Oct 102013
 

Master Day Trading Course

 

Download The Complete Master Day Trading Course here.

Introduction:

The Master Day Trading Course is designed to introduce you to the exciting world of active trading. Active trading means to actively participate in everyday price movements of the financial markets. Active trading enables you to actively manage risks and to participate from both rising and falling prices. The trades I am describing in this book can be from as short as a few seconds to as long as a few days. Many of the strategies can be applied to various timeframes. The difference between active traders and investors is that active traders trade the actual price movement versus investors who make their decisions based on the anticipation of future price movements. I tried to make this book as complete as possible. However, you will find as many strategies as traders. As you gain more experience you will realize that most strategies are based on the same basic principles and that there is really no holy grail out there.

I have been trading and coaching for many years now. The need to be independent certainly was the biggest reason for me to enter the world of trading. In what other job do you have the freedom to work from anywhere in the world where you have access to the Internet? I started with investing but always felt that there has to be more to the stock market. That’s when I started watching quotes in real time and realized how big the profit potential must be if I could just cut out a small piece of the everyday movements. There are many obstacles to conquer though in order to get to a consistent success. A solid strategy, a neutral state of mind and rigid risk management are only some of the key traits needed to be successful.

Whether you are planning to trade full time or just part time, this book will give you very valuable insight into the whole business. Even if you are just planning to invest you should read this book and take some of the basics of technical analysis into consideration when making your next decisions.

Types of charts:

The most common way to display charts is the line chart fol- lowed by the bar chart. In the bar chart the vertical line marks the high and low, the left horizontal line marks the opening price and the right horizontal line marks the closing price. If you selected a 5 min chart, that means that each bar reflects the price movement of only 5 minutes. In a daily chart each bar/ candle displays one entire days movement.

The type of chart used most by active traders is the candle- stick chart. This type of chart has been in use for over 100 years and has its origin in Japan. It is also referred to as a Japanese candlestick chart. The color of the candlestick itself tells us if there was an up – or downtrend in that par- ticular timeframe and makes reading them very easy. There are also numerous indicator based on the shape of the candlestick itself. I will talk about the most common ones later.

The following candlesticks are open candlesticks, meaning that their opening price was lower than the closing price and therefore reflect an overall uptrend in the timeframe you selected. The color used here for an open candlestick is green; sometimes people will use white instead.

If the opening price was higher than the closing price you get a closed candlestick that reflects a downtrend. The colors used are usually black or red.

The vertical line on the top of the candlestick is always the high, no matter what color the candlestick has. The line on the bottom always marks the low. These lines are also called shadows (upper/lower) or tail. There might be no shadows at all if the opening price marks the high and the closing price the low or vice versa. The colored part is always referred to as “the body” of the candlestick.

The pivot setup:

The pivot setup is a reversal setup that I am looking to trade long (buy). It is taking place on a 15 minute chart. Once in a while I will also trade it based on the daily chart. I am looking for a stock that is in a strong intraday down trend that extends over a few 15 minute candlesticks. After this sell off I will be looking for a consolidation marked by one or more candlesticks with a tight range. Preferably there will be a doji candlestick (see candlestick indicators) forming, which is a reversal indicator itself.

My buy entry criteria is met once the high of the current candlestick goes over the high of the previous candlestick. The initial stop is set below the low of the previous candle- stick, which is ideally the intraday low. The more narrow the range of the candlestick prior to the entry candlestick is, the smaller my stop! I will only trade this setup if the stop is small enough for my risk tolerance.

Sometimes the chart can be a little irritating. Make sure that the stock has actually fallen a significant amount to justify an entry and there is enough potential. My criteria is that the stock had at least a $2 sell off, unless it is a low priced stock. Remember, a

$2 sell off leaves you with $2 room to the upside whereas a $0,5 sell off only gives you that amount. In case the stock is not re- versing it might also be shorted (see continuation pattern).
Note: Recently the pivot pattern has worked best after pull- backs (price decrease) in stocks that were in an overall uptrend and up for the day itself. This scenario is less risky as well.

