Keep Calm and Carry OnKeep an eye on the chart above.
Again, the planned thread of ed posts are interrupted by an idea that is more pressing. See it as a bit of relevant escapism if you will. Not that Money Man is a guru, but he has been asked many times by fellow traders how to get out of a tight spot they were finding themselves in. Now we all know that giving financial advice, especially for a character without official identification, is not encouraged. There is a reason for this that we will touch on later.
Reading his previous ed posts should give a fairly comprehensive idea as to how traders end up in these situations. But ‘bringing it back here’, the first time Money Man was asked such a question was, I think in 2017 (he did not exist then in this form, but I am having him earn his keep). It was something like a listing on Coinbase of some cryptos that caused a serious rally in price. Followed by a steep correction. The trader frantically wanted to know if s/he should bail or stick in it. Once a trader starts asking, “what should I do?” or desperately looking for somebody to tell them where the price is definitely going next, the trader has lost control as price has gone outside of his tolerance. Money Man foolishly advised the trader that the price would go to the level the exuberance started from. He was ridiculed straight away as trying to be a guru. Price luckily did return to that level and he was hailed as a guru. What was foolish about that advice then? The problem with it was that it was one trader, publicly on an exchange chat, telling another exactly how to trade.
Money Man has evolved since those days and hopefully grown wiser. He came to realize that his answer then could have been much better. For one, he offered his take as a solution to somebody else’s problem. It was done in arrogance, thinking he knew the unknown with inevitability. Putting himself at risk of causing harm to somebody else through maybe understanding the problem but not knowing the person having the problem and what their goals were, or what their tolerances were. Also, why did the trader ask the question? Because they were outside of their comfort zone / tolerance and could not get to clear thinking. It was not good for anybody to offer such a specific answer, even though it worked out. By doing that he chipped away at that trader’s sense of competence and confidence. Getting to know how valuable your sense of self is, should get you to realize how important it is to stay humble, for your own sake and the sake of others.
People are vulnerable when their emotions take over and prevent them from thinking clearly – why there is a legal attempt to prevent possible charlatans from getting control of the mind of others when vulnerable (more on vulnerability and emotions in the PS). They start to look outside themselves for answers and neglect what they already have. Here lies the kicker: you have to plan and trade yourself out of the situation. You are capable. Your emotions incapacitate you, so get rid of them.
How? Money Man advises that you take the chart and look at decision levels, patterns, trends, or whatever your trading is based on (if it is simply based on hunches – you are in serious trouble). Take your calculator, work out what all the eventualities would mean and decide what is within your tolerance. Put your orders in (not market, but limit orders and conditional orders. How many times have you already felt negative emotions about market orders?). Now you have built your acceptance into the eventualities. Put alerts on (Trading View has great alerts), to reassure yourself that the sky will not fall without you knowing and then walk away for a set amount of time. Go do what will get your mind away and quill your emotions and make you feel good about yourself. Indulge in a little escapism. When you get back to the screen again, do the same as above until you feel back in control. Accept whatever happens. Accept that you will never be 100% right, but you steadied the ship yourself. Through this you will retain your confidence, not be vulnerable, and learn things which are worth the money (possibly lost) paid to learn.
Conclusion: Prevent yourself from losing control in the first place – have a read of previous ed posts to see Money Man’s ideas on this. Make sure that you know your tolerance and build it into your trades. Be kind to yourself, you are human. All traders end up finding themselves trading in discomfort every so often, so figure out what makes it more comfortable for yourself. Very important to me: Please leave a like if you appreciate the effort, please leave a comment to develop this further and Please follow if you think this thread is leading somewhere that you would like to know about.
PS We all know advertising is built on playing on your emotions. What a successful industry that is? It targets your vulnerabilities – your emotions. Fear, greed, lust, etc, etc are well known negative emotions and mindsets, but there are positive emotions too: empathy, respect, humility, etc. These are what make humanity collectively stronger. They are not self-centred but build community. They build you up when you build others up. Help me here, but I think they all could be described as wisdom (a hard word to use when talking about trading as it requires a rewiring of the mind and sounds ‘guru-ish’). Trading is not a zero-sum game, nor is life a competition. Doing it well is the goal.
Trading Tools
Managing Risk using the Long and Short ToolThis is a companion video to my "Trade Like a Pirate" article showing how the Long & Short tool can help you manage your "aRRR" - Your Reward-to-Risk Ratio. Whether you are trading a Company, a Currency, or Commodity, you want to Consistently trade your positions in terms of Risk and Reward for consistent results and to not "blow up your account" with a bad trade.
