bad trade) I chose a fund that deals only in cash and does not use leverage. Some funds that use leverage get hit very hard when they make some bad trades.

You can also invest in a simple commodities index tracker fund that involves no shorting. I would probably invest in one of these, but I don't have access to a good one where I currently live.

I am also putting money into an energy fund that invests mainly in oil companies. This one is a bit of a wildcard and I expect to sit on this for a while until oil reaches over $100 a barrel again, and then I'll sell it. I'm doing this as an opportunity to learn more about energy, so I can't really put my full weight behind this yet.

I also have a significant chunk of my savings in Australian dollars and Canadian dollars, since those are resource rich nations whose economies in general and currencies will benefit from the rise in commodities prices. I like investing in commodities currencies because I can buy and sell them very easily through online banking. I can sell them at a moment's notice. And the only fees are the buy/sell spread in the exchange rate. Easy. The only problem with currencies is that they can and will fluctuate like crazy in the short term, so I only put in money that I won't need until I'm ready to cash out further along in the bull market.

Those are my current interests, based on the low price of commodities. Commodities provide opportunities for exponential growth from their current levels. I expect that gold will initially drop as they rise. When that happens I will buy more gold, which I think will explode when the degree of currency inflation becomes apparent. Gold is the ultimate safe haven and preserver of your wealth, but commodities in general offer amazing opportunities at the moment.

marko on "long IV"

2010-01-07T17:48:00.000-08:00

again, this may be just a matter of lingo...equating long premium to a debit vertical spread and short premium to a credit vertical.

to simplify lets talk about single options. If I buy an option (just a straight call or put) either one is a debit. And either one will be long vega (positive vega). Meaning if IV goes up the option (regardless whether a call or put) will benefit due to the vega factor. And either option will hurt if IV goes down.

this is why I say that a long premium position is generally 'long' IV. and vice versa.

now some folks have trouble equating IV to time. It is true that they are different.
But it is also true that they are very much the same. (don't ya just hate double talk).

Same:
for example, think of a bell curve and one standard deviation. The more time available, the wider a bell curve becomes. Think of IV increasing what it actually does to a one standard deviation. It makes it wider. And as IV shrinks so does the one std dev.
And the more time available to an expiration date, the wider the bell curve (and the wider a std dev.)
Without time there can be NO IV. And when time runs out, IV must go to zero. So in this way they are the same thing.

Different:
In other ways IV and time can move independently of each other. For example : Such as in an earnings event. Option IV can increase over time into the event and deteriorate quickly upon the news. In this example IV is all about traders anticipation of the event and has little to do with time.

Marko

how ag used spread hacker

2010-01-07T16:49:00.001-08:00

Coincidentally, I just mentioned high probability trades. I don't equate high prob to ICs. Perhaps the people selling IC advisory services make this assertion. And no novice trader should be tinkering with multi-legged positions.

I think of high probability by looking at the risk profile. And I plunk a ticker into the tos and see if the Spread Hacker gives me an appealing probability. If I know the underlying, I'll put on the trade in size. If I don't know the underlying too well, but it's a strong candidate coming out of my screening process, then I'll put on the trade in small size and document its performance for a few expiration cycles, then scale the size. If I find a particular trade is not as profitable by average as other trades, it will be culled from the program and noted -- sometimes I go back and look at pilot error, sometimes I see market changes and sometimes I just don't see a provable cause. Reading Aronson on "Evidence Based" trading has helped me focus on objective performance measurement. I consider this a good combination of risk-return and high probability trading.
~Ag

learning options

2010-01-07T13:08:00.000-08:00

Jan 7, 2010

Are any of you guys consistently making 4,000 to 10,000 a month trading options?
Trading options to make money seems too easy. What is the "catch" ? what do you have to do in order to trade and make consistent profit??

Richard
---------
We're all somewhere on the learning curve and it never ends. You really need to consider a rate of return on capital at risk. $4K or $10K is irrelevant, it's the risk and the rate of return. Van Tharp is worth reading on this topic.

The "catch" is that trading is a professional business -- making the transition from hobby trading is the challenge of taking any avocation to be a vocation. Education, experience, discipline and determination -- in my experience there's no catch, no secret, no "Holy Grail" -- just good, old-fashioned work.

Set yourself a curriculum and some near terms goals. Paper trade to develop technical skills, then prepare for the psychological transition to real money at risk. You're looking at months of work assuming you come to table with better than room temperature IQ and above average mathematics. I recommend starting very small size and high probability trading -- the temptation is intraday trading, but I think this is a gamble. I'd prefer to see someone start with a small "tool set" of slow-moving technical trading (calendars, verticals.)