Continuation patterns:

Continuation patterns are trend-confirming setups. They can occur in virtually every timeframe. I was especially successful using this setup based on 15-minute charts. Continuation patterns allow you to find an entry in stocks that are already in a trend and moving. I find the pattern equally interesting for both longs and shorts. My example here describes a long setup. Again, vice versa is true for shorts. The pattern consists of three candlestick bars:

A wide range bar (a candlestick with a relative large range in which the lows are near or at the open and the highs near or at the close of that particular time period).

A narrow range bar (a candlestick with a small range). The candlestick has to be in the upper half of the first candlestick and the high can only be slightly higher than the high of the first candlestick. Ideally, the range is in the upper half (or higher) of the first bar and builds a doji candle, which serves as an additional continuation indictor in this example.

A breakout bar that breaks above the highs of bar 1 and 2 and signals the entry.

Trade Management:

For most traders entering a position is no problem, the exit however is by far more difficult. I use four different types of exit strategies for my trading:

The initial stop: The initial stop is your insurance against big losses and by far the most important aspect in trading overall. You should never enter a trade without knowing exactly where your initial stop is. Not keeping stops is the biggest reason for potential failure.

Partial gains: Taking partial gains means to sell part of your position after the first “reasonable” move in your favor. A reasonable move would be a move into a resistance area (for longs). This resistance can be of technical nature or of psychological (whole number resistance). Partial gains play an important role in my trading. I have seen many of the most successful traders using this concept. Taking partial gains is especially powerful in conjunction with setting the stop for the remaining shares to breakeven. Many traders have trouble with letting profits run. Taking partial gains can be a tremendous help because of it’s very positive psychological influence…imagine being in a position where you already took partial gains and the stop for the rest of your position is set to breakeven…you can let profits run without having to be afraid of potential losses.

The breakeven stop: This stop is getting interesting once your trade is inside positive territory enough so that you won’t end up loosing on it, but there is still more room for potential gain. Breakeven means to set the stop just below the price where you initially bought the stock or where your entry price was set at.

Keys to success – psychological aspects:

I believe that the right state of mind is by far the single most important key to successful trading. Yes, a solid strategy is an absolute necessity too; but without being in the right state of mind it won’t make you successful either. I state in the “philoso- phy” section of my website that I don’t think trading needs to be complicated and that keeping it simple is the way to success.

The most successful traders I know only use a few basic strate- gies. What made them so successful was their confidence in their strategy, their ability to stay neutral and to execute accord- ing to what they see. Other people I met had very sophisticated and complex approaches using several indicators. And guess what, a lot of them were successful too. I doubt that the indica- tors themselves made them successful though; more important was their confidence in their strategy. Some people can only work with very sophisticated approaches just because they don’t believe that simple things work. They say: “it can’t be that easy”. My point is that there are many approaches. I don’t want to judge whether one is better than the other. As long as they work for you the goal is achieved. No one holds the Holy Grail to success. Personally I don’t like advanced technical indicators too much. The reason is that there are too many variables that can be adjusted. I like to get clear entry signals based on abso- lute prices (i.e. highs and lows), which I am not able to alter.

This gives me less room for personal interpretation and more clear signals.

Going back to the mental aspects, I would like to point out some of the key traits of successful traders:

1.They stay neutral:

Staying neutral means to be emotionally detached from your trading decisions. You probably know guys for whom the world sucks if they take a loss of $100 and if they make $1000 they are on top of the world. They are definitely not neutral.

Disclaimer:

THE RISKS OF DAY TRADING

This book is dedicated to providing sound and proven trading techniques and support for those who wish to enter the business of day trading. Most of those who attempt to day trade are thwarted by their own lack of understanding and discipline. They have no rules and lose money trying many unproven strategies.

None of the techniques discussed in this book should be undertaken without extensive study, back testing and paper trading analysis. The author makes no warranties or guarantees to the content or accuracy of any information.

Please be aware that the risk of loss in electronic trading can be substantial. You should therefore consider, whether such trading is suitable for you in light of your circumstances and financial resources.

Potential Daytraders should be aware…

That day trading can be extremely risky. Customers should be prepared to lose all of the funds that they use for day trading. They should not fund their day trading activities with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership or funds required for current income.