How much to risk per trade? Returns and drawdowns.Between 1990 and June 2000 the median hedge fund (there are not that many that started in 1990) had an annual return of 16.3% and max drawdown of 28.5% according to MORGAN STANLEY. Keep in mind the 2/20 destroys profits. (16.3%*1.25)+2% = 22.4%, and 28.5-2 = 26.5%.
So what the median fund actually did I I did not mess it up was get 22.4% return a year and a max drawdown of 26.5%.
Of course that drawdown is the worst over a 10 year period.
The S&P 500 has an annual return of 17.2% and max drawdown of 15.4%.
What is interesting is to look at the details, for example the few specialist credit between 90 and 00.
The smallest return one had this to show: 11.5% annual, -4.9% max down.
The biggest return one had this to show: 17.4% annual, -19.4% max down.
More returns but with much more drawdown.
Here is the paper:
www.morganstanley.com
A portfolio of hedge funds, since they're not all completely correlated, would do much better than the S&P500 in particular on the drawdown side.
Renaissance says their medaillon fund uses an average of 12.5 leverage and takes 8000 trades at the same time 4000 short & 4000 long to reduce risk even more.
If this is true it means going in each position with 0,15% of their account. Not sure how far their stop is but has to be less than 10% of a share price, this means a risk of 0.015% per trade at most, now since there are 8000 at the same time it would be 8000 times more than this, but since there are shorts and longs it sorts of evens out and who know what their real risk is? All we know is it is very small that's for sure.
But leverage costs money, and what RenTec did was since their risk was so small and they do a ton of volume, they partnered with banks that offer them extremely cheap leverage.
And then they averaged 66% a year in the past 30 years, with a fund capped at 10 billion.
The secret is diversification, it reduces dramatically risk which allows for better returns.
But we have to come up with this diversification, not easy to find another good place to invest in, another good uncorrelated strategy.
And when we find those additional sources, we are not RenTec we have to pay a big price for leverage so we cannot just scale it hard.
Certain "strategies" will help reduce risk but they also cap returns much and leverage is not free so it might not be worth it depending on the person.
I just want to take a look at a few non-managed "low fee" "safe" no brain funds. Examples for the 10-year period ending January 31, 2017:
Vanguard LifeStrategy Growth Fund (MUTF:VASGX) has a Maximum Drawdown of 47.6% and annual return of 4.7%.
UBS Global Allocation Fund (MUTF:BPGLX) has a Maximum Drawdown of 48.7% and annual return of 2.6%. This fund has the rather unappetizing combination of low return and a large Maximum Drawdown.
LoL this is so bad. And all the grandpas are loving it, they think they found the holy grail and pat each other on the back. Add to this the fact that most people withdraw at the worse time...
Over the same 10 years period the S&P500, returned an annualized 7.024% dividends reinvested (4.8% otherwise) with a max drawdown of 57.8%
From 2000 to 2020 (september) it had annualized returns of 6.23%.
From 1871 to 2019 it returned about 9% (dividend reinvested) - 6.8% if we adjust for inflation, with a max drawdown of Adolf Hitler & Auschwitz the ultimate price.
So we're about in the average with 6%. Growth is slowing down (demographics, tech limits, earth limits...) so we will probably average less than 6% in the future.
From 2007 to 2017 the top strategic DIY portfolio recipes had returns of ~typically 11% with max drawdowns of also about 11%.
Ray Dalio pure alpha 2 has returned 11.5% / yr in the last 20 years and max drawdown I'm not sure I think it was 8% recently and much less before that.
Those numbers are hard to find seriously... But well we get an idea of how far it can get pushed.
An article from 2017: "Investors earned an average of 4.67% on mutual funds over the last 20 years (Source: www.creditdonkey.com)" of course there is no mention of drawdown because who cares am I right? Mutual funds are not for the best & brightest of investors.
Big risk is not a magic trick. "Big risk" does not mean "big return but with big risk". It means NO returns. It means losing with a winning strategy 😂.
Learn how to use the head and shoulder pattern in TradingViewIntroduction of Head and Shoulders Pattern
Technical analysis is a necessary thing to select the positions of perfect entry and exit. For that, There are many patterns available for trading, the head and shoulders pattern is one of them. This article is all about the head and shoulders pattern. In simple words, this pattern includes three triangles. The first triangle is on the left side, and the second one is on the right side, the last one is in between these two. This, the last triangle is the highest in the height, which is called the head, the other two are called the shoulders.
What’s Head and Shoulders?
There will be three vertices or bottom points in a certain price area, but the second apex or bottom point is higher or lower than the other two vertices or bottom points. This type is called the head and shoulders type. One with top and two shoulders is head and shoulder top; one with two shoulders is head and shoulder bottom type. However, sometimes there may be more than three vertices or bottoms. If there are one or two heads (or bottoms), two left and right shoulders, it is called a compound head and shoulder top (or compound head and shoulder bottom).
