These notes contain the Q & A from a recent seminar on options trading.
Q. & A.
Q. I don't understand momentum. Momentum to me says something is going to continue in the ongoing direction?
R. Correct. There are actually several kinds of momentum indicator. Most of them show a 0 line and an above or below
position. However with momentum a 'momentum call' can be bullish, even if it is below the 0 line providing it is moving towards the line. And it can be bearish if it is at the top - above the 0 line provided it is currently moving downwards.
It is a daily indicator and can change daily so it needs to be running in the same direction for more than a day to be conclusive, but sometimes it can be an early warning of a top or bottom if the momentum changes before the direction of the movement changes. If you draw your own charts you can make your own momentum indicator on a scale of 0 to plus 100 and 0 to minus 100.
Q. You used the expression 'charting emotion.' What did you mean by that?
R. Good question. I didn't realise I'd said that. Nor do I consider bar charts to be particularly emotional.
But candlesticks when you learn how to read the black and white sections, the opens and closes, and their different positions are a chart of the days emotions. An all white candle can be seen as a bullish candle. A long black upward tail can be seen as a 'top rejection' and when the open and the close are at the same place - a doji - the emotion of uncertainty is indicated. Do get the candlestick charting book I mentioned and do learn to accept the emotional movements that are shown on these charts.
Trading is an emotional business. I don't mean you have to be emotional about a set of figures or a chart, but emotional in that the two prime movers of any market - greed and fear - are emotions that drive the herd - of which you are not a part.
Q. Explain oversold and overbought as mentioned in technical analysis?
R. Basically there is no such thing as oversold or overbought, as for every buyer there is a seller, and for every seller there is a buyer. However when a market's prices have declined too steeply and too fast and volume has been large, the market is said to be oversold. The normal reaction to this is that the market will start to rise again.
When overbought, on the other hand, generally a market has risen too fast, too steeply, and with larger than normal volume. These positions often show up on the RSI and the Stochastic oscillators.
Q. There are a lot of different plans and ideas available. Should I use just 1 or more than 1.
R. This is important. You should read the manual through two or more times and get the 'feel' of what appeals to you. During this period you will have bought a diary or traders notebook and you can then hand write the items you are going to use to create your plan.
I could tell you mine but it wouldn't be yours. Your plan must be yours and it must be complete. Mine involves trading certain options when a certain set of circumstances occurs. This means I am out of the market more than I am in it but I win far more times than I lose. The Digital options Trading Plan offers a simple and profitable technique for making considerable profits from options trading.
I subscribe to a live service so that I can check up at any time, day or night, on where the markets are, and
I began all this by writing stuff down in my traders notebook. That is also to be your first step.
My systematic approaches all include 'entry' and 'exit' plans and I have all these written down so that I do not deviate from the original intentions.
Believe me when I tell you taking a stop loss is good for you. Far better than sitting on a trade that has reversed your expectations.
Time is the enemy
Q. Your system is very simple. I always believed that trading was complex?
R. It is complex if you think it is. The complexity is really a series of simple items all added together to appear complex. When talking about Ranges, Fibonacci numbers, Elliott waves and Gann Movements it can appear to be more complex than it really is. My material is always designed to work in areas that can be both simply understood and easily and accurately predicted.
Q. Are there set points to exit a trade.
No there are not. My strongest advice to beginners and even to experienced traders is to be sure to take some of your profits. A large number of consistent small profits is better, both psychologically, and in true reality, than waiting for big profits that just may never appear.
Large profits are great and gaps in your favour will often deliver them to you. When these turn up accept them with thanks. And if a gap does work against you (it shouldn't often if you are truly trend conscious) take the quickest stop loss you can. Without an exit plan you have no plan at all.
Q. What about the fear of losing one's bank?
R. OK. By bank you mean the capital deposit you have lodged with your broker.
If you lose 20% of your 'bank' you will need to make 25% profits to replace the loss. That doesn't sound too severe. But if you lose another 30% you would then be down 50% of your 'bank' and you would need to make 100% profit to recover your losses. And if your bank were down 80% - which is possible - you will have to seek 400% profits on the 20% remaining to break even.