That customers should be cautious of claims of large profits from daytrading. Customers need to be wary of advertisements or other statements that emphasize the potential for large profits in day trading. Day trading can also lead to large and immediate financial losses.

That day trading requires knowledge of securities markets. Day trading requires in-depth knowledge of the securities markets and trading techniques and strategies. In attempting to profit through daytrading, an investor must compete with professional, licensed traders employed by securities firms. An investor should have appropriate experience before engaging in day trading.

That day trading requires knowledge of a firm’s operations. An investor should be familiar with a securities firm’s business practices, including the operation of the firm’s order execution systems, procedures, and should confirm that a firm has adequate systems capacity to permit customers to engage in day trading activities.

That day trading may result in large commissions. Day trading may require an investor to trade his or her account aggressively, and pay commissions on each trade. The total daily commissions that they pay on trades may add to losses or significantly reduce earnings.

That day trading on margin or short selling may result in losses beyond the initial investment. When customers day trade with funds borrowed from the firm or someone else, they can lose more than the funds originally placed at risk. A decline in the value of the securities that are purchased may require additional funds to be paid.

Download The Complete Master Day Trading Course here.

Oct 102013
 

The Greeks options: What They Are and How to Use Them…

Delta / Gamma / Theta / Vega / Rho / Greek Strategies – Trading Pro System /

The Greeks - Managing By The NumbersThere are ways of estimating the risks associated with options, such as the risk of the stock price moving up or down, implied volatility moving up or down, or how much money is made or lost as time passes. They are numbers generated by mathematical formulas. Collectively, they are known as the “greeks”, because most use Greek letters as names. Each greek estimates the risk for one variable: delta measures the change in the option price due to a change in the stock price, gamma measures the change in the option delta due to a change in the stock price, theta measures the change in the option price due to time passing, vega measures the change in the option price due to volatility changing, and rho measures the change in the option price due to a change in interest rates.

Delta

The first and most commonly used greek is “delta”. For the record, and contrary to what is frequently written and said about it, delta is NOT the probability that the option will expire ITM. Simply, delta is a number that measures how much the theoretical value of an option will change if the underlying stock moves up or down $1.00. Positive delta means that the option position will rise in value if the stock price rises, and drop in value if the stock price falls. Negative delta means that the option position will theoretically rise in value if the stock price falls, and theoretically drop in value if the stock price rises.

The delta of a call can range from 0.00 to 1.00; the delta of a put can range from 0.00 to –1.00. Long calls have positive delta; short calls have negative delta. Long puts have negative delta; short puts have positive delta. Long stock has positive delta; short stock has negative delta. The closer an option’s delta is to 1.00 or –1.00, the more the price of the option responds like actual long or short stock when the stock price moves.

So, if the XYZ Aug 50 call has a value of $2.00 and a delta of +.45 with the price of XYZ at $48, if XYZ rises to $49, the value of the XYZ Aug 50 call will theoretically rise to $2.45. If XYZ falls to $47, the value of the XYZ Aug 50 call will theoretically drop to $1.55.

If the XYZ Aug 50 put has a value of $3.75 and a delta of -.55 with the price of XYZ at $48, if XYZ rises to $49, the value of the XYZ Aug 50 put will drop to $3.20. If XYZ falls to $47, the value of the XYZ Aug 50 put will rise to $4.30.

Now, these numbers assume that nothing else changes, such as a rise or fall in volatility or interest rates, or time passing. Changes in any one of these can change delta, even if the price of the stock doesn’t change.

Note that the delta of the XYZ Aug 50 call is .45 and the delta of the Aug 50 put is -.55. The sum of their absolute values is 1.00 (|.45| + |-.55| = 1.00). This is true for every call and put at every strike. The intuition behind this is that long stock has a delta of +1.00. Synthetic long stock is long a call and short a put at the same strike in the same month. Therefore, the delta of a long call plus the delta of a short put must equal the delta of long stock. In the case of the XYZ Aug call and put, .45 + .55 = 1.00. Remember, a short put has a positive delta. (Note: delta can be calculated with different formulas, which won’t be discussed here. Using the Black-Scholes model for European-style options, the sum of the absolute values of the call and put is 1.00. But using other models for American-style options and under certain circumstances, the sum of the absolute values of the call and put can be slightly less or slightly more than 1.00.)