The W bottom pattern is an important pattern in morphology, and its trend looks like the English letter "W". The W bottom pattern is a mid-term bottom pattern. It usually occurs at the end of a swing downtrend, and generally does not appear in the middle of a market trend. A mid-term short market must correspond to a mid-term bottom, that is, a W The brewing time of the bottom has its minimum period rule, so the shaping period of the bottom W is a necessary condition for judging the authenticity of the shape.
The components of the bottom W have the following two conditions:
There must be at least a relatively long distance between the first low point and the second low point of the bottom of W. Sometimes there will be short-term double bottoms in the market. This cannot be regarded as a bottom of W, but only a small market. Rebound at the end, and it is often a trap.
The transactions at the first low point are relatively active, while the transactions at the second low point are extremely dull. Moreover, the appearance of the second low point is usually slightly arc-shaped. Therefore, the W bottom pattern has the characteristics of a left-pointed right circle.
The formation of the bottom W pattern is due to the fact that after the long-term price decline, some investors who are optimistic about the market outlook believe that the price is already very low and has investment value, and the anticipatory buying is active, and the price will naturally rise, but this will affect the large investment institutions to absorb low-cost chips. Therefore, under the pressure of large investment institutions, the price has returned to the first low point, forming support. The fall this time hurt the enthusiasm of investors, and the shape was arc-shaped. There are two low points and two rebounds in the bottom W pattern. From the first high point, horizontal neckline pressure can be drawn. When the price breaks upward again, it must be accompanied by active transactions before the bottom W is officially established. If the upward breakthrough is unsuccessful, the exchange rate must continue to be adjusted horizontally. After the exchange rate breaks through the neckline, the neckline pressure becomes the neckline support, and the exchange rate will retreat at this time. The exchange rate temporarily retreats to the vicinity of the neckline. After the retreat ends, the exchange rate begins to rise in waves.
Generally speaking, the second low point of the W bottom pattern is better than the first low point, which can create a bottom-breaking atmosphere and let retail investors out, thus forming a relatively concentrated bottom of chips to facilitate the pull of large investment institutions.
Head and shoulders are the reversal patterns. That includes the concept of the bearish and bullish trend. In this pattern, there would be a one trend line, reacts as support, all three triangles are connected with that, called a neckline. If the trend crosses the neckline, there will be a change in the trend. By this, we can decide the trend (upward or downward).
The next is the bearish head and shoulders (top reversal) and the bullish head and shoulders (bottom reversal).
Bullish Head and Shoulders (Figure B): In this, the trend enters by falling. And makes the head and shoulders pattern by breaking the neckline. Then it will jump and make an uptrend by crossing the neckline in an incremental way.
Bearish Head and Shoulders (Figure A): The trend initials in the uptrend further it crosses the neckline and makes the Head and Shoulders pattern and then after, by breaking the neckline, it will fall. It calls Top reversal, too.
In-depth Description of Head and Shoulders Pattern:
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The reversal pattern refers to the pattern formed by the reversal of the stock price trend, that is, the signal that the stock price turns from an uptrend to a downtrend, or from a downtrend to an uptrend.
1. The pattern analysis
The head and shoulders trend can be divided into the following different parts:
(i) The left shoulder part-lasts a period of ascending time, the trading volume is very large, in the past, people who bought at any time were profitable, so they started to get Profit-selling caused a short-term decline in the stock price, and the turnover was significantly reduced when it reached its peak.
(ii) Top, After a short period of time, the stock price rose again strongly, and the transaction also increased. However, compared with the left shoulder part, the highest point of trading volume has significantly decreased. The stock price rose above the previous high and then fell again. The trading volume also decreased during this down period.
(iii) The right shoulder part-the stock price fell to close to the last down low point and then gained support to rebound. However, the market investment sentiment was significantly weakened, and the turnover was significantly reduced compared with the left shoulder and the head, and the stock price could not reach the head high The point fell back, and the right shoulder part was formed.
(iv) Breakthrough, Fall from the top of the right shoulder and break through the bottom neckline connected by the bottom of the left shoulder and the bottom of the head. The extent of the breakthrough of the neckline must exceed 3% of the market price.
Simply put, the shape of the top of the head and shoulders presents three distinct peaks, one of which is in the middle is slightly higher than the other two peaks. As for trading volume, there was a cascading decline.
2. Market meaning
The head and shoulders is a technical trend that cannot be ignored. From this pattern, we can observe the fierce competition between the poor and the weak.