At the same time, you'll be studying trade management, position management, capital management and risk management. These all tend to travel by different names and philosophies. The objective is to develop and refine a trading system encompassing all these necessities. Start with a trading plan and build out.

There's been several recognized authors and their books mentioned here and in other email lists.

You have to become a student of the market -- studying and learning market, its internals and its motives.

Setting a goal of $4000 per calendar month is the cart before the horse. : )

Cheers,
ag

etf performance website

2010-01-06T17:36:00.001-08:00

http://etfscreen.com/etfperf.php?s=21d

shadowtrader exit on EXPE

2010-01-06T09:40:00.000-08:00

January 6, 2009

Company: Expedia, Inc (EXPE)
Action: Sell the stock
Shares: 250
Price: 25.15
Stop: n/a
Target: n/a

Trade Explanation: EXPE has violated yesterday's bottoming tail, the ascending trendline, and the 50ma on the daily chart. In addition, the low of the first 15 minute large red bodied bar has been surpassed. We sold out of our position and are now flat EXPE.

cs on adjustments

2010-01-03T14:17:00.001-08:00

A very nice suggestion. While, I don't presently have the time to share all that I do I will provide some insight into some of the methods I use.

Risk and reward is a balancing act. We need also include probability in the equation. Also, I tend to distinguish between trade specific risk management and portfolio risk management. At the portfolio level, we are typically talking about diversification and perhaps some hedging techniques. For example, if you only trade covered calls your portfolio will be susceptible to a market downturn. That may be okay if you're a long equity investor, but I think you need to question how much of a portfolio draw down are you willing to take. Most people don't do that and saw their accounts decimated by 40% to 50% following the market sell-off at the end of 2008. Imagine if they just stopped themselves out with a 10% loss...

Many of the positions I trade have a relatively small maximum return when compared to their maximum loss (e.g., iron condors). What allows me to make money over the long-term is that they tend to have a high probability of success, which simply means that they win more often than they lose. So, I cannot expect to take maximum losses and remain solvent. So, what I end up with are trades that are "probably" going to be profitable but that will result in losses from time to time. My job is simply to curtail the losses to a level that allows the profits from the majority of trades to absorb the loss while still growing my equity.

The techniques I use vary from strategy to strategy, but let's talk covered calls since that is sort of where this thread started.

The position typically starts with a naked short put being sold out-of-the-money on a stock that has met my fundamental and technical selection criteria. In short, I want a company that is 1.) profitable, 2.) growing its earnings, and 3.) that has a bullish technical pattern. I then ask myself a few questions. The first question I ask is how much can this stock sell-off and still be a moderate to long-term bullish candidate? If the stock falls below that price level it would no longer satisfy my technical criteria, so I want out. The second question I ask is that if I closed the position at that price level what would my exit price likely be? This allows me to calculate an anticipated loss, which then allows me to size the position so that the anticipated loss is limited relative to my overall capital. General advice is to risk no more than 5% of capital, but experienced traders with a meaningful account size will limit that further to 1% or 2%. I am willing to take closer to the 5% loss because these are longer term investments for me and I want to give the stock the room it needs to move in a natural pricing pattern. A successful trade also tends to earn 5% or more on risk capital, so a couple winners will offset the loss and keep me in the game. I have a 70%+ win rate on these, so the probabilities are also in my favor.

So, when I open the short put or covered call position I know that 1.) I am probably going to make money, and 2.) that all I need to do is manage the downside risk. If I am effective in managing the risk and limiting my losses, my account will have no choice but to grow. Here are the basic steps I use to do that...

Assuming I like the trade, I will open the position using a limit order. I then immediately place a contingent order that closes the position if the underlying stock sells off to the level of my defined stop. I place that on a "Good Til Cancelled" or "GTC" basis. This way, if the stock drops in value it's like triggering the ejection seat on a diving fighter plane. The stock has demonstrated that I was wrong and I'm not so much concerned about how I get out so long as I get out.

It's worth noting that the stop is typically below the strike of the short put, so there is a defined price range between the strike of the put and my stop in which I am willing to accept assignment of the stock. If assigned I will hold the stock and probably begin selling calls against it. At this point I have brought in a credit from the put sale and am now bringing in another credit from the sale of the call option. This reduces my break-even point and I then reassess my stop-loss. My immediate goal is not so much to lower the level of the stop-loss, but to ensure that I am comfortable with it. I might move it lower to accommodating a further downside fluctuation, but more often than not I just leave it where it is at. From there on out the game plan is to sell calls against the stock rolling from one month to the next so long as the stock's price pattern does not break down and it is not called away. My stop gets moved up along the way and between price advances in the stock and the rolling premium sales, it is soon at a price level that provides a profit.