You can add, subtract, and multiply deltas to calculate the delta of a position of options and stock. The position delta is a way to see the risk/reward characteristics of your position in terms of shares of stock, and it’s how thinkorswim presents it to you on the Position Statement on the Monitor page. The calculation is very straightforward. Position delta = option theoretical delta * quantity of option contracts * number of shares of stock per option contract. (The number of shares of stock per option contract in the U.S. is usually 100 shares. But it can be more or less, due to stock splits or mergers.) thinkorswim performs this calculation for each option in your position, then adds them together for each stock.

So, if you are long 5 of the XYZ Aug 50 calls, each with a delta of +.45, and short 100 shares of XYZ stock, you will have a position delta of +125. (Short 100 shares of stock = -100 deltas, long 5 calls with delta +.45, with 100 shares of stock per contract = +225. –100 + 225 = +125)

A way to interpret this delta is that if the price of XYZ rises $1, you will theoretically make $125. If XYZ falls $1, you will theoretically lose $125. IMPORTANT: These numbers are theoretical. In reality, delta is accurate for only very small changes in the stock price. Nevertheless, it is still a very useful tool for a $1.00 change, and is a good way to evaluate your risk.

An ATM option has a delta close to .50. The more ITM an option is, the closer its delta is to 1.00 (for calls) or –1.00 (for puts). The more OTM and option is, the closer its delta is to 0.00.

Delta is sensitive to changes in volatility and time to expiration. The delta of ATM options is relatively immune to changes in time and volatility. This means an option with 120 days to expiration and an option with 20 days to expiration both have deltas close to .50. But the more ITM or OTM an option is, the more sensitive its delta is to changes in volatility or time to expiration. Fewer days to expiration or a decrease in volatility push the deltas of ITM calls closer to 1.00 (-1.00 for puts) and the deltas of OTM options closer to 0.00. So an ITM option with 120 days to expiration and a delta of .80 could see its delta grow to .99 with only a couple days to expiration without the stock moving at all.

The delta of an option depends largely on the price of the stock relative to the strike price. Therefore, when the stock price changes, the delta of the option changes. That’s why gamma is important.

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Gamma

Gamma is an estimate of how much the delta of an option changes when the price of the stock moves $1.00. As a tool, gamma can tell you how “stable” your delta is. A big gamma means that your delta can start changing dramatically for even a small move in the stock price.

Long calls and long puts both always have positive gamma. Short calls and short puts both always have negative gamma. Stock has zero gamma because its delta is always 1.00 – it never changes. Positive gamma means that the delta of long calls will become more positive and move toward +1.00 when the stock prices rises, and less positive and move toward 0.00 when the stock price falls. It means that the delta of long puts will become more negative and move toward –1.00 when the stock price falls, and less negative and move toward 0.00 when the stock price rises. The reverse is true for short gamma.

For example, the XYZ Aug 50 call has a delta of +.45, and the XYZ Aug 50 put has a delta of -.55, with the price of XYZ at $48.00. The gamma for both the XYZ Aug 50 call and put is .07. If XYZ moves up $1.00 to $49.00, the delta of the XYZ Aug 50 call becomes +.52 (+.45 + ($1 * .07), and the delta of the XYZ Aug 50 put becomes -.48 (-.55 + ($1 * .07). If XYZ drops $1.00 to $47.00, the delta of the XYZ Aug 50 call becomes +.38 (+.45 + (-$1 * .07), and the delta of the XYZ Aug 50 put becomes -.62 (-.55 + (-$1 * .07).

Position gamma measures how much the delta of a position changes when the stock price moves $1.00. Position gamma is calculated much in the same way as position delta. In the Position Statement on the Monitor page, thinkorswim takes the gamma of each option in your position, multiplies it by the number of contracts and the number of shares of stock per option contract, then adds them together.

