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TradeGenie.com
Contents
Swing Trading Strategy  .  .  .  .  .  .  .  .  .  .  .  .  .  . 09
Earnings Play Strategy  .  .  .  .  .  .  .  .  .  .  .  .  .  . 10
Indexes, ETF and Ultra Short Trading  .  .  .  .  .  .  .  . .  . 1 2
Understanding Position Sizing Part 1  .  .  .  .  .  .  .  .  . 14
Understanding Position Sizing Part 2  .  .  .  .  .  .  .  .  . 17
Position Sizing How much is enough?  .  .  .  .  .  .  .  .  . 20
Dollar Cost Averaging  .  .  .  .  .  .  .  .  .  .  .  .  .  . 22
Understanding Targets  .  .  .  .  .  .  .  .  .  .  .  .  .  . 26
Importance of Red Target  .  .  .  .  .  .  .  .  .  .  .  .  . 28
Executing the Trade  .  .  .  .  .  .  .  .  .  .  .  .  .  .  . 30
Beating the Market Maker via Show or Fill Rule  .  .  .  .  .  . 32
Uptick and Upbid Rule .  .  .  .  .  .  .  .  .  .  .  .  .  . 35
To Chase or Not To Chase  .  .  .  .  .  .  .  .  .  .  .  .  . 36
Eliminating Greed through Conditional Order  .  .  .  .  .  . 38
Protecting Your Capital via Stop Price  .  .  .  .  .  .  .  .  . 39
T r a d e G e n i e
G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
TradeGenie.com 2 Money Market Mastery
Understanding Expectancy .  .  .  .  .  .  .  .  .  .  .  .  . 44
 .  .  .  .  .  . 48
 .  .  .  .  .  .  . 49
 .  .  .  .  .  .  . 50
 .  .  .  .  .  .  . 52
59
 .  .  .  .  .  .  . 62
 .  .  .  .  .  .  . 65
 .  .  .  .  .  . 69
Exiting the Trade .  .  .  .  .  .  .  .  .  .
General Guidelines on Selling Your Contracts
Keeping the Trading Journal  .  .  .  .  .
How I Trade Gaps  .  .  .  .  .  .  .  .
How I Trade Breakouts  .  .  .  .  .  .  .  .  .  .  .  .  .  .
How I Trade Opening Range Breakout  .  .
Importance of Volume  .  .  .  .  .  .  .
Life Cycle of a Stock .  .  .  .  .  .  .  .  .
 .  .  .  .  .
About Trade Genie
Meet Our Founder - Noshee Khan
 .  .  .  .  .  .  .  .  .  .  .  .  .  .
 .  .  .  .  .  .  .  . 06
03
Trade Genie Options Trading Strategies
Money Market Mastery
About
Trade Genie
Our Master Trader, Mr. Noshee Khan, has an extensive background
in programming, systems analysis, software design, and
implementation. He also holds an MBA in finance.
In his capacity as an enterprise software consultant for the German
multinational software corporation SAP, Noshee specialized in the
implementation of business processes for many Fortune 500 companies
including Intel and Applied Materials.
“Although I enjoyed my work, all these positions of great responsibility did
not really satisfy me enough in terms of a rewarding lifestyle, or a true sense
of accomplishment.”
In 2003 Noshee developed an interest in trading and the latest software
being used in the brokerages. He soon found himself immersed in the
subject and exchanging information with the leading industry experts
through the early online trading forums.
Noshee soon discovered that the analytical skills from his day job
transferred perfectly to understanding and predicting the intricacies of
the stock market.
“I quickly started to make winning trades consistently and after seven years
of learning, I was able to quit my $120 per hour job, start a career in
trading, and begin my dream lifestyle of trading for a living”
Before long, friends and family started asking Noshee for trading tips,
and their friends soon followed.
“In 2010 I founded Trade Genie to help other traders, as well as offering
subscription services for my daily stocks and options trade alerts. I now look
forward to each day with great anticipation and excitement, I have found my
calling.”
3
Trade Genie Options Trading Strategies
Money Market Mastery
TradeGenie.com 4
Over the past decade, tens of thousands of individual traders and
investors have joined Trade Genie’s subscription services and stayed with
us due to the continual overall success of the trades Noshee recommends.
“I take great pride in offering a premium service to our subscribers by replying
to any questions clients have, personally.”
Noshee is passionate about trading and his nearly two decades of
knowledge and experience position him to be one of the most
knowledgeable and successful traders in the US today. Noshee does not
trade because he needs to, he trades because it is his passion and
enjoyment.
“The reason I started Trade Genie was that I realized that there is no greater
satisfaction than helping others to achieve their financial security and their
own greatest dreams.”
Each day before the market opens, Noshee performs a psychological
workout, developed over years in association with key mentors, as he
prepares for the opportunities of the day ahead.
During trading hours, he analyzes the markets and trades for his account
and provides the trading alerts for our members. After the market closes
Noshee goes through a debriefing process, reviewing the markets as he
prepares himself for the next day.
At the weekend Noshee prepares his teaching materials for the ‘free’
coaching webinars offered with all Trade Genie memberships.
Between times, Noshee compiles our newsletter which is full of pertinent
market information, comments on the previous day’s trades as well as
masterful tips and insights to help you elevate your trading skills.
“I realized that all my years of experience analyzing the markets to find the
right trades to execute was so much more rewarding when I shared my
knowledge with others who don’t have the time to do the analysis or the
experience to trade successfully themselves.”
Trade Genie Options Trading Strategies
Money Market Mastery
TradeGenie.com 5
At Trade Genie, we offer an elevated level of service, keeping in touch
with you throughout the trade if the situation changes so you can make
the most of opportunities as they arise. Our trades are hand-picked in
real-time after analyzing the trade opportunities thoroughly with respect
to the risk and reward ratio.
We provide our members with the exact buy price along with multiple
exit target prices which allow you to assess the relative risks of each in an
easy to understand way. We then keep you updated throughout the trade
if these exit targets can be adjusted to your advantage while the trade is in
play.
We give you precise trade management strategies and guidance along
with the trade alerts that require it. All memberships come with our
‘Trading Systems’ guidebook and ‘Options Trading Strategies’ manual.
These guides outline the recommended steps to take in order to maximize
gains and minimize losses, and as such are essential trade secrets within
themselves.
Our trading statistics are live on our homepage where you can see our
win rates, average percentage gain, and loss, as well as the average time it
takes to close the trades. It goes without saying that these results are
excellent, and naturally, the dedicated trader who judiciously selects
trades based on focused analysis, can easily multiply the average
percentage gain manyfold.
However, it is our level of support, transparency, in-trade guidance, free
coaching webinars, newsletter, and our markets trend and strength
reports, that really take the weight off your shoulders and give you the
knowledge and confidence you require to trade successfully like a pro.
Take a look at our testimonials page and see what our clients say, then try
us and see for yourself why we are undoubtedly the best stock options
advisory service available in the US today.
We look forward to welcoming you into our community of financially
successful individuals, growing their portfolios and profits. while living
their dreams and enjoying life to the fullest.
Trade Genie Options Trading Strategies
Money Market Mastery
TradeGenie.com 6
• Working as a IT Consultant: Check.
• Dealing with the early morning commute: Check.
• Constantly reporting to my boss: Check.
• Feeling as if the daily routine was sucking the life out of my
body: Check.
Here is my story
I worked at an IT consulting job. So, I was doing the typical consulting
work routine. I’d get up early to make the morning commute, run
around all day helping clients, and attend long meetings. It was a stressful
and unhealthy lifestyle. Whenever When I got any breaks, I would grab
something quick and calorie-filled at McDonald’s and drink way too
much coffee to keep my energy up. Once the day finally ended, I’d leave
work at 6 pm, grab something again from a fast-food restaurant because
traffic would back-up and I wouldn’t get home until 8 pm. Then I would
crawl into bed without spending time with my new wife.
It was definitely a trying lifestyle. I reached my breaking point in
March of 2010 when I was told I was being laid off. At that moment,
everything in my life came to a screeching halt. I had no money
coming in. Yet getting back into the proverbial rat race was
disheartening.
I could find another consulting job where I would just become miserable
again and not spend any time with my wife. And then, what about the
future when kids became a part of our lives? I didn’t look forward to
barely seeing them day in and day out if I went back to IT consulting. I
would miss seeing them off from school or picking them up in the
afternoons. I wouldn’t be there for school concerts or to sing holiday
songs or attend Dad’s Donuts Days. They would grow up never really
knowing who the man was that would rush out the door in the mornings
and what part he had in their lives.
Meet Our Founder
Noshee Khan
In March 2010 I lived in an ordinary world:
Trade Genie Options Trading Strategies
“What a waste of life!” I asked myself. “Why am I working so hard?
For whom?”
I wanted to reclaim my dignity. I wanted to provide my wife with a happy
life and provide my future children with the Dad that they deserved to
know. I wanted to feel the inner satisfaction of helping others while being
my own boss. I wanted to enjoy everything that I had missed out on
before, such as traveling around the world and working at any location
while choosing the hours I wanted to put in at the job.
While I had that constant fear, about making a living, completely
wrecking my life and possibly my marriage, I did the only thing that I
could do. I evicted myself from the misery. I didn’t prepare my IT
consulting resume. I shut down the recruiters trying to get me involved in
various projects across the country and overseas. I burned that past bridge
down.
Yet I still needed to provide for my family’s financial security. So, I went
to snipping down my monthly budget. Every unnecessary expense had to
go as I focused on what was necessary for our lives. Then, I sat down and
poured my energy into my life’s passion: becoming a full-time stocks and
options trader.
There was just so much more information I needed to absorb. Luckily,
with the trading knowledge that I had acquired trading part-time while
working as an IT consultant, I had enough to start my journey at full
steam. I also lucked out and had some wonderful people, my guiding
angels who provided me with mentorships that allowed me to go along
the right track. I read all the online literature I could find about stocks
and options trading. I soaked up the knowledge from books, as my angels
looked on and admired my passion and talent for the trade.
I quickly held my own as a stock and options trader and exceeded even
my own expectations. It was at that time I founded Trade Genie to share
my successes with others. My wife and I soon owned homes in several
countries. I could now trade from anywhere in the world as I enjoyed
creature comforts and outdoor activities. I could play on sandy beaches in
the summer and go kayaking, zip-lining, and bungee jumping in the
mountains.
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TradeGenie.com 7
Trade Genie Options Trading Strategies
I even had the opportunity to go on exciting elephant rides in foreign
countries during the day after putting in some hours on the stock market.
It was a dream come true.
After having received such an excellent mentorship, I paid it forward and
offered advice to other traders so they could create their own fortunes
through my stock market advisory services and coaching programs. As I
further honed the techniques and my knowledge of the stock market, I
started to notice an interesting pattern. Much of my time was being spent
learning every possible technique out there, which forced me to expend a
lot of time and energy trying to mesh together all of the different
techniques. Instead, I learned that I could reach further success by
changing my focus and concentrating on truly mastering just a few
techniques that most professional traders use to reach financial success.
Through this new stocks and options trading strategy, I saw enormous
gains at a rapid pace and my portfolio grew at light speed. I was absolutely
shocked. While I had mastered several chart patterns and trading
techniques, there were three specific techniques that continually proved
highly profitable to me.
And now I want to share these three techniques with you for free. I want
you to break out of the corporate cubicle wars and instead reach the same
financial success with stock market trading that I have.
You no longer need to worry about how to master stock trading. You can
spend more time with your family and pursue all the luxuries that life has
to offer. In my “Mastering the Stock Market” guidebook, I go into greater
detail about these three simple trading techniques and how mastering these
will transform you into an independent and highly profitable trader.
Simply drop me a line via our contact page and I will send you your free
“Mastering the Markets” guidebook today so that you can find the success
that my trader followers and members have found. You can finally burn
the bridges that are holding you back from true financial freedom and the
happiness it provides.
Money Market Mastery
TradeGenie.com 8
Swing Trading
Strategy
Successful swing trading requires skillful interpretation of the
herd mentality that drives price change. Swing trading combines the
better of two worlds – the slower pace of investing and the increased
potential gains of day trading. By rolling over your money rapidly
through short term gains you can quickly build your equity.
The basic strategy of swing trading is to jump into a strongly trending
stock after its period of consolidation or correction is complete. Strongly
trending stocks often make a quick move after completing its correction
which one can profit from. One then sells the stock after 2 to 7 days for a
5-10% move. When you combine options with swing trading the return
could be somewhere 25 – 100% in a short period of time. This process
can be repeated over and over again.
One can also play the short side by shorting the stocks that fall through
the strong support. In brief a Swing Trader’s goal is to make money by
capturing the quick moves that stock makes in its life span, and at the same
time controlling his/her risk by proper money management techniques.
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In swing trading or any form of trading knowing the exact
stock target price to exit the trade will keep you in trade and
minor pullbacks will not give you worries that you are losing the
profit . Similarly knowing the exact stop price will also not shake you
out in case the stock pull backs severely . These two price levels are
crucial to one’s success .
No matter how strong the chart looks if the stock does not
have potential to move further up (in case of long trade) or down (in
case of short trade) then there is no point in entering the trade as the risk
is higher than the reward . At certain price point the buyers start
accumulating the stock preventing from further fall and stock make
a big move to the upside . The same phenomenon happens when the
stock is making upside move and suddenly reaches a price point and
collapses .
time we would enter into the trade which is coming
up for earnings. Let’s assume that tomorrow morning CMI is reporting
earnings. .30 and
we bought out-of-the-money Puts May 65 for $1.00. Our basket Calls
and Puts cost is $4.40 Forecast = CMI can gap up above 72 or gap down
to 65.
Let’s assume CMI gaps up enough that our call which we bought for
$3.30 trades above $4.
basket.
. If Puts are trading
near 10 cents then we don’t sell PUTS rather sell calls and hold PUTS.
Selling PUTS for 10 cents do not make sense as some brokers may be
charging you more than 10 cents to sell one contract.
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S will gain some value and we can
alue . However, PUTS could expire worthless too .
In case CMI pulls back the PUT
get better salvage v
Scenario 2
Everything same as scenario 1 above but it seems it is better to get out
of Calls and PUTS at the same time to make decent profit in the basket .
The volatility after earnings go away and even stock moves upward the
options do not move .
.
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G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
Indexes, ETF
and Ultra
Short Trading
If you have subscribed to Index Options trading then this section is
for you to read and understand.
Depending on the market direction I trade the following fifteen
symbols.
1 . DIA ($INDU)
2 . SPY ($SPX)
3 . QQQ ($NDX)
4 . $OEX (S&P 100)
5 . $XAU (Gold and Silver Index – Philadelphia Stock Exchange)
6 . $HGX – Housing Index
7. GDX – Market Vectors Gold Miners
8. DXD – Ultra Short Dow Jones 30 Pro Shares
9. SDS – Ultra Short S&P Pro Shares
10. QLD - Proshares Ultra QQQ
11. QID – Ultra Short QQQQ Pro Shares
12. DUG – Ultra Short Oil & Gas Pro Shares
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13 . SKF – Ultra Short Financials
14 . FAZ - Financial Bear 3x Shares
15 . TZA - Small Cap Bear 3x Shares
.
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Understanding
Position Sizing
Part 1
“He who thinks he knows, doesn’t know. He who knows that
he doesn’t know, knows.”
—Lao Tse
In this Chapter, we will talk about Position Sizing - one of the
most important concepts that will stop you from going broke on
your first trade!
Position sizing is simply the how much of trading . It answers the
question such as “How many contracts or shares per trade you should
buy for your account size?”
When you enter a position, it is essential to know the point at which
you will get out of the position in order to preserve your capital . This is
your “risk” . It is your worst-case loss - except for slippage and a runaway
market going against you . One of the most common position-sizing
systems involves controlling your per trade size as a function of this risk .
There are various Position-sizing model. In this chapter we will
discuss position sizing based on Percent-Risk model.
To implement position sizing concept you need to know three
variables. These are your portfolio size, risk tolerance percentage and
stop loss percentage. Risk tolerance is defined as how much you are
willing to lose on one trade as part of your total portfolio amount. Stop
loss is defined as how much you are willing to lose in a given trade.
Please make sure to understand the difference between the two.
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Investment Amount = (Portfolio Size/Stop Loss
Percentage) * (Risk Tolerance)
Investment Amount = ($50,000/0.5) * (0.02) = $2000
The above equation for determining the Investment amount
shows that if we increase the risk tolerance while keeping the Portfolio
size and Stop Loss Percentage same we would be able to investment
more in AAPL trade.
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To illustrate position sizing lets assume your portfolio size is $50,000 .
Let’s also assume that you do not want to risk more than 2 percent of your
capital in any trade . This means you are willing to lose $1000 ($50,000 *
0 .02) on one single trade . Let’s say that based on your technical analysis
you have determined that your stop loss percentage will be around 50
percent .
Let’s take the example of AAPL . You are bullish in AAPL and are
interested in buying AAPL Calls as you think AAPL will rise in price .
Let’s assume one AAPL Call contract is trading at $20 . Since one contract
controls one hundred share, therefore, purchasing one contract of AAPL
at $20 will require $2000 ($20 *100) investment . As we know not all
trades are successful and they hit our stop loss . Your technical analysis
tells you that when AAPL trades at a certain price your Call contract will
be trading at $10 thus you will incur 50 percent loss . This is your stop
loss percentage . In other words you will lose $1000 ($10 *100) in this
trade which is 2 percent ($50,000/$1000) of your starting capital .
In other words your risk is defined as 2 percent and your stop loss
is at 50 percent . Therefore based on your portfolio size of $50,000 you
should not invest more than $2000 in AAPL trade . This investment
amount is calculated as follows .
For example, if we increase risk tolerance percentage to 4 percent
then the investment amount as determined by the equation will be
$4000 calculated as follows:
Investment Amount = ($50,000/0 .5) * (0 .04) = $4000
Similarly you can keep the risk tolerance to 2 percent but if you decrease
the stop loss percentage to 25 percent then you would be able to invest
$4000 in AAPL trade and is calculated as follows:
Investment Amount = ($50,000/0 .25) * (0 .02) = $4000
As you can see your Investment amount in a single trade is a function
of your portfolio size, risk tolerance percentage and stop loss percentage .
It is suggested that risk tolerance level should remain constant (e .g . 2
percent) whereas your stop loss percentage and your portfolio size will
fluctuate from time to time .