I tend to favor solid, established companies (e.g., S&P 100) that pay dividends but will also go after growth stocks. Recent examples include Dow Chemical (DOW) and Nordic American Tanker (NAT) among the dividend paying variety and Research In Motion (RIMM) on the growth side of things. This last year I enjoyed solid gains during the market rally with I believe two positions being stopped out. What made this year particularly attractive for naked puts and covered calls is that stocks were trading at relatively low price levels and options premiums are rather high. Combine that with the rally we saw since March, and it was difficult not to make money with the strategy. This is dangerous because it feeds our greed impulses and we tend to loosen up on the reigns.

Covered calls and naked puts are two of the few options strategies where I use an actual stop order, but I use it for those particular positions because that is what I found that works for me. I have learned not to engage in philosophical or "what if" debates with myself. I make my peace with the trade before it's opened. I know I might get stopped out and take a loss, that I might see the stock rally to new highs while I'm stuck with limited premium, etc. I'm okay with all of the possibilities.

mc on condor type trades

2010-01-03T14:16:00.001-08:00

I am not a big fan of selling <10 delta options. What I have learned after many years of trading is that these cannot be realistically defended. By that I mean that protecting these options as the underlying moves toward the short strike forces you into a guessing game - and one that is very costly.

You either defend too early or unnecessarily thereby forfeiting your razor thin potential profit or you act too late and are simply in a position to fight to minimize further losses.

From a reward for risk standpoint the ratio you suggest points out how challenging it is to defend your position. for instance, one way to protect your position is to add a butterfly and thus force the short strike out.

Example with the -700/710 side of the condor you could add something like the +700/-2 710/+720 fly to net into the -710/720 wing. But adding that fly will require a debit trade and, if done at the wrong time or price, can almost entirely wipe out the original credit received. If it costs you say 50 cents your original 11.5:1 reward for risk now shrinks to 32 to 1 and the risk of losing is now presumably greater since the underlying is probably already bumping up to your short strike instead of being a couple standard deviations away.

In effect, this kind of trade (i.e. one with short 10 delta strikes) basically a set-it, forget-it type of bet. Yes it will work out many times and hopefully the Russian roulette you play with this type of position works out.

My style of trading is, as implied, avoids the nail-biting of this type of trade. If I were to attempt it though, I'd be much more inclined to just sell a strangle or pick one direction where I didn't think the underlying would trade and sell one half of the condor, bide my time and then sell the other half if it makes sense later on.

With the short strangle (or even a straddle) the idea would be that if the underlying makes a directional move, there would be more credit available to help defend the weak short strike. E.g. if the position starts with the -520p/-700 strangle and rut goes toward the 700 strike, you can add something like the +700/-710 vertical to shove that short strike out and pay for it by selling something like the -540p/+520p or whatever to keep your net credit somewhat stable.

With the short vertical, you can either wait and get lucky on guessing the direction correctly or, if wrong, when the underlying moves to threaten the short strike, only then sell the other side of the condor at strikes that allow you to pay for defending the losing vertical. e.g. if you bet on a January effect rally and sell the 520p/510p vertical but the market decides to tank, when near the 520 strike you add the 520/20/00 butterfly to defend the 520 strike and pay for it by selling whatever call vertical pays for the debit (plus probably a little more insurance).

Lots of different and time-intensive ways to play these things that I'm sure others will comment on.

mc on de-localizing risk

2010-01-03T12:56:00.000-08:00

Chris calls out the "magic words' below:
"... the long-term money is made and lost through managing risk. Until a trader learns how to effectively manage risk, their trading will be marked with painful equity draw downs..."

How's this for a new year's/decade's thread: how do you manage trading risk? what techniques, rules, principles or whatever do you follow to stay out of trouble?

For me it's all about position size and "de-localizing" risk.

with my style, I know I will inevitably grow a trade (i.e. max dollars at risk) over the life-cycle of the position. so that means starting almost infinitesimally small - I start each expiration cycle with a one-lot limited
risk spread (usually a long otm vertical). I watch the max risk throughout the trade and try to keep things ideally maxed around 1%-2% of total capital (though I will undoubtedly blast through this a couple times a year and have as much as 20%-25% of total capital at risk on my net positions). The point about position sizing for me is that no matter what happens - even in the worst case - I can live to trade again. If I am vigilant about position size, everything else falls into place: no need to "cut losses short" or have any such artificial line in the sand where I admit I'm wrong; I ASSUME I'm wrong from the get go by staking and maintaining the position size.