Just as delta changes, so does gamma. If you were to look at a graph of gamma versus the strike prices of the options, it would look like a hill, the top of which is very near the ATM strike. Gamma is highest for ATM options, and is progressively lower as options are ITM and OTM. This means that the delta of ATM options changes the most when the stock price moves up or down. Let’s look at a deep ITM call option (delta near 1.00), an ATM call option (delta near .50), and an OTM call option (delta near .10). If the stock rises, the value of the ITM call will increase the most because it acts most like stock. Even though the ITM call has positive gamma, its delta really doesn’t get much closer to 1.00 than before the stock rose. The value of the OTM call will also increase, and its delta will probably increase as well, but it will still be a long way from 1.00. The value of the ATM option increases, and its delta changes the most. That is, its delta is moving closer to 1.00 much quicker than the delta of the OTM call. Practically speaking, the ATM call can provide a good balance of potential profit if the stock rises versus loss if the stock falls. The OTM call will not make as much money if the stock rises, and the ITM will lose more money if the stock falls.

Judging how gamma changes as time passes and volatility changes depends on whether the option is ITM, ATM or OTM. Time passing or a decrease in volatility acts as if it’s “pulling up” the top of the hill on the graph of gamma, and making the slope away from the top steeper. What happens is that the ATM gamma increases, but the ITM and OTM gamma decreases. The gamma of ATM options is higher when either volatility is lower or there are fewer days to expiration. But if an option is sufficiently OTM or ITM, the gamma is also lower when volatility is lower or there are fewer days to expiration.

What this all means to the option trader is that a position with positive gamma is relatively safe, that is, it will generate the deltas that benefit from an up or down move in the stock. But a position with negative gamma can be dangerous. It will generate deltas that will hurt you in an up or down move in the stock. But all positions that have negative gamma are not all dangerous. For example, a short straddle and a long ATM butterfly both have negative gamma. But the short straddle presents unlimited risk if the stock price moves up or down. The long ATM butterfly will lose money if the stock price moves up or down, but the losses are limited to the total cost of the butterfly.

Gamma is a good reason to look at a profit/loss graph of your position over a wide range of possible stock prices. The thinkorswim Analysis page will help you see how risky a negative gamma position might be.

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Theta

 

Theta, a.k.a. time decay, is an estimate of how much the theoretical value of an option decreases when 1 day passes and there is no move in either the stock price or volatility. Theta is used to estimate how much an option’s extrinsic value is whittled away by the always-constant passage of time. The theta for a call and put at the same strike price and the same expiration month are not equal. Without going into detail, the difference in theta between calls and puts depends on the cost of carry for the underlying stock. When the cost of carry for the stock is positive (i.e. dividend yield is less than the interest rate) theta for the call is higher than the put. When the cost of carry for the stock is negative (i.e. dividend yield is greater than the interest rate) theta for the call is lower than the put.

Long calls and long puts always have negative theta. Short calls and short puts always have positive theta. Stock has zero theta – its value is not eroded by time. All other things being equal, an option with more days to expiration will have more extrinsic value than an option with fewer days to expiration. The difference between the extrinsic value of the option with more days to expiration and the option with fewer days to expiration is due to theta. Therefore, it makes sense that long options have negative theta and short options have positive theta. If options are continuously losing their extrinsic value, a long option position will lose money because of theta, while a short option position will make money because of theta.

But theta doesn’t reduce an option’s value in an even rate. Theta has much more impact on an option with fewer days to expiration than an option with more days to expiration. For example, the XYZ Oct 75 put is worth $3.00, has 20 days until expiration and has a theta of -.15. The XYZ Dec 75 put is worth $4.75, has 80 days until expiration and has a theta of -.03. If one day passes, and the price of XYZ stock doesn’t change, and there is no change in the implied volatility of either option, the value of the XYZ Oct 75 put will drop by $0.15 to $2.85, and the value of the XYZ Dec 75 put will drop by $0.03 to $4.72.

Theta is highest for ATM options, and is progressively lower as options are ITM and OTM. This makes sense because ATM options have the highest extrinsic value, so they have more extrinsic value to lose over time than an ITM or OTM option. The theta of options is higher when either volatility is lower or there are fewer days to expiration. If you think about gamma in relation to theta, a position of long options that has the highest positive gamma also has the highest negative theta. There is a trade-off between gamma and theta. Think of long gamma as the stuff that provides the power to a position to make money if the stock price starts to move big (think of a long straddle). But theta is the price you pay for all that power. The longer the stock price does not move big, the more theta will hurt your position.