As your portfolio size increases or decreases your investment amount
per trade has to be adjusted accordingly based on your risk tolerance
and stop loss percentage . Let’s say your portfolio has grown to $60,000 .
Keeping risk tolerance and stop loss percentage same we would be able to
invest $2400 in our AAPL Calls which is calculated as follows:
Investment Amount = ($60,000/0 .5) * (0 .02) = $2400
Based on $2400 investment if you lose in this trade the loss amount
would be $1200 which is 2 percent of your portfolio size .
In summary proper position sizing will eliminate fear level, rate of
errors and will build your confidence in trading . Th is will lead yo u
to improvement in your success rate, and higher profits in gradual
systematic way . Above all few bad trades will not wipe out your account
and you will live to trade in the future .
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Understanding
Position Sizing
Part 2
Money management is a very confusing term . When we looked
it up on the Internet, the only people who used it the way that Van was
using it were the professional gamblers . Money management as defined
by other people seems to mean controlling your personal spending;
giving money to others for them to manage, risk control, making the
maximum gain, plus 1,000 other definitions .
To avoid confusion, Van elected to call money management “Position
Sizing .” Position sizing answers the question, “How big of a position
should you take for any one trade?”
Position sizing is the part of your trading system that tells you “how
much .”
Once a trader has established the discipline to keep their stop loss
on every trade, without question the most important area of trading is
position sizing . Most people in mainstream Wall Street totally ignore
this concept, but Van believes that position sizing and psychology
count for more than 90% of total performance (or 100% if every
aspect of trading is deemed to be psychological).
Position sizing is the part of your trading system that tells you how
many shares or contracts to take per trade. Poor position sizing is the
reason behind almost every instance of account blowouts. Preservation
of capital is the most important concept for those who want to stay in
the trading game for the long haul.
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Imagine that you had $100,000 to trade . Many traders (or
investors, or gamblers) may just jump right in and decide to invest a
substantial amount of this equity ($25,000 maybe?) on one particular
stock because they were told about it by a friend, or it sounded like a
great buy; or perhaps they decide to buy 10,000 shares of a single
stock because the price is only $4 .00 a share (equating to $40,000) .
They have no per-planned exit or idea about when they are
going to get out of the trade if it happens to go against them and
they are subsequently risking a LOT of their initial $100,000
unnecessarily .
To prove this point, we’ve done many simulated games in
which everyone gets the same trades . At the end of the simulation, 100
different people will have 100 different final equities, with the
exception of those who go bankrupt . And after 50 trades, we’ve seen
final equities that range from bankrupt to $13 million--yet everyone
started with $100,000 and they all got the same trades .
Position sizing and individual psychology were the only two
factors involved .
Van says that this just shows how important position sizing is.
So how does it work?
Suppose you have a portfolio of $100,000 and you decide to only
risk 1% on a trading idea that you have . You are risking $1,000 .
This is the amount RISKED on the trading idea (trade) and should
not be confused with the amount that you actually INVESTED in
the trading idea (trade) .
So that’s your limit, you decide to only RISK $1,000 on any given
idea (trade). You can risk more as your portfolio gets bigger, but you
only risk 1% of your total portfolio on any one idea.
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Now suppose you decide to buy a stock that was priced at
$23 .00 per share and you place a protective stop at 25% away, which
means if the price drops to $17 .25 you are out of the trade . Your risk
per share in dollar terms is $5 .75 . Since your risk is $5 .75, you divide
this value into your 1% allocation (which is $1,000) and you are able
to purchase 173 shares, rounded down to the nearest share .
Work it out for yourself, so you understand that if you get
stopped out of this stock (i .e ., the stock drops 25%), you will only
lose $1,000 or 1% of your portfolio . No one likes to lose, but if you
didn’t have the stop and the stock dropped to $10 .00 per share, you can
see how quickly your capital vanishes .
Another thing to notice is that you will be purchasing about
$4000 worth of stock . Work it out for yourself . Multiply 173 shares
by the purchase price of $23 .00 per share and you’ll get $3979 .
It would probably be around $4000 when you add commissions .
Thus, you are purchasing $4000 worth of stock, but you are
only risking $1000 or 1% of your portfolio .
And since you are using 4% of your portfolio to buy the
stock ($4000), you can buy a total of 25 stocks this way without
using any borrowing power or margin, as the stockbrokers call it .
This may not sound as “sexy” as putting a substantial amount
of money in one stock that “takes off,” but that strategy is a recipe
for disaster and very rarely happens . Therefore it is best left on the
gambling tables in Las Vegas .
To continue to trade and stay in the markets over the long
term, learning position sizing and protecting your initial capital is vital .
Van believes that people who understand position sizing and
have a reasonably good system can usually meet their objectives
through developing the right position sizing strategy .
Position Sizing
How much is
enough?
Start small . So many traders that are trading a new strategy start
by risking the full amount that they plan on using for the long term
with that strategy . The most frequent reason given is that they don’t want
to “miss out” on that big trade or long winning streak that could be
just around the corner . The problem i s that m ost t raders h ave a much
greater chance of losing than they do of winning while they learn the
intricacies of trading the new strategy . Therefore, start small (very small)
and minimize the “tuition paid” to learn the new strategy . Don’t worry
about transactions costs (such as commissions), just worry about learning
to trade the strategy and follow the process . Once you’ve proven that
you can consistently and profitably trade the strategy over a meaningful
period of time (months, not days), then you can begin to ramp up your
position sizing .
Manage losing streaks . Make sure that your position sizing algorithm
helps you to reduce the position size when your account equity
is dropping . You need to have objective and systematic ways to avoid
the “gambler’s fallacy.” The gambler’s fallacy can be paraphrases like
this: after a losing streak, the next bet has a better chance to be a
winner. If that is your belief, then you will be tempted to increase
your position size when you shouldn’t.
Don’t meet time-based profit goals by increasing your position
size. All too often, traders approach the end of the month or the end
of the quarter and say, “I promised myself that I would make “X”
dollars by the end of this period.
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“I have talked to many folks who have blown up their
accounts. I don’t think I have heard one person say that he
or she took small loss after small loss until the account went
down to zero.Without fail, the story of the blown up account
involves inappropriately large position size or huge price
moves, and sometimes a combination of the two.”
~D.R.Barton
.
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The only way I can make my goal is to double (or triple, or worse)
my position size . This thought process has led to many huge losses .
Stick to your position sizing plan!
We hope this information will help guide you toward a mindset of
capital preservation on your journey toward successful trading .
Dollar Cost
Averaging
The dollar-cost-averaging strategy is based on dividing
the total amount to be invested in a trade into three lots and investing
these three lots at different stock prices . The idea is to add to our open
position on stock weakness rather than closing out the trade at loss . We
will always begin our trade with the investment of 2% of our portfolio
balance . In case we are wiped out in this trade for any reason, such as
stock gapping down or gapping up, the maximum we would lose is 2%
of our portfolio balance . By default the first profit objective is 20-25% .
If stock pulls-back after our entry and hit our first pullback price
then we invest the second lot at reduced cost . This will bring down the
average cost per contract . After second purchase the profit objective is
30-35% . In case stock does not hit our profit objective and rather went
to our second pullback price then we invest the third lot at a price per
contract lesser than the second purchase . The third purchase will reduce
the average cost per contract to even further . Once we purchase the third
lot then we set the order to sell at profit objective of 35-40% . After the
third purchase we also monitor our trade for our stop. If stop hits then
we close our trade. The expected loss would be between 40-45%.
Example – CF – January 185 Calls
Let us assume the portfolio size is $26,500. We take 6% of the
portfolio balance which comes to $1,600. Divide $1,600 into three lots
which comes to $533. Let us also assume we are buying CF Jan 185
Calls which are trading at $530.
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First Buy
The amount of $530 will bring one contract . Set the sell order
immediately at 25% profit or the target bid provided with the alert . In
this example, the target bid is $6 .60 . There is no hard stop set at this
moment . If target bid hit we would gain $1 .30 per contract and the
trade will be closed .
Second Buy
However, let us assume the target bid did not hit and stock pulled
back and hit our first pullback price . You will either be provided the
pullback stock price in advance or real-time email alert will be sent .
Lets assume CF contract at the pullback price is trading is $2 .90 .
We would invest $580 to purchase two contracts . After this purchase the
total amount invested will be $1110 ($530+$580) and we would have
three contracts on hand at the average cost of $3 .70 ($1110/3) . After the
purchase set the conditional good till cancel order to sell either at the
stock target price or at the target bid provided . There is no hard stop set .
In this example, the target bid is $5 .00 . If target bid hits the gain will be
$1 .30 per contract . The return on investment will be 35 .14% and the
trade will be closed .
Third Buy
However, let us assume the target bid did not hit and stock either
pulled back and hit our second pullback price or went sideways . In
this case third purchase will trigger and we would buy more
contracts . Let us assume at second price CF Calls are trading at
$2.40. This means we will buy two more contracts for the total
amount of $480. After this purchase we will have five contracts at
the average cost of $3.18 and total amount invested would be
$1590. After this purchase set the good till cancel order to sell all
contracts either at stock target price given or target bid given. In
our case target bid is set at $4.30. If our target bid hits we
stand to gain $1.12 per contract. Total gain will be $560.
Reward-to-Risk Ratio = (Expected Profit
* Probability of Profit) / (Maximum Loss *
Probability of Loss) = (25% * 80%) / (40% * 20%) =
(2.0) / (0.8) = 2.5: 1
Assumption
The assumptions are as follows:
Stop Price
Suppose after third purchase the stock further move down (in
case of Calls) then our stop would trigger at either stock stop price
given or the stop bid given . In our case the estimated stop price is
$1 .90 . If stop hits we would lose $1 .28 per contract .
Total amount we will be $640 . The loss percentage will be
40 .25% which will be around 2 .42% of our portfolio balance .
Reward-to-Risk Ratio
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1. Once we enter the trade – stock would trade such that it
will give us 25% profit.
2. In case stock pulls back to our first pull back price – it will
bounce back up.
3. If stock does not bounce after hitting first pullback price
then there is a high.
4. Probability that stock will bounce back after hitting
second pullback price .
5. If stock further goes down then the trend is changing and
we need to close our Trade .
6. The expected win ratio in this strategy is 80% .
7. The first profit target is 25% .
8 . The second profit target is 35% .
9 . The third profit target is 35% .
10 . Expected loss is between 40-45% .
11 . Expected loss as percentage of portfolio per trade is 2-3%
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Understanding
Targets
“The professional concerns himself with doing the right thing
rather than with making money, knowing that the profit
takes care of itself if the other things are attended to.”
—Jesse Livermore
When you fully commit to a goal, the focus of positive energy onto
a desired result is like programming a missile to “lock on” to a moving
target; the missile automatically pursues the target no matter how elusive
it becomes. The act of commitment also attracts exciting, new possibilities
to your doorstep, leading to dramatic changes in your life.
1.	 Green Target - This is the immediate target which I expect the
stock to hit very quickly and the probability of it hitting is 95%.
I usually sell one-fourth of my position on this target. I expect
stock to continue its journey towards next target which is “yellow
target”. If the target is given in percentage then it means it is
based on option buy price.
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2 . Yellow Target - This is the second target after green target . The
probability of hitting the yellow target is 85% . The difference
between yellow and green target besides the probability is that
after hitting the green target I expect stock to continue towards
yellow, whereas, after hitting yellow target I expect stock to
pullback somewhere in the middle of green and yellow targets .
I sell 75% of my position on yellow target unless stock gaps up
or down or blows through the yellow target without stopping . If
I see reversal after hitting yellow or market direction changing
then I liquidate my rest of the position which could be below
yellow target in case of long position or above yellow target in
case of short position . In other words the last one-fourth position
could be liquidated at lesser price than what I sold at yellow .
When the stock is in the middle of “yellow” and “red” target my
stop is set just below “yellow” target .
3.	 Red Target - This is the third target after “yellow”. This is the
target where I am expecting the stock to hit and pullback all the
way to yellow target. Therefore, I sell all my contracts whatever I
have left after selling at yellow target. The probability of hitting
red target is around 70%. Once the stock travels towards red
target my stop is set just below yellow target. The reason it is set
below yellow is that I am expecting stock to rebound after hitting
yellow target. In case it does not rebound then I am out of the
position completely.
4.	 Revised Red Target - If I am watching my trade and I see more
potential in the trade and confident that stock will go through
the “Red” target then I revised my “red” target. The stop is set
just below “red” target to participate in further gains.
5.	 Pullback Price - This is the price which I expect that stock could
pullback after I enter the trade. This serves various purposes.
For example, if I have spread trade long then I can close out the
short leg once the stock hits the pullback price and starts moving
upward. The second purpose is that there are trades where I do
not put all my investment in the beginning as I expect that stock
could pullback. Therefore, in this case I divide my investment
into two lots. The second lot will be invested in case the stock
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pulls back to the “pullback price” and rebounds . The pullback
price is determined based on various methods . Example, it could
be purely based on charts analysis on candles, it could be previous
support, it could be a simple moving average, weighted moving
average or volume weighted moving average or a trend line .
Importance
of Red Target
“The professional concerns himself with doing the right thing
rather than with making money, knowing that the profit
takes care of itself if the other things are attended to.”
 .
—Jesse Livermore
In the previous Chapter I have explained green, yellow and red
targets In this Chapter I will explain the importance of Red target .
Red target is the target where the stock is expected to hit and reverse
or pullback severely .
If you are long and stock gaps above at open and stays above the red
target then you are safe . If it gaps above red target and reverses and goes
down below red target then it is better to sell your contracts and lock
your gains . The reverse phenomenon is applicable in case of shorts .
You should pay more attention to the stock if it hits red target
after market is closed. If the stock hits red target after market close then
it must continue upward movement next day pre-market or at least
when the market opens. This means it should gap-up and continue
moving upward. If it does not then it is in your best interest to sell your
contracts and lock your gains or minimize your loss or get out at
breakeven. You can always get back in once the stock stabilizes. There is
always a new trade around the corner. Preservation of capital is the first
goal in trading. Making profit is secondary.
Let me give you an example of how you can protect your profit and
what you need to do.
Suppose red target is $18.50 and stock closes at $17.40. After
market is closed the stock jumps to $18.55. This means stock has hit
the red target and red target is no longer valid.
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Next day the stock should continue moving upward beyond $18 .55
at pre-market and also after the market is opened . If it does not continue
moving upward then you know must lock your gains within fifteen
minutes of the market open .
In short watch your stock after-market and pre-market for hitting the
red target whether you are long or short and when market opens take the
decision to hold or sell . Sometimes you may want to add to the position
as it could be gapping up due to some extra-ordinary news . I usually send
alert pre-market or right after the market is open advising members what
to do in such scenario .
The above concept is also applicable when you are short or have puts
in your portfolio . This means if red target is hit when market is closed
then when market reopens stock should immediately continue going
down beyond red target, otherwise you have to sell and lock gains .
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Executing
the Trade
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1 . Determining which Option to Buy
The option selection is based on target price and how fast
I estimate that the stock will hit the target price . If stock is trading
at $60 .00 and my target is $63 .00 and I am expecting that stock will
hit the target within thirty days then I would buy next month and
strike closer to the target which is $62 .50 in this case . This means when
stock reaches $63 .00 my option will be in the money and the time
value has been converted into intrinsic value giving me the most
bang for the buck . However, sometimes it is prudent to buy in-the-
money option for various reasons, such as out-of-the-money option does
not look attractive due to far away from the target price, open interest or
simply overpriced .
2 . Dividing the Capital into Two Lots
No matter how good the trade looks, I never put all my money at
once . I buy contracts worth 50% of capital as determined by
position-sizing and the rest 50% after testing the water to see if I am
right . I let the trade develop . Once I am pretty sure that trade is going
my way then I buy another 50% of allocated fund (based on position-
sizing) .
3 . Using Limit Orders Intelligently
Watch your limit orders carefully . You cannot walk away from limit orders
the way you can with stocks . Since the true value of an option directly
depends upon the price of the underlying stock, your “bargain bid” of 15
minutes ago may eventually be executed at a very disadvantageous price .
For example, let’s look at a stock at $50 with a 45 call option bid at $6 .00
and offered at $6 .50 .
You bid $6 .00, the stock drops quickly to $48 and you are the proud
owner at $6 .00 . Unfortunately, you should not have paid more than
$4 .50 at a stock price of $48 .00 . Therefore, you should watch your
limit order constantly to check whether it should be revised or
cancelled .
4 . Handling Partial Execution
Don’t be overanxious on a partial execution . After you have placed
an order to buy 10 options at $8 .70, you may get a message saying,
“you bought five at $8 .70, it’s your bid at $8 .70 for the remaining
five, and the option is offered at $9 .20’ . Instead of immediately
paying the extra $0 .50 for the five options to fill your total order, wait
a while . Since it is “your bid”, any options that come in to be sold at
the market or at $8 .70 (or less) will be yours (up to a limit of five,
of course) . Your chances are pretty good as long as the underlying
stock remains in a reasonable trading range . Of course, you should
remain in close contact with the broker or your online order screen so
that adjustments can be made in your order to respond to significant
movements in the stock .
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Beating
the Market
Maker via Show
or Fill Rule
“Show or Fill Rule” or “Limit Order Display Rule” is great help
for those traders who buy twenty contracts or less. The rule was enacted
through Exchange Act rule 11 Ac-1-4. This rule requires the market
makers to show or publish any order that improves the current bid or ask
prices unless it is filled. Any order between the current bid ask spread will
improve the market.
Before we go into the details of this rule, we need to understand the
basics of option quoting system:
Lets say you (John) want to buy 3 contracts of
February CAT 90 Calls which are trading at Bid
$6.00 and Ask $6.75
So what does this mean?
It means the market maker is bidding $6 for the option . This is the
price he is willing to pay if you want to sell your contract . On the
other hand he is asking $6.75 per contract to sell to you. In this buy
and sell process he is making 75 cents per contract. In other words we,
the option trader, always gets the worst price. This is our cost of doing
the trading business, besides paying commission to the broker.
Whereas market maker makes his money by providing liquidity in the
market.
When we get the quote, the bid price represents the highest bidder,
and the ask price represents the lowest offer or seller.
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Under the “Show or Fill Rule”, the market maker has two options:
1.	 Either he gives you three contracts at $6.30 or
2.	 Shows the Bid as $6.30 and Ask as $6.75
If he decides not to sell you at $6 .30 then when he shows the bid and ask
the spread will be 45 cents and is reduced from 75 cents .