An unlikely scenario.
To keep your losses at 20% or smaller you need tight and hard stop losses and stop profits. You need to accept with gratitude all the small profits that are made and not go looking for the bigger ones - at least not until you have several years experience.
The best way to double your 'bank' is to trade yourself into real profits. The worst way is to deposit more funds. Ideally you need a 'bank' that is big enough so that your stop losses are only 10%, Then, if you get to the 70% success rate, 10% break even. 20% small losses, you will grow your 'bank' yourself and become a real professional trader.
If you really do get it wrong and lose your bank, go back to this manual, re-read it, read the goals bit, get out your traders notebook and copy down your exact plans and start again.
Then re do your paper trade experience for at leas 6 to 8 weeks before beginning again.
In real trading at the end of each month EVALUATE what you have done and why you did it. As a professional trader always remember.
Q. Double tops don't attract any extra business?
R. All brokers and people who have professional charting services like Metastock and Fibonacci knowledge at their finger tips are aware of double tops and double bottoms, but trading rarely increases after such events occur.
OK. You are right. One broker I dealt with had a young hot shot in his office and whenever I got him he was always babbling on about resistance points being broken, sitting on a double top etc and he seemed like a young man going places.
He didn't last because one can be overenthusiastic about technical analysis and as I've always emphasized: 'never listen to your broker.' He may be the nicest, best informed bloke you've ever known, but his job is to accept and follow your orders, and your job is to give him those orders correctly.
Back to those double tops and bottoms. They must confirm themselves as having actually occurred. Just like the Parabolic Stop And Reverse. A PSAR dot can move from above to below and then back to above and then below again, all before a new trend is proven - or it can change direction just for one day, then change back and the old trend continue.
A double top, as an example, may be just a few days apart, or maybe week or even months apart. They do not have to be precise. E.g. 3034 on June 1st and 3043 on July 1st are virtually recognisable as a double top provided the share has dropped substantially and risen again between these dates. 9 cents on a $30.00 share is a pretty close top resistance point. If the share continues up then the double top HAS NEVER EXISTED. If it starts down from 3043 which it may have reached in just a moment, and then jiggled around before going seriously down it has proven itself and should be taken. It is taken because it proved itself by beginning and maintaining a downward movement after the double was established.
Double tops and double bottoms are not things to be anticipated. But when they do prove themselves they are often the turning point of a very very large movement which you will be in at from very early on. Watch for them. Let them prove that they are real. Then play them for all they are worth, and that is plenty.
Q. What is overtrading?
R. Jessie Livermore the hero of Reminiscences of a Stock Operator was a brilliant trader with a keen mathematical brain. He was reputed to have gone broke 4 times and he shot himself when his last run failed.
In between times he was a multi millionaire, but the reason he went broke on odd occasions, was because he overtraded. In other words he bought more, on margin, than he could handle if the markets went against him, possibly due to an over belief that a certain trend that he was playing with would not change until he had completed his transactions!
Never become an over trader. Increase the size of your trades when you have doubled your 'bank' from genuine trading profits, and if beginning in this business, never leave yourself open to lose more than 10% to 20% if stop lossed out.
Your money management skills should be of equal importance to you as your trading skills.
The saying goes that the market is always right and it is.
Remember that you need faith in your methods and that faith can be obtained by paper trading first. But it can only be reinforced by taking consistent small profits when real trading, and having set entry points and fixed exits on all trades.
And NEVER upping the amount of contracts you are taking just because you feel good about a certain trade. O H L C and T A are the ultimate answers. And marketing like a clockwork machine for entries and exits on fixed money percentages, is the only way to become professional, allowing for the fact that after you have gained the experience you can change your stop-loss stop profit exits to 'trailing stops.'
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