Position theta measures how much the value of a position changes when one day passes. Position theta is calculated much in the same way as position delta, but instead of using the number of shares of stock per option contract, theta uses the dollar value of 1 point for the option contract. (The dollar value of 1 point in an option contract for U.S. equities is usually $100, but can be different due to stock splits.) thinkorswim takes the theta of each option in your position, multiplies it by the number of contracts and the value of 1 point for the option contract, then adds them together.

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Vega

 

Vega (the only greek that isn’t represented by a real Greek letter) is an estimate of how much the theoretical value of an option changes when volatility changes 1.00%. Higher volatility means higher option prices. The reason for this is that higher volatility means a greater price swings in the stock price, which translates into a greater likelihood for an option to make money by expiration.

Long calls and long puts both always have positive vega. Short calls and short puts both always have negative vega. Stock has zero vega – it’s value is not affected by volatility. Positive vega means that the value of an option position increases when volatility increases, and decreases when volatility decreases. Negative vega means that the value of an option position decreases when volatility increases, and increases when volatility decreases.

Let’s look at the XYZ Aug 50 call again. It has a value of $2.00 and a vega of +.20 with the volatility of XYZ stock at 30.00%. If the volatility of XYZ rises to 31.00%, the value of the XYZ Aug 50 call will rise to $2.20. If the volatility of XYZ falls to 29.00%, the value of the XYZ Aug 50 call will drop to $1.80.

Vega is highest for ATM options, and is progressively lower as options are ITM and OTM. This means that the value of ATM options changes the most when the volatility changes. The vega of ATM options is higher when either volatility is higher or there are more days to expiration.

Position vega measures how much the value of a position changes when volatility changes 1.00%. Position vega is calculated much in the same way as position theta. thinkorswim takes the vega of each option in your position, multiplies it by the number of contracts and the dollar value of 1 point for the option contract, then adds them together.

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Rho

Rho is an estimate of how much the theoretical value of an option changes when interest rates move 1.00%. The rho for a call and put at the same strike price and the same expiration month are not equal. Rho is one of the least used greeks. When interest rates in an economy are relatively stable, the chance that the value of an option position will change dramatically because of a drop or rise in interest rates is pretty low. Nevertheless, we’ll describe it here for your edification.

Long calls and short puts have positive rho. Short calls and long puts have negative rho. How does this happen? The cost to hold a stock position is built into the value of an option. It all has to do with the idea of an option being a substitute of sorts for a stock position. For example, if you think the stock of XYZ is going to rise, you could buy 100 shares of XYZ for $4800, or you could buy 2 of the XYZ Aug 50 calls for $400. (2 XYZ Aug 50 calls would give me a position delta of +90 — pretty close to the XYZ stock position delta of +100.) As you can see, you would have to spend about 12X the amount spent on the options that you would spend on the stock. That means that you would have to borrow money or take cash out of an interest-bearing account to buy the stock. That interest cost is built into the call option’s value.

The more expensive it is to hold a stock position, the more expensive the call option. An increase in interest rates increases the value of calls and decreases the value of puts. A decrease in interest rates decreases the value of calls and increases the value of puts.

Back to the XYZ Aug 50 calls. They have a value of $2.00 and a rho of +.02 with XYZ at $48.00 and interest rates at 5.00%. If interest rates increase to 6.00%, the value of the XYZ Aug 50 calls would increase to $2.02. If interest rates decrease to 4.00%, the value of the XYZ Aug 50 calls would decrease to $1.98.

Here’s how we use strategies based on the greeks to generate Reliable Profits No Matter if the Market goes UP or DOWN…with the thinkorswim platform.

Oct 072013
 

New Winning Trade System Download
Stock Option Trading Course VideosClick here to Download the Complete Winning Trade System!

New sequel to the Trading Pro System has arrived!

Hi Traders,

The Trading Pro System has taught thousands of people to trade successfully.

People have been asking for another course (perhaps DEMANDING would be a better word).

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