As soon as you place your order, your bid will be shown on the top
which is $6 .30 .
Now lets say another trader (Tom) wants to sell 20 contracts of Feb
90 Calls but he does not want to sell at $6 .30 rather at $6 .50 . As soon as
he places his sell order the Bid and Ask will be displayed as follows:
Bid $6 .30 - Ask $6 .50
Spread is further reduced and now it is at 20 cents .
Remember, you (John) are bidding to buy at $6.30 and another
trader (Tom) is asking to sell at $6.50.
According to the rule, the bid and ask is valid for at least 20
contracts. This means the market maker must fill your order of 20
contracts or less at the current bid and ask price.
The general rule of thumb is that spread should not be more than 5
percent . Therefore, if the bid is $6 .00 ask should not be $6 .30 .
So, based on this rule you do not want to pay $6 .75 rather willing to
pay $6 .30 as you think this is the fair value of the option . Therefore, you
placed the order to buy 3 contracts of February CAT 90 Calls at $6 .30 .
This is your bid . You are bidding for the contracts at $6 .30 .
Prior to the “Show or Fill Rule”, the market maker was not obligated
to show your bid of $6 .30 . He would simply leave it as bid $6 .00 and
ask $6 .75 .
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So, if you are buying three contracts of CAT Feb 90 Calls at $6 .30,
the market maker is obligated to either sell you at $6 .30 or show the
bid at $6 .30 . At this time market maker is thinking that if I do not fill
the order at $6 .30 and rather show and post the order then by law I am
obligated to honor the price of $6 .30 for 20 contracts . In this process the
other seller (Tom) can sell at $6 .30 instead of $6 .50 or $6 .00 . Therefore,
Tom will get better price which is $6 .30 instead of $6 .00 .
Therefore, market maker will fill your (John) order of three contracts
at $6 .30 quickly to get you out of the way and so he does not have to
show your order to the market . The other seller (Tom) will not be able
to get $6 .30 and has to sell at $6 .00 if he wants to sell or wait for the bid
to improve .
It is advised that first place the order in between bid and ask and see
if you get filled . This will make huge difference on your profits in the
long run . However, if the stock is moving fast in your direction and the
potential in the trade is significant then fighting with the market maker
is not worth, as the trade may slip away . If my order does not get filled
within 15 seconds at my bid price I either improve my bid or pay at ask
and move on with the trade as I do not want to miss out on the profit .
34
Uptick and
Upbid Rule
After the SEC reinstated a new version of the uptick rule following
the 2008 financial crisis, there has been very little information available
online . If you search for “uptick rule” most of the info you will find i s
on the old uptick rule . The current version isn’t really an uptick rule at
all, but rather an up-bid rule . This new version was first put into effect
in November 2010 .
Simply put, shares of a stock cannot be sold short at or below the best
bid when the rule is in effect . The short seller must sell on the offer and
wait for a buyer to fill his offer . The rule goes into effect when a stock’s
price decreases by 10% or more from its previous day’s close . Once a
stock has dropped 10% from its previous day’s close (even if just briefly
dropping that far) the rule will then be in effect f or the rest of the day
and the next trading day . The rule can only be triggered during regular
trading hours although if it is triggered it remains in force during
after-hours and pre-market trading .
For those who use Interactive Brokers’ TWS platform, a little red
circle will appear to the right of the stock description when the
uptick rule is in effect. If you mouse over the red circle it will say
“Short sale restriction is in effect from [date] to [date].”
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To Chase or
Not To Chase
Most of the time alerts can be filled easily with the buy price
provided. However, sometimes the trade seems to be slipping away fast.
At this moment members have to decide to chase or not to chase the
trade.
The following guidelines will help you in knowing how much extra
can be paid for the trade:
1.	 If recommended option buy price mentioned is in the range
of $0.70 - $1.00 then we can pay 5 cents over the buy price
mentioned.
2.	 If recommended option buy price mentioned is in the range
of $1.05 - $2.50 then we can pay 10 cents over the buy price
mentioned.
3.	 If recommended option buy price is in the range of $2.55 - $4.00
then we can pay 15 cents over the buy price mentioned.
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4 . If recommended option buy price is in the range of $4 .05 - $6 .00
then we can pay 20 cents over the buy price mentioned .
5 . If recommended option buy price is in the range of $6 .05 - $8 .50
then we can pay 30 cents over the buy price mentioned .
6 . If recommended option buy price is in the range of $8 .55 -
$12 .00 then we can pay 40 cents over the buy price mentioned .
7 . If recommended option buy price is in the range of $12 .05 -
$20 .00 then we can pay 50 cents over the buy price mentioned .
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It is also suggested that when you are paying above the
recommended buy price for the option contracts as per guidelines
given above then you should buy only one-half of the number of
contracts as per Position Sizing . The rest of the contracts should be
bought at much lower price to average down per contract cost .
Another factor in deciding whether to pay extra is to look at the
yellow target . If stock is still far enough from yellow target then it is ok
to pay extra . However, if you see that by paying extra there is not much
potential left in the trade considering yellow target then I suggest to leave
the trade alone and either wait for the next trade or send me email . There
is always something to trade .
37
Eliminating Greed
through Conditional
Order
“My plan of trading was sound enough and won oftener
than it lost. If I had stuck to it I’d have been right perhaps as
often as seven out of ten time.”
—Jesse Livermore
After buy order for my contracts are filled I set the order to sell my
contracts based on the conditional order taking into account the three
targets and number of contracts I have purchased.
The conditional order for Calls contract is set as follows:
“Sell XYZ calls contracts at market
when XZY stock price is equal to
or greater than certain price”.
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In case of Puts contracts I set my conditional order as
follows:
“Sell XYZ puts contracts at market
when XYZ stock price is equal to
or less than XYZ stock price” .
Setting the conditional order eliminates the need to calculate target bid
prices as well as greed factor from trading .
Some points to remember:
1 . Order is set at “market” not at limit
2 . Make sure greater than or equal is set for Calls and
3 . Less than or equal is set for Puts
4 . Test the Conditional order for one contract first and when it
works fine and you feel comfortable then set for actual contracts
you have .
3 8
Protecting
Your Capital
via Stop Price
“Your protective stop is like a red light.You can go through it,
but doing so is not very wise! If you go through town running
every red light, you probably won’t get to your destination
quickly or safely.”
—Richard Harding
You do not have a trading system unless you know exactly when you
will get out of a market at the time you enter it . Your worse case exit,
which is designed to preserve your capital, should be determined ahead
of time . In addition, you should also have some idea about how you plan
to take profits and a strategy for letting your profits run .
Market legend William O’ Neil said “The whole secret to winning
in the stock market is to lose the least amount possible when you’re
not right .”
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There are many varieties of stop loss and depending on your risk
tolerance and instrument you are trading you would select the stop loss
method accordingly.
Below are some of the few stop loss methods used by professional
traders around the world:
• Fixed Loss Amount Stop
• Fixed Percentage Stop
• Price Trailing Stop
• Percentage Trailing Stop
• Volatility Trailing Stop
• Moving Average Crossover Stop
• Support and Resistance Break Stop
• Channel Breakout Stop
• Trend Line Break Stop
• Inactivity Stop
• Time Limit Stop
In this article we will talk about five stop loss methods and the rest
you can do the research on your own and implement in your trading . So
let’s begin .
Fixed Loss Amount Stop
Many professional traders suggest to use fixed loss amount stop . It
gives them some psychological advantage . You determine before hand
how much you are willing to lose on a trade and set that as a stop
beforehand . For example, you invest $2000 in a trade and bought
100 shares of a stock at $20 per share . You have decided to lose $500
in the trade . This means when stock is trading at $15 you want to get
out of the trade .
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4 0
Fixed Percentage Stop
Some traders set stops by allowing the price to retrace a certain
percentage of the entry price . For example, you do not want to lose
more than 10 percent in a trade . You bought 100 shares at $20 per
share so you would set the stop at $18 . In case stock retraces and goes
below $18 you are out with 10 percent loss .
Since you’re trading can take you on a roller coaster of emotion,
this discipline helps to calm those emotions and take them out of your
trading, so that you’re trading with your mind again, and not your heart .
Sounds good, right? However, there are a couple of problems with
this approach .
The first problem is that your stop loss may not take into account the
daily movement of the stock (called the Average True Range, or ATR) .
This is the daily fl uc tuation that a stoc k naturally oscillates through
during a day . You can find the ATR of a stock by looking at a daily chart,
and seeing how much the stock moves up or down in a day, and ensure
that your stop loss is set outside of this range, to prevent you being taken
out of a position due to normal market fluctuation and not simply a
minor pullback .
The second problem is that the stock may be on a short-term
downward trend, but may be positioned to recover and climb back up to
even higher highs, and by setting a very tight stop, you may lose out on
the upswing by exiting early .
There are a number of ways to implement stop loss rules to avoid the
situation described above . One such way is to use a trailing stop that will
move with the market as it advances but will stay static if the trade moves
against you . A popular method is to trail the stop based on the low for
long trades and the high for short trades or the open or previous day’s
close can be used . The only problem with this type of trailing stop is that
you have to move and set the stops manually each day, since there are
very few trading platforms that can do this for you automatically . Some
more automated solutions would be: price trailing stops, percentage
trailing stop, and volatility trailing stop .
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Price Trailing Stop
A price trailing stop uses a fixed price distance to trail each bar’s
stop . This is useful especially where you may want to limit your stop
distance to a fixed predetermined value, i .e . $0 .50, $1 .00, $5 .00 etc .
One draw back of this stop is that $1 could be a large move for one
stock and very small move for another . This is why the price trailing stop
should mainly be used on individual stocks whose movement is well
known to a trader .
Percentage Trailing Stop
For stocks with similar volatility levels, the percentage trailing stop
can offer better results . Here you can start with say a 5% stop loss, but
have it trail with the market higher while allowing for inter-day and
intra-day volatility . However, similar to the price trailing stop, for
some stocks a 5% is a large move, and for others not so large .
Volatility Trailing Stop
A third trailing stop option is the volatility trailing stop . As the
name suggests the stop distance is matched to the volatility of the
individual stock . A trader can obtain this information by checking the
ATR (Average True Range) indicator . For those not familiar with ATR,
the indicator measures the opening and closing prices each day over a
14 to 30 day period . It then averages out the movement to provide
the average daily trading range for the stock . This ensures that whether
the stock usually moves 1% or 10% daily, it will not whipsaw you
out of the trade on normal trading movement .
The best stop strategy and settings are best left up to you and your
risk tolerance . I even know a number of traders that use a combination of
strategies . They initially use a price stop to keep losses small in case they
made a mistake on the entry . But then, once the trade is showing a profit,
they give more room using a percentage stop .
Ultimately, you want to keep another important rule of successful
trading in mind when you set your stops: “Keep your losses small and let
your winners run .”
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Money management is a complex topic, and can certainly
cover several more articles, but these are the basics, and you can
start from here . The most important factor in determining the nature
of your stop is to determine if it makes sense given your objectives,
the instruments you are trading, and your temperament . You must
use stop loss which makes sense .
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4 3
Understanding
Expectancy
“At the heart of all trading is the simplest of all concepts--that
the bottom-line results must show a positive mathematical
expectation in order for the trading method to be profitable.”
—Chuck Branscomb
What is expectancy in a nutshell?
A trading system can be characterized as a distribution of the
R-multiples it generates. Expectancy is simply the mean or average
R-multiple generated.
What does that mean?
By now you should know that in the game of trading it is much more
efficient to think of the profits and losses of your trades as a ratio of
the initial risk taken (R) .
But let’s just go over it again briefly:
One of the real secrets of trading success is to think in terms of risk-
to-reward ratios every time you take a trade. Ask yourself, before you
take a trade, “What’s the risk on this trade? Is the potential reward
worth the potential risk?”
So how do you determine the potential risk on a trade? Well, at the
time you enter any trade, you should pre-determine some point at
which you’d get out of the trade to preserve your capital. That exit
point is the risk you have in the trade or your expected loss. For
example, if you buy a $40 stock and you decide to get out if that stock
falls to $30, then your risk is $10.
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The risk you have in a trade is called R . Th a t s hould b e e asy t o
remember because R is short for risk . R can represent either your risk
per unit, which in the example is $10 per share, or it can represent your
total risk . If you bought 100 shares of stock with a risk of $10 per
share, then you would have a total risk of $1,000 .
Remember to think in terms of risk-to-reward ratios . If you
know that your total initial risk on a position is $1,000, then you can
express all of your profits and losses as a ratio of your initial risk . For
example, if you make a profit of $2,000 (2 x $1000 or $20/share),
then you have a 2R profit . If you have a profit of $10,000 (10 x
$1000) then you have a profit of 10R .
The same thing works on the loss side . If you have a loss of
$500, then you have a 0 .5R loss . If you have a loss of $2000, then you
have a 2R loss .
But wait, you say, how could you have a 2R loss if your total risk
was $1000? Well, perhaps you didn’t keep your word about
taking a $1000 loss and you didn’t exit when you should have exited .
Perhaps the market gapped down against you . Losses bigger than 1R
happen all the time . Your goal as a trader (or as an investor) is to keep
your losses at 1R or less . Warren Buffet, known to many as the
world’s most successful investor, says the number one rule of
investing is to not lose money . However, contrary to popular belief,
Warren Buffet does have losses. Thus, a much better version of
Buffet’s number one rule would be to keep your losses to 1R or less.
When you have a series of profits and losses expressed as risk-
reward ratios, what you really have is what Van calls an R-
multiple distribution. As a result, any trading system can be
characterized as being an R-multiple distribution. In fact, you’ll
find that thinking about trading system as R-multiple
distributions really helps you understand your system and learn
what you can expect from them in the future.
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Let’s look at an example:
Entry Price, Stop, 1 R, Actual Exit Price,
Profit/Loss
Trade One = $50 .00 $45 .00 $5 .00 $60 .00 = 2 R gain
Trade Two = $22 .00 $20 .00 $2 .00 $16 .00 = 3 R loss
Trade Three = $100 .00 $80 .00 $20 .00 $300 .00 = 10 R
gain Trade Four = $79 .00 $70 .00 $9 .00 $70 .00 = 1 R
loss Total = 8 R Gain
Expectancy (Mean = 8 R / 4) 2 R
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So what does all of this have to do with expectancy?
When you have an R-multiple distribution from your trading system,
you need to get the mean of that distribution . (The mean is the average
value of a set of numbers) . And the mean R-multiple equals the system’s
expectancy .
Expectancy gives you the average R-value that you can expect from
the system over many trades . Put another way, expectancy tells you how
much you can expect to make on the average, per dollar risked, over a
number of trades .
So when you have a distribution of trades to analyze, you can look at
the profit and loss of each one of the trades that was executed in terms of
R (how much was profit and loss based on your initial risk) and determine
whether the system is a profitable system .
So this “system” has an expectancy of 2R, which means you can
“expect” to make two times what you risk over the long term using this
system, based on the data that you have available .
Please note that you can only get a good idea of your system’s
expectancy when you have a minimum of thirty trades to analyze, and
the preference would be to have 100 to 200 trades to really get a clear
picture of the system’s expectancy .
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So in the real world of investing or trading, expectancy tells you the
net profit or loss that you can expect over a large number of single unit
trades . If the total amount of money in the losing trades is greater than
the total amount of money in the winning trades, then you are a net
loser and have a negative expectancy . If the total amount of money in the
winning trades is greater than the total amount of money in the losing
trades, then you are a net winner and have a positive expectancy .
Example, you could have 99 losing trades, each costing you a dollar .
Thus, you would be down $99 . However, if you had one winning trade of
$500, then you would have a net payoff of $401 ($500 less $99)--despite
the fact that only one of your trades was a winner and 99% of your trades
were losers .
We’ll end our definition of expectancy here because it is a subject that
can become much more complex .
Van Tharp has written extensively on this topic and it is one of the
core concepts that he teaches . As you become more and more familiar
with R-Multiples, position sizing and system development, expectancy
will become much easier to understand .
To safely master the art of trading or investing, it is best to learn and
understand all of this material . Although it may seem complex at times,
we encourage you to persevere because like any worthwhile endeavor, as
soon as you truly grasp it and then work towards mastering it, you will
catapult your chances of real success in the markets .
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Exiting
the Trade
“A man must believe in himself and his judgment if he
expects to make a living at this game.”
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—Jesse Livermore
There are two strategies to exit the trade with profit . These are:
1 . Based on Profit Objective
If my target is to make 20% on the trade then I calculate the target bid
based on 20% profit and place Good Till Cancel Order . I also put the
sell order for 20% to 25% profit when I don’t have time to calculate the
target bid and the stock is moving fast . If I am out on the same day with
20% to 25% profit then I am happy . The target profit objective varies
based on option price . For option contract trading at $6 and above
my profit objective could be 10% whereas for option trading at $3 my
profit objective would be 20% . In both scenario I am targeting $0 .60 per
contracts .
2 . Based on Target Price
If I am basing my exit on stock target price then I place my good-
till-cancel order to sell one-fourth at first target, one-half at second
target and one-fourth at third target . If the stock has not reached its
target after certain number of days of its upward movement and
showing sign of pullback then I go ahead and liquidate my position
and lock my profit as there is always a trade waiting for me around the
corner . If the stock is not doing its thing after certain days have passed
then I try to liquidate the position at breakeven too .
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General
Guidelines on
Selling Your
Contracts
Below is the general guideline on how many contracts to sell at what
target. You can use the multiplier. For example, if you have 8 contracts
then see number 4 below and multiply by 2.
If you have 1 contract
then ideally sell at yellow target.
If you have 2 contracts
then sell 1 at green and 1 at yellow target.
If you have 3 contracts
then sell 1 each at green, yellow and red target.
If you have 4 contracts
then sell 1 at green, 2 at yellow
and 1 at red target.
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Keeping the
Trading Journal
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Discipline means designing, testing, and following your trading
system. It means learning to enter and exit in response to predefined
signals rather than jumping in and out on a whim. It means doing the
right thing, not the easy thing. And the first challenge on the road to
disciplined trading involves setting up a record-keeping system.
Becoming a good trader means taking several courses - psychology,
technical analysis, and money management. Each course requires its
own set of records. You will have to score high on all three in order to
graduate. Your first essential record is a spreadsheet of all your trades. You
have to keep track of entries and exits, slippage and commissions as a well
as profits and losses.
