WE WRITE ABOUT
- Trade suggestions focus primarily on stock options, stock index options and options on exchange traded funds (ETF's)
- Bullish (long) option trading strategies – buying calls, selling puts or other bullish plays
- Bearish (short) option trading strategies – buying puts, selling calls, or other bearish plays
- Trading time horizon is short-to-medium term, generally considered to be from approximately one to ten weeks in length
- Selections are designed to be low-risk trades with high-profit potential and a defined target price
- Technical analysis is used to suggest a specific trade entry price and when to exit the position
THE CHART (see $SPX chart example down below)
The illustration is usually a candlestick stock chart with the graphics
- 14-day Relative Strength Indicator (RSI) – at the top of the chart
- Closing Price (Hourly, Daily, or Weekly)
- 14-day Exponential Moving Average (EMA) – blue horizontal line
- 50-day Simple Moving Average – MA(50) red horizontal line
- 200-day Simple Moving Average – MA(200) green horizontal line
- 20-day upper Bollinger Band (BB) level – upper solid purple line
- 20-day Simple Moving Average – purple dotted line in the middle
- 20-day lower Bollinger Band (BB) level – lower solid purple line
- 25% of the trading account is allocated for monthly credit spreads
- 15% is directed towards weekly credit spreads
- 20% allocated to debit trades
- 20% is reserved for any trade adjustments
- 20% is a loss reserve to cover drawdowns
Note: Account Allocation varies depending on the stock market volatility, market corrections, price trends, quarterly earnings, etc.
Attempt to limit the potential maximum risk of loss from each trade to less than 5% of the total trading account.
Technical Analysis/Chart Terms You Should Know
Technical Analysis - a method of evaluating investments by analyzing statistics generated based on market activity, such as past prices and volume. Technical analysts do not attempt to measure an investment's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Technical analysts (like TheOptionPlayer.com) believe that the historical performance of stocks and markets are indications of future performance. In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a Technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, the technical analyst's decision would be based on the patterns or activity of people going into each store.
Stock Chart - a graphical depiction of an investment's price movements over a given time period. Technical analysts use chart formations to identify trends in a stock's price and to help them decide whether and when to buy and sell - that is, to determine entry and exit points. Technical analysts also use chart formations to decide where to place initial and trailing stops. See $INDU Chart example at the bottom of this page (which represents the Dow Jones Industrial Average index)
Candlestick Chart - a price chart that displays the high, low, open, and close for an investment each day over a specified period of time. The $INDU Chart at the bottom of this page is a candlestick chart
Closing Price - the final price at which an investment is traded at the end of the trading day. The closing price represents the most up-to-date valuation of an investment until trading commences again on the next trading day. Most financial instruments are traded after hours (although with markedly smaller volume and liquidity levels), so the closing price of an instrument may not match its after-hours price. Still, closing prices provide a useful marker for investors to assess changes in investment prices over time - the closing price of one day can be compared to the previous closing price in order to measure market sentiment for a given investment over a trading day. The price follows the time-frame – see (Daily) in the middle of the chart example below
Relative Strength Indicator (RSI) - A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued. See RSI in the upper left corner of the chart example below
Simple Moving Average (MA or SMA) - A simple, or arithmetic, moving average that is calculated by adding the closing price of the instrument for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react. Denoted in the middle of chart below as MA (50) which is the 50-day SMA red line across the chart and MA (200) which is the 200-day SMA line in green across the chart
Exponential Moving Average (EMA) - A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. The exponential moving average is also known as "exponentially weighted moving average". This type of moving average reacts faster to recent price changes than a simple moving average. Denoted in the middle of chart below as EMA (14) which is the 14-day EMA blue line across the chart
Bollinger Bands - A band plotted two standard deviations away from a simple moving average, developed by famous technical trader John Bollinger. Because standard deviation is a measure of volatility, Bollinger bands adjust themselves to the market conditions. When the markets become more volatile, the bands widen (move further away from the average), and during less volatile periods, the bands contract (move closer to the average). The tightening of the bands is often used by technical traders as an early indication that the volatility is about to increase sharply. This is one of the most popular technical analysis techniques. The closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market. Labeled in the chart below as BB (20,2,0) which refers to two solid purple lines across the chart, one above and the other line below the candlesticks and the purple dotted line across the middle
Volume - The number of shares or contracts traded in a security or an entire market during a given period of time. It is simply the amount of shares that trade hands from sellers to buyers as a measure of activity. If a buyer of a stock purchases 100 shares from a seller, then the volume for that period increases by 100 shares based on that transaction. Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. If the markets have made strong price move either up or down the perceived strength of that move depends on the volume for that period. The higher the volume during that price move the more significant the move. The Volume is labeled in the middle of the chart followed by the amount of trading volume for the time period (2,764,724 in the chart example below). The reddish bars represent volume on 'down' days, gray bars are days when the price closes 'up'.
Moving Average Convergence/Divergence (MACD) - a trend-following momentum indicator that shows the relationship between two moving averages. Traders also watch for a move above or below the zero line - when the MACD falls below this signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the zero (signal line), the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Labeled as MACD in the box at the bottom of the chart
Implied Volatility - the estimated volatility of a financial instrument. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets.
Historical Volatility - the actual realized volatility of a financial instrument over a given time period. This measure is frequently compared with implied volatility to determine if options prices are over- or undervalued. Stocks with a high historical volatility usually require a higher risk tolerance.
Disclaimer: Trading and investing involve a substantial degree of a risk of loss and are not suitable for everyone. Past performance is not indicative of future results. Fundamental factors, seasonal and weather trends, daily news, and other current events may have already been factored into the markets. Some trading strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. The publisher, and/or its affiliates, staff or anyone associated with www.theoptionplayer.com, do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (subscribers or otherwise). Information provided is compiled by sources believed to be reliable. The publisher, and/or its principals, assume no responsibility for any errors or omissions as the information may not be complete or events may have been canceled or rescheduled. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the expressed written consent of the publisher.