The other real risk management practice I follow is to constantly shift where my max risk is a trade or de-localizing the max loss point. I do that by shoving the risk away from atm strike - however I can make that happen - while still giving myself a chance to somehow make money on the trade.

As Chris notes, there is no all-weather vehicle (strategy) for trading so as long as I follow the "nudge the risk away while keeping max risk acceptable" practice, I've taken care of business.

TCK headed for teh 50 dma

2009-12-30T18:14:00.001-08:00

JAH risk defined

2009-12-30T17:41:00.001-08:00

watchlist CVX Chevron

2009-12-30T17:34:00.001-08:00

watchlist CHEVRON

GREAT sample trade writeup from ray

2009-12-30T01:09:00.000-08:00

PHG - I found this volatility breakout on one of my scans this evening. I decided to annotate a chart and run through my logic on this one. You can get the chart at http://chart.ly/kftc4h

1) Heavily traded stock.
2) Breaking out of volatility squeeze. Bollinger Bandwidth < 6% of price on the squeeze.
3) OBV above 20 day moving average.
4) Stock had been channeling between the 2 std deviation Bollinger Bands in the past. More recently channeling between upper band and 20 day moving average (middle of the band).

Look for stock to move up along the upper Bollinger Band as it expands.
Buy above todays low.
Define risk at intraday low of last mid-line touch (red line on chart).
As the position moves up look for respect of 20 day moving average, until then keep the stop at the defined risk.

Position size: 1% risk
The position risk is the difference between today's intraday high and the defined risk/stop, about $1.50.
I want my maximum risk to be no more than 1% of my portfolio.
Maximum number of shares = 1% of portfolio/$1.50
For the portfolio that I am using I will actually be taking a position of about half this size (that's how much I have to allocate to this trade), so my maximum risk will be ~0.5% of my portfolio.

Upside should be at least $1.50, more if I ride the wave or it breaks out of the channel (but assuming the channel will continue).

Channel cycle is about 1 month, so time frame in the position should be a minimum of 2 weeks.

Well, that is my reasoning on this one. Let me know your thoughts.

Cheers,
Ray

Richard Donchian's 20 guides to trading

2009-12-28T19:17:00.003-08:00

http://trendfollowing.com/whitepaper/donchian-commodities.pdf

how to add more funds to thinkdesktop papermoney

2009-12-28T12:41:00.001-08:00

12:38 hja:   ADD FUNDS TO PAPER 
 09:01  hja: Monitor tab
 09:02  hja: activity and pos statement
 09:02  hja: make sure you are on the old layout
 09:02  hja: click on Not weighted
 09:02  hja: go to position
 09:02  hja: then adjust cash
 09:02  hja: + or - what you want  
12:40 greg: ok, i'll check that...
12:40 greg: excellent ! thank you hja.

stockcharts public lists

2009-12-28T10:26:00.001-08:00

stockcharts public lists

richard lehman - http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1399335

maurice walker - http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID1926808

the rumpled one

2009-12-26T00:43:00.000-08:00

TC send me a lead to check out this trader called "the rumpled one":

TRADING IS SIMPLE:

* Price either goes up or down.
* No one knows what will happen next.
* Keep losses small and let winners run.
* POSITION SIZE = RISK / STOP LOSS
* The reason you entered has no bearing on the outcome of your trade.
* You can control the size of your loss (skill) but you can't control the size of your win (luck).
* You need to know when to pick up your chips and cash them in.

he has some quotes from "HOW WE DECIDE": http://www.tradingsystemforex.com/general-discussion/917-never-lose-again-therumpledone-4.html

covered calls advisor's overall market meter

2009-12-24T15:14:00.000-08:00

quote:

Sunday, December 20, 2009
Overall Market Meter -- An Updated Rating Process
The "Overall Market Meter" on the right sidebar of this blog always reflects the Covered Calls Advisor's current overall stock market outlook. Currently, this indicator is "SLIGHTLY BULLISH." This meter also shows each of the seven possible market sentiment indicators: Very Bullish, Bullish, Slightly Bullish, Neutral, Slightly Bearish, Bearish, and Very Bearish. A recent blog article link described the Covered Calls Advisor's preferred covered calls investing strategy for each of these seven possible indicators. To determine which indicator is most representative of this advisor's overall stock market outlook at any given time, a quantitative-based, multi-factor decision model is used.

http://coveredcallsadvisor.blogspot.com/2009/12/overall-market-meter-updated-rating.html