Another essential record shows the balance in your account at the
end of each month. Plot it on a chart, creating an equity curve whose
angle will tell you whether you are in gear with the market. The goal is
a steady uptrend, punctuated by shallow declines. If your curve slopes
down, it shows you are not in tune with the markets and must reduce the
size of your trades. A jagged equity curve tends to be a sign of impulsive
trading.
Your trading diary is the third essential record. Whenever you enter a
trade, print out the charts that prompted you to buy or sell. Paste them
on the left page of a large notebook and write a few words explaining why
you bought or sold, stating your objective and a stop. When you close
out that trade, print out the charts again, paste them on the right page
and write what you have learned from the complete trade.
Traders fail because of impatience and lack of discipline. Good
records set you apart from the market crowd and put you on the road to
success. If you are serious about learning to trade, start with a relatively
small account and set a goal of learning to trade rather than making a lot
of money in a hurry. Keep a diary and put a performance grade on every
trade.
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How I
Trade Gaps
Gaps trading is one of my favorite trading strategies . It is also one
of the difficult strategies to trade as trader can get caught in the wrong
direction and start losing right away . This could be very demoralizing .
Therefore, understanding gaps, what causes gaps and what to look for in
trading gap is very important . Dozens of stocks gap up or down every
day but not all stocks are trade-able . There are only handful of stocks
which are good trade candidates on any given day . Therefore, knowing
which one to trade and which one to avoid is crucial to improving the
portfolio balance . So lets begin in understanding the gaps and in the next
article we will go in detail on how to trade gaps and fade gaps by using
Calls and Puts .
1 .1 What Are Gaps
There are essentially three ways that the price of a stock can open
for trading relative to its prior closing price . It can open higher, lower,
or at the same price .
When there is a significant difference between a stock’s prior day
closing price and its opening price, it is called a gap. If the opening
price is higher than the prior closing price, it is called a gap up. If the
opening price is lower than the prior closing price then it’s a gap down.
When a stock opens at essentially the same price as the prior
close, or the difference is very small, then it is considered to be a flat
open.
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1 .2 What Causes Gaps
A variety of factors can cause the market or individual stocks to
gap . Examples include late breaking news on specific stocks, earnings
reports, analyst upgrades or downgrades, overnight futures trading,
economic news, major world events, or simply an imbalance between
supply and demand .
Regardless of the specific catalyst, gaps occur due to excess demand
on the buy or sell side, which is further exaggerated by low volume
trading that takes place outside of regular market hours . Since the total
number of buyers and sellers is lower during post - and premarket hours,
any significant buying pressure pushes stock prices higher than would
normally occur during regular market hours . The opposite is true when
there is more selling pressure .
1 .3 When Gaps Occur
Gaps occur every day of the trading week but mostly on Mondays
and Fridays . The larger the gap, the better the potential in the trade . If
stock is gapping up on news such as major analyst upgrade or an upside
earnings announcement, then the chances are that stock will continue
moving upward . But the stocks which gap up for no reason will likely
pullback .
1 .4 Types of Gaps
There are mainly four types of gaps . Each of these is described below:
1 .4 .1 Common Gaps
Sometimes referred to as a trading gap or an area gap, the common
gap is usually uneventful . In fact, they can be caused by a stock going
ex-dividend when the trading volume is low.
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These gaps are common (get it?) and usually get filled fairly quickly .
“Getting filled” means that the price action at a later time (few days to
a few weeks) usually retraces at the least to the last day before the gap .
This is also known as closing the gap or closing the window (in
Japanese) .
1 .4 .2 . Breakaway Gaps
Breakaway gaps are the exciting ones . They occur when the price
action is breaking out of their trading range or congestion area . To
understand gaps, one has to understand the nature of congestion areas in
the market . A congestion area is just a price range in which the market
has traded for some period of time, usually a few weeks or so . The area
near the top of the congestion area is usually resistance when
approached from below . Likewise, the area near the bottom of the
congestion area is support when approached from above . To break
out of these areas requires market enthusiasm and, either, many more
buyers than sellers for upside breakouts or more sellers than buyers for
downside breakouts .
Volume should pick up significantly, for not only the increased
enthusiasm, but many are holding positions on the wrong side of the
breakout and need to cover or sell them . It is better if the volume does
not pick up until the gap occurs . This means that the new change in
market direction has a chance of continuing . The point of breakout
now becomes the new support (if an upside breakout) or resistance (if a
downside breakout) . Don’t fall into the trap of thinking this type of gap,
if associated with good volume, will be filled soon . It might take a long
time . Go with the fact that a new trend in the direction of the stock has
taken place, and trade accordingly .
1 .4 .3 . Runaway Gaps
Runaway gaps are also called measuring gaps, and are best described
as gaps that are caused by increased interest in the stock . For runaway
gaps to the upside, it usually represents traders who did not get in
during the initial move of the up trend and while waiting for a
retracement in price, decided it was not going to happen . Increased
buying interest happens all of a sudden, and the price gaps above the
previous day’s close . This type of runaway gap represents an almost
panic state in traders . Also, a good
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uptrend can have runaway gaps caused by significant news events that
cause new interest in the stock .
1 .4 .4 Exhaustion Gaps
Exhaustion gaps are those that happen near the end of a good up -
or downtrend . They are many times the first signal of the end of that
move . They are identified by high volume and large price difference
between the previous day’s close and the new opening price . They can
easily be mistaken for runaway gaps if one does not notice the
exceptionally high volume .
It is almost a state of panic if the gap appears during a long down
move and pessimism has set in . Selling all positions to liquidate holdings
in the market is not uncommon . Exhaustion gaps are quickly filled as
prices reverse their trend . Likewise, if they happen during a bull move,
some bullish euphoria overcomes trades, and buyers cannot get enough
of that stock . The prices gap up with huge volume; then, there is great
profit taking and the demand for the stock totally dries up . Prices drop,
and a significant change in trend occurs . Exhaustion gaps are probably
the easiest to trade and profit from .
1 .5 How I Trade Gaps
Ideally when a stock gaps up, we should not buy “Calls” unless it
makes a new high after 10:00 AM EST . Similarly, if a stock gaps down,
we should not buy “Puts” unless it makes a new low after 10:00 AM
EST . When stock gaps up it makes a high and then reverses to the
downside but stays above the open price . It trades aggressively between
open price and high price . Professionals try to short at high made
during the first thirty minutes of the market open . They place the stop
just little above the high which was made during the first thirty
minutes . At this stage the battle rages between the bulls and the bears
where bears try to push it down and bulls buy on every dip and
eventually one of them wins .
1 .5 .1 How I Trade Gap Up - By Buying Calls
I watch the five-minute charts and see how stock is trading .
Usually it oscillates between open and high .
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I also watch buy and sell pressure to figure it out which side will likely
win . Sometimes it is evident from the get-go who will win sometimes it
is not clear till later stage . To enter long the ideal entry is when stock
pulls back and comes closer to the open price but do not violate it . As
soon as the stock comes close to open price and buying pressure starts
building up that’s when we could go long with the stop either just below
the open or below the support price which is below the open price .
This is low risk high reward trade and decision has to be made quickly
and trade executed at lightening speed . If the amount of gap is
significantly high then the profit target could be just below the high
made so far . Another entry for going long is when stock breaks the high
made during the first 30 minutes . The stop in this case is below the
open price of that day or the low made so far . If there is a support level
below the open then the stop is below this support rather than below
open . Usually the stock dips below the open to take out the stop and
then it moves upward very fast .
When I am buying calls then I buy only half lot and keep another lot
to buy either at lower price (near open) or buy second lot when it breaks
the high made (within 30 minutes) decisively and moves aggressively
upward .
1 .5 .2 How I Trade Gap Up - By Buying Puts
When the stock gaps up on news then analyzing this news is
very important . Before the market opens reading the news on the
stocks which are gapping up is crucial to understanding what the stock
would eventually do after the stock starts trading during normal market
hours . If the stock is gapping up for no good reason, that is no
substantial news to justify the gap, then it is likely a good candidate
for fading the gap . In other words if the gap is overly exaggerated the
stock will likely reverse its direction to the downside and if the gap
amount is significant then a trader can buy Puts to take advantage of
the reversal . Another factor which helps in my decision whether to fade
the gap or trade in the direction of the gap is where the stock is trading
at open with respect to the resistance . If the stock gaps up and hit the
resistance and unable to conquer the resistance right at the beginning
then it has very high chance that it will fail to cross the resistance later
during the day and rather it will sell off . If this is the case then a trader
can buy Puts with stop 50 to
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70 cents above the resistance line and lock gains when stock approaches
the support . The potential b etween resistance a nd support should be
enough to justify buying Puts as option trading requires certain dollar
amount move to justify the spread between bid and ask .
1 .5 .3 How I Trade Gap Down - By Buying Puts
Gap down strategy is the same as gap up but in reverse . Stocks gap
down due to some major bad news . When stock gaps down a trader
needs to evaluate the further potential in the trade, buy/sell pressure,
any major support nearby which could stop further decline in the stock
move . For example, if stock gaps down and 200 day moving average is
close by then it has high probability that it will stop going down
further once it hits 200 day moving average . Even if it dips below 200
day moving average it could bounce back above .
If the stock has gap down huge and there is no significant support
nearby and selling pressure is rising then the chances are that it will
continue going down in the direction of the gap . During the first 30
minutes of market open - day traders try to fade the gap by going long
and placing the stop just below the low made during the 30 minutes .
Once this low is broken then the selling pressure starts rising and they
switch their position from long to short . It is at this moment or knowing
that stock is further deteriorating that a trader can buy put with a stop
above the high made so far . However, if the gap is huge this high could
be far from the entry point and if stock reverses to the upside then trader
can lose significant portion of its trading amount by the time he stops
out . Therefore, I look for another resistance point which is way below the
open or high and if stock closes above this resistance line then I close my
Puts position otherwise the profit target is slightly above the next major
support . Since gap down trading can be fast and furious and stock could
reverse its direction after hitting the support therefore, I do not take risk
of greed factor to come into play . I place conditional order (described
later in this guide book) and let the price move take me out of the trade
with profit . In this way greed factor is eliminated and I am out of the
trade with decent profit . Knowing the resistance, support is the key to
trading gap down trades .
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1 .5 .4 How I Trade Gap Down - By Buying Calls
When stock gaps down and hit support it stops going down further .
Not only it stops going down but starts moving up aggressively .
Recognizing this change in trend a trader can buy Calls with stop below
the low made during the first 30 minutes . The profit target is the first
major resistance . The move could be fast therefore, I prefer to place
conditional order and let the trade close itself with profit . The
conditional order eliminates the greed factor .
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How I Trade
Breakouts
“Breakouts and breakdowns attract many participants but
require precise timing to turn a profit. Insiders know that
these hot spots attract dumb money. They initiate whipsaws
after each volume surge to shake out weak hands. This ensures
that the majority enters positions just as the market reverses.”
.
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Not all breakouts are from Cup-With-Handle base formations .
Stocks that successfully retest their resistance level usually rebound
forcefully to fresh new highs .
One form of breakout is called “Continuation Breakouts” .
Continuation type breakouts are typical on up trending momentum
stocks moving to new highs . The resistance the breakout breaks through
is usually a weaker type of resistance . For example, stock makes a new
52-week high around $151 and then pulls back 3-5 points . Then it
starts rising again and breaks price point of $151 with volume . This is
considered as Continuation Breakout .
Higher quality breakouts (fast and big move) usually occur for flat
top breakouts with longer top consolidation periods (1 week to 1 month
in time frame) . Flat top breakouts usually allow for tighter breakout stop
limits enabling higher quality profit/loss trades .
When stocks breakout after strong rally then it is possible the stock
may not go further up as the move has already taken place . During the
day of the breakout the volume has to be very high .
Trader should be cautious on breakouts that occur on earnings or
news events (upgrades) . These can cause false breakouts . Some of the
better breakouts usually occur when there is no news . Therefore, traders
should be capable of recognizing the failed breakouts and should get out
of the trade immediately . The initial loss is the best loss in this case as
any hesitancy can result in disaster . Some price action can indicate that a
retest is way underway while in the background that very price action was
the beginning of a sell off and eventual price breakdown; with a close
below its important support line. We also need to be cautious on
breakouts after a previous rally. While breakouts do occur their profit may
be less and stop loss may need to be higher.
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T r a d e G e n i e
G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
Trader should master the breakouts with unwavering execution . Some
of the best breakouts can be found by making a list of breakout candidates
prior to the actual breakout and then watch for the abrupt upward stock
movement to trigger an entry point . I monitor breakout candidates like
a hawk and when it starts trading above the important resistance line and
volumes starts increasing and meet my minimum criterion that’s when I
enter the trade with half lot . Once the stock establishes itself as successful
breakout then I add another half to my position . Sometimes we all have
the urge to cheat a little bit and enter prematurely into the breakout,
thinking that if a stock is eventually going to breakout then why not buy
it at low price . This is not disciplined trading rather trading with greed .
If a breakout is going to happen then the gain will be enormous so it is
advisable to wait for confirmation of the breakout .
Be cautious on breakouts after a previous rally . While breakouts do
occur their profit may be less and stop loss may need to be higher .
61
How I Trade
Opening Range
Breakout
The market opens and your favorite watch list equity is moving
upward, so you decide to go long and purchase shares or calls . Then are
you left wondering why after twenty five minutes of the market open it
stalls and stops moving up? For example, one trading day you noticed
that PSX opens at $50 .50, dipped slightly and made a low of $50 .25
and then started aggressively moving upwards . You decided to chase the
stock and bought when it was trading at $51 .40 . After you established
your position, PSX continued to climb further to $51 .65 . Then around
9:55 am EST PSX stopped its upward climb and traded in the narrow
range of $50 .70 and $51 .20 for the remainder of the day . I used to get
stuck in trades like these till I came across the concept of Opening Range
Breakout .
Statistics indicate that only 1/3 of stocks make their high or low of
the day within the first 30-minutes of the market open . This means
the remaining 2/3 of the equities make new highs or new lows after the
first 30 minutes has elapsed . So if a trader buys a stock during the
first 30 minutes, there is a high probability that the trade will not
materially move up for the remainder of the day. Therefore if you are
determined to make decent money trading stocks you need to
understand and apply the invaluable concepts of Opening Range and
Opening Range Breakout.
Let’s first understand the concept of Opening Range. The
Opening Range is defined in terms of time and price.
TradeGenie.com Money Market Mastery
T r a d e G e n i e
G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
6 2
TradeGenie.com Money Market Mastery
T r a d e G e n i e
G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
The time element is simply the first X number of minutes in the
trading day where the trader defines the time element in accordance to
his/her personal trading style . Since I am swing trader, I concentrate
on a 30 minute Opening Range by progressively examining the 5
minute, 15 minute interval and then finally make my decision on
the 30 minute time frame .
To better understand the concept of Opening Range let’s consider
the PSX example mentioned above . In this example PSX made a low of
$50 .25 and a high of $51 .65 . Therefore, the 30-minute Opening Range
for PSX is simply defined as $50 .25-$51 .65 . Market professionals mostly
use a 30-minute Opening Range due to economic reports being released
at 10 am EST . These reports affect the market sentiment from bullish
to bearish or vice versa and thus stocks react positively or negatively .
The other factor is also related to stocks themselves . Stocks may also
have news which is driving their moves . Once the news is digested and
analyzed stocks move in normal fashion .
Based on the example above, the Opening Range price range element
for PSX is $50 .25-$51 .65 using a 30 minute time frame? Therefore,
when a stock starts moving above the opening range high it is considered
as bullish, whereas if the stock is trading below the opening range low
it is considered as bearish . This is the fundamental starting point for the
trader to understand and trade the Opening Range . However, there is
more to it than just price and time . The third variable is the volume,
but before we bring volume into the picture we need to understand the
concept of breakout, resistance and support .
Understanding Breakout
To clearly understand Opening Range a trader needs to be
intimately familiar with the breakout concepts which I have
previously described in this eBook . For a quick refresher please
reference - “How I Trade Breakouts” mentioned earlier .
6 3
Understanding Resistance and Support
The high and low made during the Opening Range period
can be considered as lines of resistance and support respectively;
otherwise the stock would have moved higher or lower depending on
the market sentiment during the first 30 minutes . To better see
these resistance and support levels switch to a 5-minute time frame
to illustrate the consolidation pattern at both the high and the low .
This will visually reinforce the corresponding lines of support and
resistance .
Now that support and resistance are clearly defined by the high
and the low of the 30-minute Opening Range, then once the stock
breaks above or below one of these two lines then you can take the
decisive action . If you cannot clearly see either the support or the
resistance of a stock, then it is prudent to move to the next stock which
shows definitive areas of support and resistance .
TradeGenie.com Money Market Mastery
T r a d e G e n i e
G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
64
Importance
of Volume
Earlier we talked about price and time with regards to the
Opening Range . In this section we will discuss about the importance of
volume . As we know there are 8000 stocks listed on trading exchange .
And all of these stocks are making lows and high during the first 30
minutes of trading . So how does a trader determine which few stocks to
concentrate on when the market opens? The answer lies in the volume .
Those stocks which are moving with high volume at the market open
are the first area of focus . On any bullish or bearish day, the number of
stocks trading with high volume could reach to 500 or more . It is not
possible for any human being to manually evaluate this list to identify
good potential trading candidates . Therefore, it is suggested that you
should concentrate on preselected basket of stocks which you have
selected based on price, average volume and average true range .
If you trade options, then further restrictions will be used to identify
option-able stocks which have good history of options, decent spread,
high option volume and high open interest . Based on these criteria you
may come up with a basket of 300 stocks which you can focus on
during a trading day. Therefore, your Opening Range breakout strategy
will be applied only to these 300 stocks.
When the market opens I filter my basket of stocks for those
trading at high volume.
TradeGenie.com Money Market Mastery
T r a d e G e n i e
G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
6 5
For example, stocks which are trading upward at twice their normal
volume have higher chance of continuation to upside than the stocks
which are moving up only at 50 percent of its normal volume . Once I
apply the volume filter, I only get handful of stocks to concentrate upon .
This makes my job easier to identify one or two good candidates to trade
that day . My Opening Range strategy is then applied to these stocks
which are trading at high volume .
Let’s say I have basket of 300 stocks based on the criteria I have
identified above . At market open, I apply the volume filter and it usually
returns approximately 40 aggressively upward moving stocks on a bullish
day . When I apply a 5-minute Opening Range filter to these 40 stocks,
then I may find that only 15 stocks are moving beyond the high made
during the first 5-minutes of market open . Therefore, I concentrate on
these 15 stocks starting from the sixth minute of market open .
I scroll through these 15 stocks quickly using daily and 60-minutes
charts to see bigger picture of how these 15 stocks are trading . Looking at
these charts I create a short list of 8 - 10 stocks using various criteria such
as crossing of 50-day or 200 day moving average from below, determine
if it is oversold, or whether the stock is in continuation of previous trend
or starting new trend . Most importantly, I gauge how much potential
this stock has to capture some decent gains if I trade options .
In addition to the 5-minute Opening Range window I have set up a
15-minute Opening Range window . I now review the 8- 10 stocks which
have been screened using the 5-minute Opening Range and longer time
interval chart analysis to see which stocks show up in my 15-minute
Opening Range window . This tells me that other stocks have stopped
moving and are going through consolidation or pulling back .
Let’s say I now have 5 stocks on my 15-minute Opening Range
window allowing me to immediately monitor their subsequent price
action . At this time, I check the news on these 5 stocks, whether earnings
TradeGenie.com Money Market Mastery
T r a d e G e n i e
G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
66
Granting Profitable Trades Daily - Trade Genie
Granting Profitable Trades Daily - Trade Genie
Granting Profitable Trades Daily - Trade Genie
Granting Profitable Trades Daily - Trade Genie
Granting Profitable Trades Daily - Trade Genie
Granting Profitable Trades Daily - Trade Genie
Granting Profitable Trades Daily - Trade Genie
Granting Profitable Trades Daily - Trade Genie
Granting Profitable Trades Daily - Trade Genie
Granting Profitable Trades Daily - Trade Genie
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Granting Profitable Trades Daily - Trade Genie

  • 2. Contents Swing Trading Strategy . . . . . . . . . . . . . . 09 Earnings Play Strategy . . . . . . . . . . . . . . 10 Indexes, ETF and Ultra Short Trading . . . . . . . . . . 1 2 Understanding Position Sizing Part 1 . . . . . . . . . 14 Understanding Position Sizing Part 2 . . . . . . . . . 17 Position Sizing How much is enough? . . . . . . . . . 20 Dollar Cost Averaging . . . . . . . . . . . . . . 22 Understanding Targets . . . . . . . . . . . . . . 26 Importance of Red Target . . . . . . . . . . . . . 28 Executing the Trade . . . . . . . . . . . . . . . 30 Beating the Market Maker via Show or Fill Rule . . . . . . 32 Uptick and Upbid Rule . . . . . . . . . . . . . . 35 To Chase or Not To Chase . . . . . . . . . . . . . 36 Eliminating Greed through Conditional Order . . . . . . 38 Protecting Your Capital via Stop Price . . . . . . . . . 39 T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y TradeGenie.com 2 Money Market Mastery Understanding Expectancy . . . . . . . . . . . . . 44 . . . . . . 48 . . . . . . . 49 . . . . . . . 50 . . . . . . . 52 59 . . . . . . . 62 . . . . . . . 65 . . . . . . 69 Exiting the Trade . . . . . . . . . . General Guidelines on Selling Your Contracts Keeping the Trading Journal . . . . . How I Trade Gaps . . . . . . . . How I Trade Breakouts . . . . . . . . . . . . . . How I Trade Opening Range Breakout . . Importance of Volume . . . . . . . Life Cycle of a Stock . . . . . . . . . . . . . . About Trade Genie Meet Our Founder - Noshee Khan . . . . . . . . . . . . . . . . . . . . . . 06 03
  • 3. Trade Genie Options Trading Strategies Money Market Mastery About Trade Genie Our Master Trader, Mr. Noshee Khan, has an extensive background in programming, systems analysis, software design, and implementation. He also holds an MBA in finance. In his capacity as an enterprise software consultant for the German multinational software corporation SAP, Noshee specialized in the implementation of business processes for many Fortune 500 companies including Intel and Applied Materials. “Although I enjoyed my work, all these positions of great responsibility did not really satisfy me enough in terms of a rewarding lifestyle, or a true sense of accomplishment.” In 2003 Noshee developed an interest in trading and the latest software being used in the brokerages. He soon found himself immersed in the subject and exchanging information with the leading industry experts through the early online trading forums. Noshee soon discovered that the analytical skills from his day job transferred perfectly to understanding and predicting the intricacies of the stock market. “I quickly started to make winning trades consistently and after seven years of learning, I was able to quit my $120 per hour job, start a career in trading, and begin my dream lifestyle of trading for a living” Before long, friends and family started asking Noshee for trading tips, and their friends soon followed. “In 2010 I founded Trade Genie to help other traders, as well as offering subscription services for my daily stocks and options trade alerts. I now look forward to each day with great anticipation and excitement, I have found my calling.” 3
  • 4. Trade Genie Options Trading Strategies Money Market Mastery TradeGenie.com 4 Over the past decade, tens of thousands of individual traders and investors have joined Trade Genie’s subscription services and stayed with us due to the continual overall success of the trades Noshee recommends. “I take great pride in offering a premium service to our subscribers by replying to any questions clients have, personally.” Noshee is passionate about trading and his nearly two decades of knowledge and experience position him to be one of the most knowledgeable and successful traders in the US today. Noshee does not trade because he needs to, he trades because it is his passion and enjoyment. “The reason I started Trade Genie was that I realized that there is no greater satisfaction than helping others to achieve their financial security and their own greatest dreams.” Each day before the market opens, Noshee performs a psychological workout, developed over years in association with key mentors, as he prepares for the opportunities of the day ahead. During trading hours, he analyzes the markets and trades for his account and provides the trading alerts for our members. After the market closes Noshee goes through a debriefing process, reviewing the markets as he prepares himself for the next day. At the weekend Noshee prepares his teaching materials for the ‘free’ coaching webinars offered with all Trade Genie memberships. Between times, Noshee compiles our newsletter which is full of pertinent market information, comments on the previous day’s trades as well as masterful tips and insights to help you elevate your trading skills. “I realized that all my years of experience analyzing the markets to find the right trades to execute was so much more rewarding when I shared my knowledge with others who don’t have the time to do the analysis or the experience to trade successfully themselves.”
  • 5. Trade Genie Options Trading Strategies Money Market Mastery TradeGenie.com 5 At Trade Genie, we offer an elevated level of service, keeping in touch with you throughout the trade if the situation changes so you can make the most of opportunities as they arise. Our trades are hand-picked in real-time after analyzing the trade opportunities thoroughly with respect to the risk and reward ratio. We provide our members with the exact buy price along with multiple exit target prices which allow you to assess the relative risks of each in an easy to understand way. We then keep you updated throughout the trade if these exit targets can be adjusted to your advantage while the trade is in play. We give you precise trade management strategies and guidance along with the trade alerts that require it. All memberships come with our ‘Trading Systems’ guidebook and ‘Options Trading Strategies’ manual. These guides outline the recommended steps to take in order to maximize gains and minimize losses, and as such are essential trade secrets within themselves. Our trading statistics are live on our homepage where you can see our win rates, average percentage gain, and loss, as well as the average time it takes to close the trades. It goes without saying that these results are excellent, and naturally, the dedicated trader who judiciously selects trades based on focused analysis, can easily multiply the average percentage gain manyfold. However, it is our level of support, transparency, in-trade guidance, free coaching webinars, newsletter, and our markets trend and strength reports, that really take the weight off your shoulders and give you the knowledge and confidence you require to trade successfully like a pro. Take a look at our testimonials page and see what our clients say, then try us and see for yourself why we are undoubtedly the best stock options advisory service available in the US today. We look forward to welcoming you into our community of financially successful individuals, growing their portfolios and profits. while living their dreams and enjoying life to the fullest.
  • 6. Trade Genie Options Trading Strategies Money Market Mastery TradeGenie.com 6 • Working as a IT Consultant: Check. • Dealing with the early morning commute: Check. • Constantly reporting to my boss: Check. • Feeling as if the daily routine was sucking the life out of my body: Check. Here is my story I worked at an IT consulting job. So, I was doing the typical consulting work routine. I’d get up early to make the morning commute, run around all day helping clients, and attend long meetings. It was a stressful and unhealthy lifestyle. Whenever When I got any breaks, I would grab something quick and calorie-filled at McDonald’s and drink way too much coffee to keep my energy up. Once the day finally ended, I’d leave work at 6 pm, grab something again from a fast-food restaurant because traffic would back-up and I wouldn’t get home until 8 pm. Then I would crawl into bed without spending time with my new wife. It was definitely a trying lifestyle. I reached my breaking point in March of 2010 when I was told I was being laid off. At that moment, everything in my life came to a screeching halt. I had no money coming in. Yet getting back into the proverbial rat race was disheartening. I could find another consulting job where I would just become miserable again and not spend any time with my wife. And then, what about the future when kids became a part of our lives? I didn’t look forward to barely seeing them day in and day out if I went back to IT consulting. I would miss seeing them off from school or picking them up in the afternoons. I wouldn’t be there for school concerts or to sing holiday songs or attend Dad’s Donuts Days. They would grow up never really knowing who the man was that would rush out the door in the mornings and what part he had in their lives. Meet Our Founder Noshee Khan In March 2010 I lived in an ordinary world:
  • 7. Trade Genie Options Trading Strategies “What a waste of life!” I asked myself. “Why am I working so hard? For whom?” I wanted to reclaim my dignity. I wanted to provide my wife with a happy life and provide my future children with the Dad that they deserved to know. I wanted to feel the inner satisfaction of helping others while being my own boss. I wanted to enjoy everything that I had missed out on before, such as traveling around the world and working at any location while choosing the hours I wanted to put in at the job. While I had that constant fear, about making a living, completely wrecking my life and possibly my marriage, I did the only thing that I could do. I evicted myself from the misery. I didn’t prepare my IT consulting resume. I shut down the recruiters trying to get me involved in various projects across the country and overseas. I burned that past bridge down. Yet I still needed to provide for my family’s financial security. So, I went to snipping down my monthly budget. Every unnecessary expense had to go as I focused on what was necessary for our lives. Then, I sat down and poured my energy into my life’s passion: becoming a full-time stocks and options trader. There was just so much more information I needed to absorb. Luckily, with the trading knowledge that I had acquired trading part-time while working as an IT consultant, I had enough to start my journey at full steam. I also lucked out and had some wonderful people, my guiding angels who provided me with mentorships that allowed me to go along the right track. I read all the online literature I could find about stocks and options trading. I soaked up the knowledge from books, as my angels looked on and admired my passion and talent for the trade. I quickly held my own as a stock and options trader and exceeded even my own expectations. It was at that time I founded Trade Genie to share my successes with others. My wife and I soon owned homes in several countries. I could now trade from anywhere in the world as I enjoyed creature comforts and outdoor activities. I could play on sandy beaches in the summer and go kayaking, zip-lining, and bungee jumping in the mountains. Money Market Mastery TradeGenie.com 7
  • 8. Trade Genie Options Trading Strategies I even had the opportunity to go on exciting elephant rides in foreign countries during the day after putting in some hours on the stock market. It was a dream come true. After having received such an excellent mentorship, I paid it forward and offered advice to other traders so they could create their own fortunes through my stock market advisory services and coaching programs. As I further honed the techniques and my knowledge of the stock market, I started to notice an interesting pattern. Much of my time was being spent learning every possible technique out there, which forced me to expend a lot of time and energy trying to mesh together all of the different techniques. Instead, I learned that I could reach further success by changing my focus and concentrating on truly mastering just a few techniques that most professional traders use to reach financial success. Through this new stocks and options trading strategy, I saw enormous gains at a rapid pace and my portfolio grew at light speed. I was absolutely shocked. While I had mastered several chart patterns and trading techniques, there were three specific techniques that continually proved highly profitable to me. And now I want to share these three techniques with you for free. I want you to break out of the corporate cubicle wars and instead reach the same financial success with stock market trading that I have. You no longer need to worry about how to master stock trading. You can spend more time with your family and pursue all the luxuries that life has to offer. In my “Mastering the Stock Market” guidebook, I go into greater detail about these three simple trading techniques and how mastering these will transform you into an independent and highly profitable trader. Simply drop me a line via our contact page and I will send you your free “Mastering the Markets” guidebook today so that you can find the success that my trader followers and members have found. You can finally burn the bridges that are holding you back from true financial freedom and the happiness it provides. Money Market Mastery TradeGenie.com 8
  • 9. Swing Trading Strategy Successful swing trading requires skillful interpretation of the herd mentality that drives price change. Swing trading combines the better of two worlds – the slower pace of investing and the increased potential gains of day trading. By rolling over your money rapidly through short term gains you can quickly build your equity. The basic strategy of swing trading is to jump into a strongly trending stock after its period of consolidation or correction is complete. Strongly trending stocks often make a quick move after completing its correction which one can profit from. One then sells the stock after 2 to 7 days for a 5-10% move. When you combine options with swing trading the return could be somewhere 25 – 100% in a short period of time. This process can be repeated over and over again. One can also play the short side by shorting the stocks that fall through the strong support. In brief a Swing Trader’s goal is to make money by capturing the quick moves that stock makes in its life span, and at the same time controlling his/her risk by proper money management techniques. TradeGenie.com 9 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y In swing trading or any form of trading knowing the exact stock target price to exit the trade will keep you in trade and minor pullbacks will not give you worries that you are losing the profit . Similarly knowing the exact stop price will also not shake you out in case the stock pull backs severely . These two price levels are crucial to one’s success . No matter how strong the chart looks if the stock does not have potential to move further up (in case of long trade) or down (in case of short trade) then there is no point in entering the trade as the risk is higher than the reward . At certain price point the buyers start accumulating the stock preventing from further fall and stock make a big move to the upside . The same phenomenon happens when the stock is making upside move and suddenly reaches a price point and collapses .
  • 10. time we would enter into the trade which is coming up for earnings. Let’s assume that tomorrow morning CMI is reporting earnings. .30 and we bought out-of-the-money Puts May 65 for $1.00. Our basket Calls and Puts cost is $4.40 Forecast = CMI can gap up above 72 or gap down to 65. Let’s assume CMI gaps up enough that our call which we bought for $3.30 trades above $4. basket. . If Puts are trading near 10 cents then we don’t sell PUTS rather sell calls and hold PUTS. Selling PUTS for 10 cents do not make sense as some brokers may be charging you more than 10 cents to sell one contract. TradeGenie.com 1 0 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y S will gain some value and we can alue . However, PUTS could expire worthless too . In case CMI pulls back the PUT get better salvage v Scenario 2 Everything same as scenario 1 above but it seems it is better to get out of Calls and PUTS at the same time to make decent profit in the basket . The volatility after earnings go away and even stock moves upward the options do not move .
  • 11. . TradeGenie.com 1 1 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 12. Indexes, ETF and Ultra Short Trading If you have subscribed to Index Options trading then this section is for you to read and understand. Depending on the market direction I trade the following fifteen symbols. 1 . DIA ($INDU) 2 . SPY ($SPX) 3 . QQQ ($NDX) 4 . $OEX (S&P 100) 5 . $XAU (Gold and Silver Index – Philadelphia Stock Exchange) 6 . $HGX – Housing Index 7. GDX – Market Vectors Gold Miners 8. DXD – Ultra Short Dow Jones 30 Pro Shares 9. SDS – Ultra Short S&P Pro Shares 10. QLD - Proshares Ultra QQQ 11. QID – Ultra Short QQQQ Pro Shares 12. DUG – Ultra Short Oil & Gas Pro Shares TradeGenie.com 1 2 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 13. 13 . SKF – Ultra Short Financials 14 . FAZ - Financial Bear 3x Shares 15 . TZA - Small Cap Bear 3x Shares . TradeGenie.com 1 3 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 14. Understanding Position Sizing Part 1 “He who thinks he knows, doesn’t know. He who knows that he doesn’t know, knows.” —Lao Tse In this Chapter, we will talk about Position Sizing - one of the most important concepts that will stop you from going broke on your first trade! Position sizing is simply the how much of trading . It answers the question such as “How many contracts or shares per trade you should buy for your account size?” When you enter a position, it is essential to know the point at which you will get out of the position in order to preserve your capital . This is your “risk” . It is your worst-case loss - except for slippage and a runaway market going against you . One of the most common position-sizing systems involves controlling your per trade size as a function of this risk . There are various Position-sizing model. In this chapter we will discuss position sizing based on Percent-Risk model. To implement position sizing concept you need to know three variables. These are your portfolio size, risk tolerance percentage and stop loss percentage. Risk tolerance is defined as how much you are willing to lose on one trade as part of your total portfolio amount. Stop loss is defined as how much you are willing to lose in a given trade. Please make sure to understand the difference between the two. TradeGenie.com 1 4 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 15. Investment Amount = (Portfolio Size/Stop Loss Percentage) * (Risk Tolerance) Investment Amount = ($50,000/0.5) * (0.02) = $2000 The above equation for determining the Investment amount shows that if we increase the risk tolerance while keeping the Portfolio size and Stop Loss Percentage same we would be able to investment more in AAPL trade. TradeGenie.com 1 5 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y To illustrate position sizing lets assume your portfolio size is $50,000 . Let’s also assume that you do not want to risk more than 2 percent of your capital in any trade . This means you are willing to lose $1000 ($50,000 * 0 .02) on one single trade . Let’s say that based on your technical analysis you have determined that your stop loss percentage will be around 50 percent . Let’s take the example of AAPL . You are bullish in AAPL and are interested in buying AAPL Calls as you think AAPL will rise in price . Let’s assume one AAPL Call contract is trading at $20 . Since one contract controls one hundred share, therefore, purchasing one contract of AAPL at $20 will require $2000 ($20 *100) investment . As we know not all trades are successful and they hit our stop loss . Your technical analysis tells you that when AAPL trades at a certain price your Call contract will be trading at $10 thus you will incur 50 percent loss . This is your stop loss percentage . In other words you will lose $1000 ($10 *100) in this trade which is 2 percent ($50,000/$1000) of your starting capital . In other words your risk is defined as 2 percent and your stop loss is at 50 percent . Therefore based on your portfolio size of $50,000 you should not invest more than $2000 in AAPL trade . This investment amount is calculated as follows .
  • 16. For example, if we increase risk tolerance percentage to 4 percent then the investment amount as determined by the equation will be $4000 calculated as follows: Investment Amount = ($50,000/0 .5) * (0 .04) = $4000 Similarly you can keep the risk tolerance to 2 percent but if you decrease the stop loss percentage to 25 percent then you would be able to invest $4000 in AAPL trade and is calculated as follows: Investment Amount = ($50,000/0 .25) * (0 .02) = $4000 As you can see your Investment amount in a single trade is a function of your portfolio size, risk tolerance percentage and stop loss percentage . It is suggested that risk tolerance level should remain constant (e .g . 2 percent) whereas your stop loss percentage and your portfolio size will fluctuate from time to time . As your portfolio size increases or decreases your investment amount per trade has to be adjusted accordingly based on your risk tolerance and stop loss percentage . Let’s say your portfolio has grown to $60,000 . Keeping risk tolerance and stop loss percentage same we would be able to invest $2400 in our AAPL Calls which is calculated as follows: Investment Amount = ($60,000/0 .5) * (0 .02) = $2400 Based on $2400 investment if you lose in this trade the loss amount would be $1200 which is 2 percent of your portfolio size . In summary proper position sizing will eliminate fear level, rate of errors and will build your confidence in trading . Th is will lead yo u to improvement in your success rate, and higher profits in gradual systematic way . Above all few bad trades will not wipe out your account and you will live to trade in the future . TradeGenie.com 1 6 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 17. Understanding Position Sizing Part 2 Money management is a very confusing term . When we looked it up on the Internet, the only people who used it the way that Van was using it were the professional gamblers . Money management as defined by other people seems to mean controlling your personal spending; giving money to others for them to manage, risk control, making the maximum gain, plus 1,000 other definitions . To avoid confusion, Van elected to call money management “Position Sizing .” Position sizing answers the question, “How big of a position should you take for any one trade?” Position sizing is the part of your trading system that tells you “how much .” Once a trader has established the discipline to keep their stop loss on every trade, without question the most important area of trading is position sizing . Most people in mainstream Wall Street totally ignore this concept, but Van believes that position sizing and psychology count for more than 90% of total performance (or 100% if every aspect of trading is deemed to be psychological). Position sizing is the part of your trading system that tells you how many shares or contracts to take per trade. Poor position sizing is the reason behind almost every instance of account blowouts. Preservation of capital is the most important concept for those who want to stay in the trading game for the long haul. TradeGenie.com 1 7 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 18. Imagine that you had $100,000 to trade . Many traders (or investors, or gamblers) may just jump right in and decide to invest a substantial amount of this equity ($25,000 maybe?) on one particular stock because they were told about it by a friend, or it sounded like a great buy; or perhaps they decide to buy 10,000 shares of a single stock because the price is only $4 .00 a share (equating to $40,000) . They have no per-planned exit or idea about when they are going to get out of the trade if it happens to go against them and they are subsequently risking a LOT of their initial $100,000 unnecessarily . To prove this point, we’ve done many simulated games in which everyone gets the same trades . At the end of the simulation, 100 different people will have 100 different final equities, with the exception of those who go bankrupt . And after 50 trades, we’ve seen final equities that range from bankrupt to $13 million--yet everyone started with $100,000 and they all got the same trades . Position sizing and individual psychology were the only two factors involved . Van says that this just shows how important position sizing is. So how does it work? Suppose you have a portfolio of $100,000 and you decide to only risk 1% on a trading idea that you have . You are risking $1,000 . This is the amount RISKED on the trading idea (trade) and should not be confused with the amount that you actually INVESTED in the trading idea (trade) . So that’s your limit, you decide to only RISK $1,000 on any given idea (trade). You can risk more as your portfolio gets bigger, but you only risk 1% of your total portfolio on any one idea. TradeGenie.com 1 8 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 19. TradeGenie.com 1 9 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y Now suppose you decide to buy a stock that was priced at $23 .00 per share and you place a protective stop at 25% away, which means if the price drops to $17 .25 you are out of the trade . Your risk per share in dollar terms is $5 .75 . Since your risk is $5 .75, you divide this value into your 1% allocation (which is $1,000) and you are able to purchase 173 shares, rounded down to the nearest share . Work it out for yourself, so you understand that if you get stopped out of this stock (i .e ., the stock drops 25%), you will only lose $1,000 or 1% of your portfolio . No one likes to lose, but if you didn’t have the stop and the stock dropped to $10 .00 per share, you can see how quickly your capital vanishes . Another thing to notice is that you will be purchasing about $4000 worth of stock . Work it out for yourself . Multiply 173 shares by the purchase price of $23 .00 per share and you’ll get $3979 . It would probably be around $4000 when you add commissions . Thus, you are purchasing $4000 worth of stock, but you are only risking $1000 or 1% of your portfolio . And since you are using 4% of your portfolio to buy the stock ($4000), you can buy a total of 25 stocks this way without using any borrowing power or margin, as the stockbrokers call it . This may not sound as “sexy” as putting a substantial amount of money in one stock that “takes off,” but that strategy is a recipe for disaster and very rarely happens . Therefore it is best left on the gambling tables in Las Vegas . To continue to trade and stay in the markets over the long term, learning position sizing and protecting your initial capital is vital . Van believes that people who understand position sizing and have a reasonably good system can usually meet their objectives through developing the right position sizing strategy .
  • 20. Position Sizing How much is enough? Start small . So many traders that are trading a new strategy start by risking the full amount that they plan on using for the long term with that strategy . The most frequent reason given is that they don’t want to “miss out” on that big trade or long winning streak that could be just around the corner . The problem i s that m ost t raders h ave a much greater chance of losing than they do of winning while they learn the intricacies of trading the new strategy . Therefore, start small (very small) and minimize the “tuition paid” to learn the new strategy . Don’t worry about transactions costs (such as commissions), just worry about learning to trade the strategy and follow the process . Once you’ve proven that you can consistently and profitably trade the strategy over a meaningful period of time (months, not days), then you can begin to ramp up your position sizing . Manage losing streaks . Make sure that your position sizing algorithm helps you to reduce the position size when your account equity is dropping . You need to have objective and systematic ways to avoid the “gambler’s fallacy.” The gambler’s fallacy can be paraphrases like this: after a losing streak, the next bet has a better chance to be a winner. If that is your belief, then you will be tempted to increase your position size when you shouldn’t. Don’t meet time-based profit goals by increasing your position size. All too often, traders approach the end of the month or the end of the quarter and say, “I promised myself that I would make “X” dollars by the end of this period. TradeGenie.com 2 0 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 21. “I have talked to many folks who have blown up their accounts. I don’t think I have heard one person say that he or she took small loss after small loss until the account went down to zero.Without fail, the story of the blown up account involves inappropriately large position size or huge price moves, and sometimes a combination of the two.” ~D.R.Barton . TradeGenie.com 2 1 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y The only way I can make my goal is to double (or triple, or worse) my position size . This thought process has led to many huge losses . Stick to your position sizing plan! We hope this information will help guide you toward a mindset of capital preservation on your journey toward successful trading .
  • 22. Dollar Cost Averaging The dollar-cost-averaging strategy is based on dividing the total amount to be invested in a trade into three lots and investing these three lots at different stock prices . The idea is to add to our open position on stock weakness rather than closing out the trade at loss . We will always begin our trade with the investment of 2% of our portfolio balance . In case we are wiped out in this trade for any reason, such as stock gapping down or gapping up, the maximum we would lose is 2% of our portfolio balance . By default the first profit objective is 20-25% . If stock pulls-back after our entry and hit our first pullback price then we invest the second lot at reduced cost . This will bring down the average cost per contract . After second purchase the profit objective is 30-35% . In case stock does not hit our profit objective and rather went to our second pullback price then we invest the third lot at a price per contract lesser than the second purchase . The third purchase will reduce the average cost per contract to even further . Once we purchase the third lot then we set the order to sell at profit objective of 35-40% . After the third purchase we also monitor our trade for our stop. If stop hits then we close our trade. The expected loss would be between 40-45%. Example – CF – January 185 Calls Let us assume the portfolio size is $26,500. We take 6% of the portfolio balance which comes to $1,600. Divide $1,600 into three lots which comes to $533. Let us also assume we are buying CF Jan 185 Calls which are trading at $530. TradeGenie.com 2 2 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 23. TradeGenie.com 2 3 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y First Buy The amount of $530 will bring one contract . Set the sell order immediately at 25% profit or the target bid provided with the alert . In this example, the target bid is $6 .60 . There is no hard stop set at this moment . If target bid hit we would gain $1 .30 per contract and the trade will be closed . Second Buy However, let us assume the target bid did not hit and stock pulled back and hit our first pullback price . You will either be provided the pullback stock price in advance or real-time email alert will be sent . Lets assume CF contract at the pullback price is trading is $2 .90 . We would invest $580 to purchase two contracts . After this purchase the total amount invested will be $1110 ($530+$580) and we would have three contracts on hand at the average cost of $3 .70 ($1110/3) . After the purchase set the conditional good till cancel order to sell either at the stock target price or at the target bid provided . There is no hard stop set . In this example, the target bid is $5 .00 . If target bid hits the gain will be $1 .30 per contract . The return on investment will be 35 .14% and the trade will be closed . Third Buy However, let us assume the target bid did not hit and stock either pulled back and hit our second pullback price or went sideways . In this case third purchase will trigger and we would buy more contracts . Let us assume at second price CF Calls are trading at $2.40. This means we will buy two more contracts for the total amount of $480. After this purchase we will have five contracts at the average cost of $3.18 and total amount invested would be $1590. After this purchase set the good till cancel order to sell all contracts either at stock target price given or target bid given. In our case target bid is set at $4.30. If our target bid hits we stand to gain $1.12 per contract. Total gain will be $560.
  • 24. Reward-to-Risk Ratio = (Expected Profit * Probability of Profit) / (Maximum Loss * Probability of Loss) = (25% * 80%) / (40% * 20%) = (2.0) / (0.8) = 2.5: 1 Assumption The assumptions are as follows: Stop Price Suppose after third purchase the stock further move down (in case of Calls) then our stop would trigger at either stock stop price given or the stop bid given . In our case the estimated stop price is $1 .90 . If stop hits we would lose $1 .28 per contract . Total amount we will be $640 . The loss percentage will be 40 .25% which will be around 2 .42% of our portfolio balance . Reward-to-Risk Ratio TradeGenie.com 2 4 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 1. Once we enter the trade – stock would trade such that it will give us 25% profit. 2. In case stock pulls back to our first pull back price – it will bounce back up. 3. If stock does not bounce after hitting first pullback price then there is a high. 4. Probability that stock will bounce back after hitting second pullback price . 5. If stock further goes down then the trend is changing and we need to close our Trade . 6. The expected win ratio in this strategy is 80% . 7. The first profit target is 25% .
  • 25. 8 . The second profit target is 35% . 9 . The third profit target is 35% . 10 . Expected loss is between 40-45% . 11 . Expected loss as percentage of portfolio per trade is 2-3% TradeGenie.com 2 5 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 26. Understanding Targets “The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to.” —Jesse Livermore When you fully commit to a goal, the focus of positive energy onto a desired result is like programming a missile to “lock on” to a moving target; the missile automatically pursues the target no matter how elusive it becomes. The act of commitment also attracts exciting, new possibilities to your doorstep, leading to dramatic changes in your life. 1. Green Target - This is the immediate target which I expect the stock to hit very quickly and the probability of it hitting is 95%. I usually sell one-fourth of my position on this target. I expect stock to continue its journey towards next target which is “yellow target”. If the target is given in percentage then it means it is based on option buy price. TradeGenie.com 2 6 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 2 . Yellow Target - This is the second target after green target . The probability of hitting the yellow target is 85% . The difference between yellow and green target besides the probability is that after hitting the green target I expect stock to continue towards yellow, whereas, after hitting yellow target I expect stock to pullback somewhere in the middle of green and yellow targets . I sell 75% of my position on yellow target unless stock gaps up or down or blows through the yellow target without stopping . If I see reversal after hitting yellow or market direction changing then I liquidate my rest of the position which could be below yellow target in case of long position or above yellow target in case of short position . In other words the last one-fourth position could be liquidated at lesser price than what I sold at yellow .
  • 27. When the stock is in the middle of “yellow” and “red” target my stop is set just below “yellow” target . 3. Red Target - This is the third target after “yellow”. This is the target where I am expecting the stock to hit and pullback all the way to yellow target. Therefore, I sell all my contracts whatever I have left after selling at yellow target. The probability of hitting red target is around 70%. Once the stock travels towards red target my stop is set just below yellow target. The reason it is set below yellow is that I am expecting stock to rebound after hitting yellow target. In case it does not rebound then I am out of the position completely. 4. Revised Red Target - If I am watching my trade and I see more potential in the trade and confident that stock will go through the “Red” target then I revised my “red” target. The stop is set just below “red” target to participate in further gains. 5. Pullback Price - This is the price which I expect that stock could pullback after I enter the trade. This serves various purposes. For example, if I have spread trade long then I can close out the short leg once the stock hits the pullback price and starts moving upward. The second purpose is that there are trades where I do not put all my investment in the beginning as I expect that stock could pullback. Therefore, in this case I divide my investment into two lots. The second lot will be invested in case the stock TradeGenie.com 2 7 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y pulls back to the “pullback price” and rebounds . The pullback price is determined based on various methods . Example, it could be purely based on charts analysis on candles, it could be previous support, it could be a simple moving average, weighted moving average or volume weighted moving average or a trend line .
  • 28. Importance of Red Target “The professional concerns himself with doing the right thing rather than with making money, knowing that the profit takes care of itself if the other things are attended to.” . —Jesse Livermore In the previous Chapter I have explained green, yellow and red targets In this Chapter I will explain the importance of Red target . Red target is the target where the stock is expected to hit and reverse or pullback severely . If you are long and stock gaps above at open and stays above the red target then you are safe . If it gaps above red target and reverses and goes down below red target then it is better to sell your contracts and lock your gains . The reverse phenomenon is applicable in case of shorts . You should pay more attention to the stock if it hits red target after market is closed. If the stock hits red target after market close then it must continue upward movement next day pre-market or at least when the market opens. This means it should gap-up and continue moving upward. If it does not then it is in your best interest to sell your contracts and lock your gains or minimize your loss or get out at breakeven. You can always get back in once the stock stabilizes. There is always a new trade around the corner. Preservation of capital is the first goal in trading. Making profit is secondary. Let me give you an example of how you can protect your profit and what you need to do. Suppose red target is $18.50 and stock closes at $17.40. After market is closed the stock jumps to $18.55. This means stock has hit the red target and red target is no longer valid. TradeGenie.com 2 8 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 29. Next day the stock should continue moving upward beyond $18 .55 at pre-market and also after the market is opened . If it does not continue moving upward then you know must lock your gains within fifteen minutes of the market open . In short watch your stock after-market and pre-market for hitting the red target whether you are long or short and when market opens take the decision to hold or sell . Sometimes you may want to add to the position as it could be gapping up due to some extra-ordinary news . I usually send alert pre-market or right after the market is open advising members what to do in such scenario . The above concept is also applicable when you are short or have puts in your portfolio . This means if red target is hit when market is closed then when market reopens stock should immediately continue going down beyond red target, otherwise you have to sell and lock gains . TradeGenie.com 2 9 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 30. Executing the Trade TradeGenie.com 3 0 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 1 . Determining which Option to Buy The option selection is based on target price and how fast I estimate that the stock will hit the target price . If stock is trading at $60 .00 and my target is $63 .00 and I am expecting that stock will hit the target within thirty days then I would buy next month and strike closer to the target which is $62 .50 in this case . This means when stock reaches $63 .00 my option will be in the money and the time value has been converted into intrinsic value giving me the most bang for the buck . However, sometimes it is prudent to buy in-the- money option for various reasons, such as out-of-the-money option does not look attractive due to far away from the target price, open interest or simply overpriced . 2 . Dividing the Capital into Two Lots No matter how good the trade looks, I never put all my money at once . I buy contracts worth 50% of capital as determined by position-sizing and the rest 50% after testing the water to see if I am right . I let the trade develop . Once I am pretty sure that trade is going my way then I buy another 50% of allocated fund (based on position- sizing) . 3 . Using Limit Orders Intelligently Watch your limit orders carefully . You cannot walk away from limit orders the way you can with stocks . Since the true value of an option directly depends upon the price of the underlying stock, your “bargain bid” of 15 minutes ago may eventually be executed at a very disadvantageous price . For example, let’s look at a stock at $50 with a 45 call option bid at $6 .00 and offered at $6 .50 .
  • 31. You bid $6 .00, the stock drops quickly to $48 and you are the proud owner at $6 .00 . Unfortunately, you should not have paid more than $4 .50 at a stock price of $48 .00 . Therefore, you should watch your limit order constantly to check whether it should be revised or cancelled . 4 . Handling Partial Execution Don’t be overanxious on a partial execution . After you have placed an order to buy 10 options at $8 .70, you may get a message saying, “you bought five at $8 .70, it’s your bid at $8 .70 for the remaining five, and the option is offered at $9 .20’ . Instead of immediately paying the extra $0 .50 for the five options to fill your total order, wait a while . Since it is “your bid”, any options that come in to be sold at the market or at $8 .70 (or less) will be yours (up to a limit of five, of course) . Your chances are pretty good as long as the underlying stock remains in a reasonable trading range . Of course, you should remain in close contact with the broker or your online order screen so that adjustments can be made in your order to respond to significant movements in the stock . TradeGenie.com 3 1 Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 32. Beating the Market Maker via Show or Fill Rule “Show or Fill Rule” or “Limit Order Display Rule” is great help for those traders who buy twenty contracts or less. The rule was enacted through Exchange Act rule 11 Ac-1-4. This rule requires the market makers to show or publish any order that improves the current bid or ask prices unless it is filled. Any order between the current bid ask spread will improve the market. Before we go into the details of this rule, we need to understand the basics of option quoting system: Lets say you (John) want to buy 3 contracts of February CAT 90 Calls which are trading at Bid $6.00 and Ask $6.75 So what does this mean? It means the market maker is bidding $6 for the option . This is the price he is willing to pay if you want to sell your contract . On the other hand he is asking $6.75 per contract to sell to you. In this buy and sell process he is making 75 cents per contract. In other words we, the option trader, always gets the worst price. This is our cost of doing the trading business, besides paying commission to the broker. Whereas market maker makes his money by providing liquidity in the market. When we get the quote, the bid price represents the highest bidder, and the ask price represents the lowest offer or seller. Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 32 TradeGenie.com
  • 33. Under the “Show or Fill Rule”, the market maker has two options: 1. Either he gives you three contracts at $6.30 or 2. Shows the Bid as $6.30 and Ask as $6.75 If he decides not to sell you at $6 .30 then when he shows the bid and ask the spread will be 45 cents and is reduced from 75 cents . As soon as you place your order, your bid will be shown on the top which is $6 .30 . Now lets say another trader (Tom) wants to sell 20 contracts of Feb 90 Calls but he does not want to sell at $6 .30 rather at $6 .50 . As soon as he places his sell order the Bid and Ask will be displayed as follows: Bid $6 .30 - Ask $6 .50 Spread is further reduced and now it is at 20 cents . Remember, you (John) are bidding to buy at $6.30 and another trader (Tom) is asking to sell at $6.50. According to the rule, the bid and ask is valid for at least 20 contracts. This means the market maker must fill your order of 20 contracts or less at the current bid and ask price. The general rule of thumb is that spread should not be more than 5 percent . Therefore, if the bid is $6 .00 ask should not be $6 .30 . So, based on this rule you do not want to pay $6 .75 rather willing to pay $6 .30 as you think this is the fair value of the option . Therefore, you placed the order to buy 3 contracts of February CAT 90 Calls at $6 .30 . This is your bid . You are bidding for the contracts at $6 .30 . Prior to the “Show or Fill Rule”, the market maker was not obligated to show your bid of $6 .30 . He would simply leave it as bid $6 .00 and ask $6 .75 . TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 33
  • 34. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y So, if you are buying three contracts of CAT Feb 90 Calls at $6 .30, the market maker is obligated to either sell you at $6 .30 or show the bid at $6 .30 . At this time market maker is thinking that if I do not fill the order at $6 .30 and rather show and post the order then by law I am obligated to honor the price of $6 .30 for 20 contracts . In this process the other seller (Tom) can sell at $6 .30 instead of $6 .50 or $6 .00 . Therefore, Tom will get better price which is $6 .30 instead of $6 .00 . Therefore, market maker will fill your (John) order of three contracts at $6 .30 quickly to get you out of the way and so he does not have to show your order to the market . The other seller (Tom) will not be able to get $6 .30 and has to sell at $6 .00 if he wants to sell or wait for the bid to improve . It is advised that first place the order in between bid and ask and see if you get filled . This will make huge difference on your profits in the long run . However, if the stock is moving fast in your direction and the potential in the trade is significant then fighting with the market maker is not worth, as the trade may slip away . If my order does not get filled within 15 seconds at my bid price I either improve my bid or pay at ask and move on with the trade as I do not want to miss out on the profit . 34
  • 35. Uptick and Upbid Rule After the SEC reinstated a new version of the uptick rule following the 2008 financial crisis, there has been very little information available online . If you search for “uptick rule” most of the info you will find i s on the old uptick rule . The current version isn’t really an uptick rule at all, but rather an up-bid rule . This new version was first put into effect in November 2010 . Simply put, shares of a stock cannot be sold short at or below the best bid when the rule is in effect . The short seller must sell on the offer and wait for a buyer to fill his offer . The rule goes into effect when a stock’s price decreases by 10% or more from its previous day’s close . Once a stock has dropped 10% from its previous day’s close (even if just briefly dropping that far) the rule will then be in effect f or the rest of the day and the next trading day . The rule can only be triggered during regular trading hours although if it is triggered it remains in force during after-hours and pre-market trading . For those who use Interactive Brokers’ TWS platform, a little red circle will appear to the right of the stock description when the uptick rule is in effect. If you mouse over the red circle it will say “Short sale restriction is in effect from [date] to [date].” TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 35
  • 36. To Chase or Not To Chase Most of the time alerts can be filled easily with the buy price provided. However, sometimes the trade seems to be slipping away fast. At this moment members have to decide to chase or not to chase the trade. The following guidelines will help you in knowing how much extra can be paid for the trade: 1. If recommended option buy price mentioned is in the range of $0.70 - $1.00 then we can pay 5 cents over the buy price mentioned. 2. If recommended option buy price mentioned is in the range of $1.05 - $2.50 then we can pay 10 cents over the buy price mentioned. 3. If recommended option buy price is in the range of $2.55 - $4.00 then we can pay 15 cents over the buy price mentioned. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 4 . If recommended option buy price is in the range of $4 .05 - $6 .00 then we can pay 20 cents over the buy price mentioned . 5 . If recommended option buy price is in the range of $6 .05 - $8 .50 then we can pay 30 cents over the buy price mentioned . 6 . If recommended option buy price is in the range of $8 .55 - $12 .00 then we can pay 40 cents over the buy price mentioned . 7 . If recommended option buy price is in the range of $12 .05 - $20 .00 then we can pay 50 cents over the buy price mentioned . 36
  • 37. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y It is also suggested that when you are paying above the recommended buy price for the option contracts as per guidelines given above then you should buy only one-half of the number of contracts as per Position Sizing . The rest of the contracts should be bought at much lower price to average down per contract cost . Another factor in deciding whether to pay extra is to look at the yellow target . If stock is still far enough from yellow target then it is ok to pay extra . However, if you see that by paying extra there is not much potential left in the trade considering yellow target then I suggest to leave the trade alone and either wait for the next trade or send me email . There is always something to trade . 37
  • 38. Eliminating Greed through Conditional Order “My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten time.” —Jesse Livermore After buy order for my contracts are filled I set the order to sell my contracts based on the conditional order taking into account the three targets and number of contracts I have purchased. The conditional order for Calls contract is set as follows: “Sell XYZ calls contracts at market when XZY stock price is equal to or greater than certain price”. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y In case of Puts contracts I set my conditional order as follows: “Sell XYZ puts contracts at market when XYZ stock price is equal to or less than XYZ stock price” . Setting the conditional order eliminates the need to calculate target bid prices as well as greed factor from trading . Some points to remember: 1 . Order is set at “market” not at limit 2 . Make sure greater than or equal is set for Calls and 3 . Less than or equal is set for Puts 4 . Test the Conditional order for one contract first and when it works fine and you feel comfortable then set for actual contracts you have . 3 8
  • 39. Protecting Your Capital via Stop Price “Your protective stop is like a red light.You can go through it, but doing so is not very wise! If you go through town running every red light, you probably won’t get to your destination quickly or safely.” —Richard Harding You do not have a trading system unless you know exactly when you will get out of a market at the time you enter it . Your worse case exit, which is designed to preserve your capital, should be determined ahead of time . In addition, you should also have some idea about how you plan to take profits and a strategy for letting your profits run . Market legend William O’ Neil said “The whole secret to winning in the stock market is to lose the least amount possible when you’re not right .” TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 39
  • 40. There are many varieties of stop loss and depending on your risk tolerance and instrument you are trading you would select the stop loss method accordingly. Below are some of the few stop loss methods used by professional traders around the world: • Fixed Loss Amount Stop • Fixed Percentage Stop • Price Trailing Stop • Percentage Trailing Stop • Volatility Trailing Stop • Moving Average Crossover Stop • Support and Resistance Break Stop • Channel Breakout Stop • Trend Line Break Stop • Inactivity Stop • Time Limit Stop In this article we will talk about five stop loss methods and the rest you can do the research on your own and implement in your trading . So let’s begin . Fixed Loss Amount Stop Many professional traders suggest to use fixed loss amount stop . It gives them some psychological advantage . You determine before hand how much you are willing to lose on a trade and set that as a stop beforehand . For example, you invest $2000 in a trade and bought 100 shares of a stock at $20 per share . You have decided to lose $500 in the trade . This means when stock is trading at $15 you want to get out of the trade . TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 4 0
  • 41. Fixed Percentage Stop Some traders set stops by allowing the price to retrace a certain percentage of the entry price . For example, you do not want to lose more than 10 percent in a trade . You bought 100 shares at $20 per share so you would set the stop at $18 . In case stock retraces and goes below $18 you are out with 10 percent loss . Since you’re trading can take you on a roller coaster of emotion, this discipline helps to calm those emotions and take them out of your trading, so that you’re trading with your mind again, and not your heart . Sounds good, right? However, there are a couple of problems with this approach . The first problem is that your stop loss may not take into account the daily movement of the stock (called the Average True Range, or ATR) . This is the daily fl uc tuation that a stoc k naturally oscillates through during a day . You can find the ATR of a stock by looking at a daily chart, and seeing how much the stock moves up or down in a day, and ensure that your stop loss is set outside of this range, to prevent you being taken out of a position due to normal market fluctuation and not simply a minor pullback . The second problem is that the stock may be on a short-term downward trend, but may be positioned to recover and climb back up to even higher highs, and by setting a very tight stop, you may lose out on the upswing by exiting early . There are a number of ways to implement stop loss rules to avoid the situation described above . One such way is to use a trailing stop that will move with the market as it advances but will stay static if the trade moves against you . A popular method is to trail the stop based on the low for long trades and the high for short trades or the open or previous day’s close can be used . The only problem with this type of trailing stop is that you have to move and set the stops manually each day, since there are very few trading platforms that can do this for you automatically . Some more automated solutions would be: price trailing stops, percentage trailing stop, and volatility trailing stop . TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 4 1
  • 42. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y Price Trailing Stop A price trailing stop uses a fixed price distance to trail each bar’s stop . This is useful especially where you may want to limit your stop distance to a fixed predetermined value, i .e . $0 .50, $1 .00, $5 .00 etc . One draw back of this stop is that $1 could be a large move for one stock and very small move for another . This is why the price trailing stop should mainly be used on individual stocks whose movement is well known to a trader . Percentage Trailing Stop For stocks with similar volatility levels, the percentage trailing stop can offer better results . Here you can start with say a 5% stop loss, but have it trail with the market higher while allowing for inter-day and intra-day volatility . However, similar to the price trailing stop, for some stocks a 5% is a large move, and for others not so large . Volatility Trailing Stop A third trailing stop option is the volatility trailing stop . As the name suggests the stop distance is matched to the volatility of the individual stock . A trader can obtain this information by checking the ATR (Average True Range) indicator . For those not familiar with ATR, the indicator measures the opening and closing prices each day over a 14 to 30 day period . It then averages out the movement to provide the average daily trading range for the stock . This ensures that whether the stock usually moves 1% or 10% daily, it will not whipsaw you out of the trade on normal trading movement . The best stop strategy and settings are best left up to you and your risk tolerance . I even know a number of traders that use a combination of strategies . They initially use a price stop to keep losses small in case they made a mistake on the entry . But then, once the trade is showing a profit, they give more room using a percentage stop . Ultimately, you want to keep another important rule of successful trading in mind when you set your stops: “Keep your losses small and let your winners run .” 42
  • 43. Money management is a complex topic, and can certainly cover several more articles, but these are the basics, and you can start from here . The most important factor in determining the nature of your stop is to determine if it makes sense given your objectives, the instruments you are trading, and your temperament . You must use stop loss which makes sense . TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 4 3
  • 44. Understanding Expectancy “At the heart of all trading is the simplest of all concepts--that the bottom-line results must show a positive mathematical expectation in order for the trading method to be profitable.” —Chuck Branscomb What is expectancy in a nutshell? A trading system can be characterized as a distribution of the R-multiples it generates. Expectancy is simply the mean or average R-multiple generated. What does that mean? By now you should know that in the game of trading it is much more efficient to think of the profits and losses of your trades as a ratio of the initial risk taken (R) . But let’s just go over it again briefly: One of the real secrets of trading success is to think in terms of risk- to-reward ratios every time you take a trade. Ask yourself, before you take a trade, “What’s the risk on this trade? Is the potential reward worth the potential risk?” So how do you determine the potential risk on a trade? Well, at the time you enter any trade, you should pre-determine some point at which you’d get out of the trade to preserve your capital. That exit point is the risk you have in the trade or your expected loss. For example, if you buy a $40 stock and you decide to get out if that stock falls to $30, then your risk is $10. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 4 4
  • 45. The risk you have in a trade is called R . Th a t s hould b e e asy t o remember because R is short for risk . R can represent either your risk per unit, which in the example is $10 per share, or it can represent your total risk . If you bought 100 shares of stock with a risk of $10 per share, then you would have a total risk of $1,000 . Remember to think in terms of risk-to-reward ratios . If you know that your total initial risk on a position is $1,000, then you can express all of your profits and losses as a ratio of your initial risk . For example, if you make a profit of $2,000 (2 x $1000 or $20/share), then you have a 2R profit . If you have a profit of $10,000 (10 x $1000) then you have a profit of 10R . The same thing works on the loss side . If you have a loss of $500, then you have a 0 .5R loss . If you have a loss of $2000, then you have a 2R loss . But wait, you say, how could you have a 2R loss if your total risk was $1000? Well, perhaps you didn’t keep your word about taking a $1000 loss and you didn’t exit when you should have exited . Perhaps the market gapped down against you . Losses bigger than 1R happen all the time . Your goal as a trader (or as an investor) is to keep your losses at 1R or less . Warren Buffet, known to many as the world’s most successful investor, says the number one rule of investing is to not lose money . However, contrary to popular belief, Warren Buffet does have losses. Thus, a much better version of Buffet’s number one rule would be to keep your losses to 1R or less. When you have a series of profits and losses expressed as risk- reward ratios, what you really have is what Van calls an R- multiple distribution. As a result, any trading system can be characterized as being an R-multiple distribution. In fact, you’ll find that thinking about trading system as R-multiple distributions really helps you understand your system and learn what you can expect from them in the future. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 4 5
  • 46. Let’s look at an example: Entry Price, Stop, 1 R, Actual Exit Price, Profit/Loss Trade One = $50 .00 $45 .00 $5 .00 $60 .00 = 2 R gain Trade Two = $22 .00 $20 .00 $2 .00 $16 .00 = 3 R loss Trade Three = $100 .00 $80 .00 $20 .00 $300 .00 = 10 R gain Trade Four = $79 .00 $70 .00 $9 .00 $70 .00 = 1 R loss Total = 8 R Gain Expectancy (Mean = 8 R / 4) 2 R TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y So what does all of this have to do with expectancy? When you have an R-multiple distribution from your trading system, you need to get the mean of that distribution . (The mean is the average value of a set of numbers) . And the mean R-multiple equals the system’s expectancy . Expectancy gives you the average R-value that you can expect from the system over many trades . Put another way, expectancy tells you how much you can expect to make on the average, per dollar risked, over a number of trades . So when you have a distribution of trades to analyze, you can look at the profit and loss of each one of the trades that was executed in terms of R (how much was profit and loss based on your initial risk) and determine whether the system is a profitable system . So this “system” has an expectancy of 2R, which means you can “expect” to make two times what you risk over the long term using this system, based on the data that you have available . Please note that you can only get a good idea of your system’s expectancy when you have a minimum of thirty trades to analyze, and the preference would be to have 100 to 200 trades to really get a clear picture of the system’s expectancy . 4 6
  • 47. So in the real world of investing or trading, expectancy tells you the net profit or loss that you can expect over a large number of single unit trades . If the total amount of money in the losing trades is greater than the total amount of money in the winning trades, then you are a net loser and have a negative expectancy . If the total amount of money in the winning trades is greater than the total amount of money in the losing trades, then you are a net winner and have a positive expectancy . Example, you could have 99 losing trades, each costing you a dollar . Thus, you would be down $99 . However, if you had one winning trade of $500, then you would have a net payoff of $401 ($500 less $99)--despite the fact that only one of your trades was a winner and 99% of your trades were losers . We’ll end our definition of expectancy here because it is a subject that can become much more complex . Van Tharp has written extensively on this topic and it is one of the core concepts that he teaches . As you become more and more familiar with R-Multiples, position sizing and system development, expectancy will become much easier to understand . To safely master the art of trading or investing, it is best to learn and understand all of this material . Although it may seem complex at times, we encourage you to persevere because like any worthwhile endeavor, as soon as you truly grasp it and then work towards mastering it, you will catapult your chances of real success in the markets . TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 47
  • 48. Exiting the Trade “A man must believe in himself and his judgment if he expects to make a living at this game.” TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y —Jesse Livermore There are two strategies to exit the trade with profit . These are: 1 . Based on Profit Objective If my target is to make 20% on the trade then I calculate the target bid based on 20% profit and place Good Till Cancel Order . I also put the sell order for 20% to 25% profit when I don’t have time to calculate the target bid and the stock is moving fast . If I am out on the same day with 20% to 25% profit then I am happy . The target profit objective varies based on option price . For option contract trading at $6 and above my profit objective could be 10% whereas for option trading at $3 my profit objective would be 20% . In both scenario I am targeting $0 .60 per contracts . 2 . Based on Target Price If I am basing my exit on stock target price then I place my good- till-cancel order to sell one-fourth at first target, one-half at second target and one-fourth at third target . If the stock has not reached its target after certain number of days of its upward movement and showing sign of pullback then I go ahead and liquidate my position and lock my profit as there is always a trade waiting for me around the corner . If the stock is not doing its thing after certain days have passed then I try to liquidate the position at breakeven too . 48
  • 49. General Guidelines on Selling Your Contracts Below is the general guideline on how many contracts to sell at what target. You can use the multiplier. For example, if you have 8 contracts then see number 4 below and multiply by 2. If you have 1 contract then ideally sell at yellow target. If you have 2 contracts then sell 1 at green and 1 at yellow target. If you have 3 contracts then sell 1 each at green, yellow and red target. If you have 4 contracts then sell 1 at green, 2 at yellow and 1 at red target. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 49
  • 50. Keeping the Trading Journal . TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 50
  • 51. Discipline means designing, testing, and following your trading system. It means learning to enter and exit in response to predefined signals rather than jumping in and out on a whim. It means doing the right thing, not the easy thing. And the first challenge on the road to disciplined trading involves setting up a record-keeping system. Becoming a good trader means taking several courses - psychology, technical analysis, and money management. Each course requires its own set of records. You will have to score high on all three in order to graduate. Your first essential record is a spreadsheet of all your trades. You have to keep track of entries and exits, slippage and commissions as a well as profits and losses. Another essential record shows the balance in your account at the end of each month. Plot it on a chart, creating an equity curve whose angle will tell you whether you are in gear with the market. The goal is a steady uptrend, punctuated by shallow declines. If your curve slopes down, it shows you are not in tune with the markets and must reduce the size of your trades. A jagged equity curve tends to be a sign of impulsive trading. Your trading diary is the third essential record. Whenever you enter a trade, print out the charts that prompted you to buy or sell. Paste them on the left page of a large notebook and write a few words explaining why you bought or sold, stating your objective and a stop. When you close out that trade, print out the charts again, paste them on the right page and write what you have learned from the complete trade. Traders fail because of impatience and lack of discipline. Good records set you apart from the market crowd and put you on the road to success. If you are serious about learning to trade, start with a relatively small account and set a goal of learning to trade rather than making a lot of money in a hurry. Keep a diary and put a performance grade on every trade. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 51
  • 52. How I Trade Gaps Gaps trading is one of my favorite trading strategies . It is also one of the difficult strategies to trade as trader can get caught in the wrong direction and start losing right away . This could be very demoralizing . Therefore, understanding gaps, what causes gaps and what to look for in trading gap is very important . Dozens of stocks gap up or down every day but not all stocks are trade-able . There are only handful of stocks which are good trade candidates on any given day . Therefore, knowing which one to trade and which one to avoid is crucial to improving the portfolio balance . So lets begin in understanding the gaps and in the next article we will go in detail on how to trade gaps and fade gaps by using Calls and Puts . 1 .1 What Are Gaps There are essentially three ways that the price of a stock can open for trading relative to its prior closing price . It can open higher, lower, or at the same price . When there is a significant difference between a stock’s prior day closing price and its opening price, it is called a gap. If the opening price is higher than the prior closing price, it is called a gap up. If the opening price is lower than the prior closing price then it’s a gap down. When a stock opens at essentially the same price as the prior close, or the difference is very small, then it is considered to be a flat open. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 52
  • 53. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 1 .2 What Causes Gaps A variety of factors can cause the market or individual stocks to gap . Examples include late breaking news on specific stocks, earnings reports, analyst upgrades or downgrades, overnight futures trading, economic news, major world events, or simply an imbalance between supply and demand . Regardless of the specific catalyst, gaps occur due to excess demand on the buy or sell side, which is further exaggerated by low volume trading that takes place outside of regular market hours . Since the total number of buyers and sellers is lower during post - and premarket hours, any significant buying pressure pushes stock prices higher than would normally occur during regular market hours . The opposite is true when there is more selling pressure . 1 .3 When Gaps Occur Gaps occur every day of the trading week but mostly on Mondays and Fridays . The larger the gap, the better the potential in the trade . If stock is gapping up on news such as major analyst upgrade or an upside earnings announcement, then the chances are that stock will continue moving upward . But the stocks which gap up for no reason will likely pullback . 1 .4 Types of Gaps There are mainly four types of gaps . Each of these is described below: 1 .4 .1 Common Gaps Sometimes referred to as a trading gap or an area gap, the common gap is usually uneventful . In fact, they can be caused by a stock going ex-dividend when the trading volume is low. 53
  • 54. These gaps are common (get it?) and usually get filled fairly quickly . “Getting filled” means that the price action at a later time (few days to a few weeks) usually retraces at the least to the last day before the gap . This is also known as closing the gap or closing the window (in Japanese) . 1 .4 .2 . Breakaway Gaps Breakaway gaps are the exciting ones . They occur when the price action is breaking out of their trading range or congestion area . To understand gaps, one has to understand the nature of congestion areas in the market . A congestion area is just a price range in which the market has traded for some period of time, usually a few weeks or so . The area near the top of the congestion area is usually resistance when approached from below . Likewise, the area near the bottom of the congestion area is support when approached from above . To break out of these areas requires market enthusiasm and, either, many more buyers than sellers for upside breakouts or more sellers than buyers for downside breakouts . Volume should pick up significantly, for not only the increased enthusiasm, but many are holding positions on the wrong side of the breakout and need to cover or sell them . It is better if the volume does not pick up until the gap occurs . This means that the new change in market direction has a chance of continuing . The point of breakout now becomes the new support (if an upside breakout) or resistance (if a downside breakout) . Don’t fall into the trap of thinking this type of gap, if associated with good volume, will be filled soon . It might take a long time . Go with the fact that a new trend in the direction of the stock has taken place, and trade accordingly . 1 .4 .3 . Runaway Gaps Runaway gaps are also called measuring gaps, and are best described as gaps that are caused by increased interest in the stock . For runaway gaps to the upside, it usually represents traders who did not get in during the initial move of the up trend and while waiting for a retracement in price, decided it was not going to happen . Increased buying interest happens all of a sudden, and the price gaps above the previous day’s close . This type of runaway gap represents an almost panic state in traders . Also, a good TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 5 4
  • 55. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y uptrend can have runaway gaps caused by significant news events that cause new interest in the stock . 1 .4 .4 Exhaustion Gaps Exhaustion gaps are those that happen near the end of a good up - or downtrend . They are many times the first signal of the end of that move . They are identified by high volume and large price difference between the previous day’s close and the new opening price . They can easily be mistaken for runaway gaps if one does not notice the exceptionally high volume . It is almost a state of panic if the gap appears during a long down move and pessimism has set in . Selling all positions to liquidate holdings in the market is not uncommon . Exhaustion gaps are quickly filled as prices reverse their trend . Likewise, if they happen during a bull move, some bullish euphoria overcomes trades, and buyers cannot get enough of that stock . The prices gap up with huge volume; then, there is great profit taking and the demand for the stock totally dries up . Prices drop, and a significant change in trend occurs . Exhaustion gaps are probably the easiest to trade and profit from . 1 .5 How I Trade Gaps Ideally when a stock gaps up, we should not buy “Calls” unless it makes a new high after 10:00 AM EST . Similarly, if a stock gaps down, we should not buy “Puts” unless it makes a new low after 10:00 AM EST . When stock gaps up it makes a high and then reverses to the downside but stays above the open price . It trades aggressively between open price and high price . Professionals try to short at high made during the first thirty minutes of the market open . They place the stop just little above the high which was made during the first thirty minutes . At this stage the battle rages between the bulls and the bears where bears try to push it down and bulls buy on every dip and eventually one of them wins . 1 .5 .1 How I Trade Gap Up - By Buying Calls I watch the five-minute charts and see how stock is trading . Usually it oscillates between open and high . 55
  • 56. I also watch buy and sell pressure to figure it out which side will likely win . Sometimes it is evident from the get-go who will win sometimes it is not clear till later stage . To enter long the ideal entry is when stock pulls back and comes closer to the open price but do not violate it . As soon as the stock comes close to open price and buying pressure starts building up that’s when we could go long with the stop either just below the open or below the support price which is below the open price . This is low risk high reward trade and decision has to be made quickly and trade executed at lightening speed . If the amount of gap is significantly high then the profit target could be just below the high made so far . Another entry for going long is when stock breaks the high made during the first 30 minutes . The stop in this case is below the open price of that day or the low made so far . If there is a support level below the open then the stop is below this support rather than below open . Usually the stock dips below the open to take out the stop and then it moves upward very fast . When I am buying calls then I buy only half lot and keep another lot to buy either at lower price (near open) or buy second lot when it breaks the high made (within 30 minutes) decisively and moves aggressively upward . 1 .5 .2 How I Trade Gap Up - By Buying Puts When the stock gaps up on news then analyzing this news is very important . Before the market opens reading the news on the stocks which are gapping up is crucial to understanding what the stock would eventually do after the stock starts trading during normal market hours . If the stock is gapping up for no good reason, that is no substantial news to justify the gap, then it is likely a good candidate for fading the gap . In other words if the gap is overly exaggerated the stock will likely reverse its direction to the downside and if the gap amount is significant then a trader can buy Puts to take advantage of the reversal . Another factor which helps in my decision whether to fade the gap or trade in the direction of the gap is where the stock is trading at open with respect to the resistance . If the stock gaps up and hit the resistance and unable to conquer the resistance right at the beginning then it has very high chance that it will fail to cross the resistance later during the day and rather it will sell off . If this is the case then a trader can buy Puts with stop 50 to TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 5 6
  • 57. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 70 cents above the resistance line and lock gains when stock approaches the support . The potential b etween resistance a nd support should be enough to justify buying Puts as option trading requires certain dollar amount move to justify the spread between bid and ask . 1 .5 .3 How I Trade Gap Down - By Buying Puts Gap down strategy is the same as gap up but in reverse . Stocks gap down due to some major bad news . When stock gaps down a trader needs to evaluate the further potential in the trade, buy/sell pressure, any major support nearby which could stop further decline in the stock move . For example, if stock gaps down and 200 day moving average is close by then it has high probability that it will stop going down further once it hits 200 day moving average . Even if it dips below 200 day moving average it could bounce back above . If the stock has gap down huge and there is no significant support nearby and selling pressure is rising then the chances are that it will continue going down in the direction of the gap . During the first 30 minutes of market open - day traders try to fade the gap by going long and placing the stop just below the low made during the 30 minutes . Once this low is broken then the selling pressure starts rising and they switch their position from long to short . It is at this moment or knowing that stock is further deteriorating that a trader can buy put with a stop above the high made so far . However, if the gap is huge this high could be far from the entry point and if stock reverses to the upside then trader can lose significant portion of its trading amount by the time he stops out . Therefore, I look for another resistance point which is way below the open or high and if stock closes above this resistance line then I close my Puts position otherwise the profit target is slightly above the next major support . Since gap down trading can be fast and furious and stock could reverse its direction after hitting the support therefore, I do not take risk of greed factor to come into play . I place conditional order (described later in this guide book) and let the price move take me out of the trade with profit . In this way greed factor is eliminated and I am out of the trade with decent profit . Knowing the resistance, support is the key to trading gap down trades . 57
  • 58. 1 .5 .4 How I Trade Gap Down - By Buying Calls When stock gaps down and hit support it stops going down further . Not only it stops going down but starts moving up aggressively . Recognizing this change in trend a trader can buy Calls with stop below the low made during the first 30 minutes . The profit target is the first major resistance . The move could be fast therefore, I prefer to place conditional order and let the trade close itself with profit . The conditional order eliminates the greed factor . TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 58
  • 59. How I Trade Breakouts “Breakouts and breakdowns attract many participants but require precise timing to turn a profit. Insiders know that these hot spots attract dumb money. They initiate whipsaws after each volume surge to shake out weak hands. This ensures that the majority enters positions just as the market reverses.” . TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 59
  • 60. TradeGenie.com Money Market Mastery Not all breakouts are from Cup-With-Handle base formations . Stocks that successfully retest their resistance level usually rebound forcefully to fresh new highs . One form of breakout is called “Continuation Breakouts” . Continuation type breakouts are typical on up trending momentum stocks moving to new highs . The resistance the breakout breaks through is usually a weaker type of resistance . For example, stock makes a new 52-week high around $151 and then pulls back 3-5 points . Then it starts rising again and breaks price point of $151 with volume . This is considered as Continuation Breakout . Higher quality breakouts (fast and big move) usually occur for flat top breakouts with longer top consolidation periods (1 week to 1 month in time frame) . Flat top breakouts usually allow for tighter breakout stop limits enabling higher quality profit/loss trades . When stocks breakout after strong rally then it is possible the stock may not go further up as the move has already taken place . During the day of the breakout the volume has to be very high . Trader should be cautious on breakouts that occur on earnings or news events (upgrades) . These can cause false breakouts . Some of the better breakouts usually occur when there is no news . Therefore, traders should be capable of recognizing the failed breakouts and should get out of the trade immediately . The initial loss is the best loss in this case as any hesitancy can result in disaster . Some price action can indicate that a retest is way underway while in the background that very price action was the beginning of a sell off and eventual price breakdown; with a close below its important support line. We also need to be cautious on breakouts after a previous rally. While breakouts do occur their profit may be less and stop loss may need to be higher. 6 0 T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y
  • 61. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y Trader should master the breakouts with unwavering execution . Some of the best breakouts can be found by making a list of breakout candidates prior to the actual breakout and then watch for the abrupt upward stock movement to trigger an entry point . I monitor breakout candidates like a hawk and when it starts trading above the important resistance line and volumes starts increasing and meet my minimum criterion that’s when I enter the trade with half lot . Once the stock establishes itself as successful breakout then I add another half to my position . Sometimes we all have the urge to cheat a little bit and enter prematurely into the breakout, thinking that if a stock is eventually going to breakout then why not buy it at low price . This is not disciplined trading rather trading with greed . If a breakout is going to happen then the gain will be enormous so it is advisable to wait for confirmation of the breakout . Be cautious on breakouts after a previous rally . While breakouts do occur their profit may be less and stop loss may need to be higher . 61
  • 62. How I Trade Opening Range Breakout The market opens and your favorite watch list equity is moving upward, so you decide to go long and purchase shares or calls . Then are you left wondering why after twenty five minutes of the market open it stalls and stops moving up? For example, one trading day you noticed that PSX opens at $50 .50, dipped slightly and made a low of $50 .25 and then started aggressively moving upwards . You decided to chase the stock and bought when it was trading at $51 .40 . After you established your position, PSX continued to climb further to $51 .65 . Then around 9:55 am EST PSX stopped its upward climb and traded in the narrow range of $50 .70 and $51 .20 for the remainder of the day . I used to get stuck in trades like these till I came across the concept of Opening Range Breakout . Statistics indicate that only 1/3 of stocks make their high or low of the day within the first 30-minutes of the market open . This means the remaining 2/3 of the equities make new highs or new lows after the first 30 minutes has elapsed . So if a trader buys a stock during the first 30 minutes, there is a high probability that the trade will not materially move up for the remainder of the day. Therefore if you are determined to make decent money trading stocks you need to understand and apply the invaluable concepts of Opening Range and Opening Range Breakout. Let’s first understand the concept of Opening Range. The Opening Range is defined in terms of time and price. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 6 2
  • 63. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y The time element is simply the first X number of minutes in the trading day where the trader defines the time element in accordance to his/her personal trading style . Since I am swing trader, I concentrate on a 30 minute Opening Range by progressively examining the 5 minute, 15 minute interval and then finally make my decision on the 30 minute time frame . To better understand the concept of Opening Range let’s consider the PSX example mentioned above . In this example PSX made a low of $50 .25 and a high of $51 .65 . Therefore, the 30-minute Opening Range for PSX is simply defined as $50 .25-$51 .65 . Market professionals mostly use a 30-minute Opening Range due to economic reports being released at 10 am EST . These reports affect the market sentiment from bullish to bearish or vice versa and thus stocks react positively or negatively . The other factor is also related to stocks themselves . Stocks may also have news which is driving their moves . Once the news is digested and analyzed stocks move in normal fashion . Based on the example above, the Opening Range price range element for PSX is $50 .25-$51 .65 using a 30 minute time frame? Therefore, when a stock starts moving above the opening range high it is considered as bullish, whereas if the stock is trading below the opening range low it is considered as bearish . This is the fundamental starting point for the trader to understand and trade the Opening Range . However, there is more to it than just price and time . The third variable is the volume, but before we bring volume into the picture we need to understand the concept of breakout, resistance and support . Understanding Breakout To clearly understand Opening Range a trader needs to be intimately familiar with the breakout concepts which I have previously described in this eBook . For a quick refresher please reference - “How I Trade Breakouts” mentioned earlier . 6 3
  • 64. Understanding Resistance and Support The high and low made during the Opening Range period can be considered as lines of resistance and support respectively; otherwise the stock would have moved higher or lower depending on the market sentiment during the first 30 minutes . To better see these resistance and support levels switch to a 5-minute time frame to illustrate the consolidation pattern at both the high and the low . This will visually reinforce the corresponding lines of support and resistance . Now that support and resistance are clearly defined by the high and the low of the 30-minute Opening Range, then once the stock breaks above or below one of these two lines then you can take the decisive action . If you cannot clearly see either the support or the resistance of a stock, then it is prudent to move to the next stock which shows definitive areas of support and resistance . TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 64
  • 65. Importance of Volume Earlier we talked about price and time with regards to the Opening Range . In this section we will discuss about the importance of volume . As we know there are 8000 stocks listed on trading exchange . And all of these stocks are making lows and high during the first 30 minutes of trading . So how does a trader determine which few stocks to concentrate on when the market opens? The answer lies in the volume . Those stocks which are moving with high volume at the market open are the first area of focus . On any bullish or bearish day, the number of stocks trading with high volume could reach to 500 or more . It is not possible for any human being to manually evaluate this list to identify good potential trading candidates . Therefore, it is suggested that you should concentrate on preselected basket of stocks which you have selected based on price, average volume and average true range . If you trade options, then further restrictions will be used to identify option-able stocks which have good history of options, decent spread, high option volume and high open interest . Based on these criteria you may come up with a basket of 300 stocks which you can focus on during a trading day. Therefore, your Opening Range breakout strategy will be applied only to these 300 stocks. When the market opens I filter my basket of stocks for those trading at high volume. TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 6 5
  • 66. For example, stocks which are trading upward at twice their normal volume have higher chance of continuation to upside than the stocks which are moving up only at 50 percent of its normal volume . Once I apply the volume filter, I only get handful of stocks to concentrate upon . This makes my job easier to identify one or two good candidates to trade that day . My Opening Range strategy is then applied to these stocks which are trading at high volume . Let’s say I have basket of 300 stocks based on the criteria I have identified above . At market open, I apply the volume filter and it usually returns approximately 40 aggressively upward moving stocks on a bullish day . When I apply a 5-minute Opening Range filter to these 40 stocks, then I may find that only 15 stocks are moving beyond the high made during the first 5-minutes of market open . Therefore, I concentrate on these 15 stocks starting from the sixth minute of market open . I scroll through these 15 stocks quickly using daily and 60-minutes charts to see bigger picture of how these 15 stocks are trading . Looking at these charts I create a short list of 8 - 10 stocks using various criteria such as crossing of 50-day or 200 day moving average from below, determine if it is oversold, or whether the stock is in continuation of previous trend or starting new trend . Most importantly, I gauge how much potential this stock has to capture some decent gains if I trade options . In addition to the 5-minute Opening Range window I have set up a 15-minute Opening Range window . I now review the 8- 10 stocks which have been screened using the 5-minute Opening Range and longer time interval chart analysis to see which stocks show up in my 15-minute Opening Range window . This tells me that other stocks have stopped moving and are going through consolidation or pulling back . Let’s say I now have 5 stocks on my 15-minute Opening Range window allowing me to immediately monitor their subsequent price action . At this time, I check the news on these 5 stocks, whether earnings TradeGenie.com Money Market Mastery T r a d e G e n i e G r a n t i n g P r o f i t a b l e T r a d e s D a i l y 66