At the beginning, the optimistic forces continued to push the stock price up, the market investment sentiment was high, and a large number of transactions occurred. After a short-term downturn adjustment, those who had experienced the last uptrend of germanium bought during the adjustment period, and the stock price continued to rise. At the second high point, the market appears to be healthy and optimistic on the surface, but the transaction has been much lower than before, reflecting the weakening of the buyer's power. Those who did not have confidence in the prospects and missed the last high point and profit-taking, or those who bought at the falling low point for short-term speculation all sold, and the stock price fell again. The third rise provides an opportunity for those investors who later realized that they missed the opportunity of the last rise, but the stock price is unable to rise above the previous high, and when the trading volume drops further, it is almost certain that the past bullish optimism is almost certain The mood has been completely reversed. The future market will be weak and weak, and a sharp drop is about to come.
The analysis of this pattern is:
(i) This is a turning pattern of a long-term trend, which usually appears at the end of a bull market.
(ii) When the trading volume of the most recent high is lower than the previous high, it implies the possibility of head and shoulders; when the stock price cannot rise to the previous high for the third time, trading will continue When it drops, experienced investors will seize the opportunity to sell.
(iii) When the head-shoulders-top-neckline breaks, it is a real sell signal. Although the stock price has fallen by a considerable amount from the highest point, the decline has only just begun. Investors who have not shipped yet continue to sell.
(iv) When the neckline breaks below, we can predict which level the stock price will fall to according to this type of measurement method of least drop. The method of this measurement is to draw a vertical line one by one from the highest point of the head to the neckline, and then start at the point where the right shoulder breaks through the neckline, and measure the same length downwards. The price thus measured is the stock price. The smallest drop.
3. Tips
(i) Generally speaking, the height of the left shoulder and the right shoulder are roughly equal, and the right shoulder on the top of the head and shoulders is lower than the left shoulder. But if the height of the right shoulder is higher than the head, the pattern cannot be established.
(ii) If its neckline slopes downward, it indicates that the market is very weak.
(iii) In terms of trading volume, the left shoulder is the largest, followed by the head, and the right shoulder is the smallest. However, according to some statistics, about one-third of the head and shoulders have more turnover on the left shoulder than the head, one-third of the turnover is roughly equal, and the remaining one-third have more turnover on the head than the left shoulder. .
(iv) When the neckline breaks, there is no need to increase the turnover. If the turnover increases sharply when the break, it shows that the selling power of the market is very strong, and the stock price will decline more rapidly as the turnover increases.
(v) After breaking the neckline, there may be a temporary rebound (post-draw). This situation usually occurs when a break of low volume occurs. However, the temporary recovery should not exceed the neckline level.
(vi) The head-and-shoulders top is a very lethal form, and its drop is usually greater than the smallest drop measured.
(vii) If the stock price finally rebounds at the neckline level and is higher than the head, or if the stock price drops below the neckline and then rises above the neckline, this may be a failed head and shoulders and should not be trusted.
Reversal pattern-head and shoulders bottom
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1. The shape analysis [ Figure B ]
is the same as the shape of the head and shoulders, except that the whole shape is reversed, also known as "inverted head and shoulders". When the left shoulder is formed, the stock price drops and the trading volume increases, followed by a secondary increase with a small volume. Then the stock price fell again and fell below the lowest point of the last time, and the trading volume increased again with the decline, which was more than the trading volume during the rebound phase of the left shoulder-forming a head; when it rebounded from the lowest point of the head, the trading volume was May increase. The volume of the entire head is more than that of the left shoulder. When the stock price rebounded to the last rebound high, there was a third fall. At this time, the trading volume was obviously less than that of the left shoulder and head. When the stock price fell to the level of the left shoulder, the decline stabilized, forming the right shoulder. . Finally, the stock price formally instigated an upward trend, and accompanied by a large increase in transactions, when the neckline resistance broke through, the transaction increased significantly, and the whole pattern was established.
2. Market meaning
The analytical significance of the head and shoulders bottom is no different from that of the head and shoulders top. It tells us that the past long-term trend has been reversed. Stock prices have fallen again and again, and the second low (head) is obviously lower than the previous one. The price was low, but it quickly turned around and bounced back. The next fall, the stock price fell to the last low level and has gained support and rebounded, reflecting the optimistic forces that are gradually changing the market’s past weakening situation. When the high resistance line (neckline) of the two rebounds breaks, it shows that the optimistic side has completely knocked down the weak side, and the buyer replaces the seller to completely control the entire market.
3. Tips
(i) The shape of the top of the head and shoulders is similar to that of the bottom of the head and shoulders. The main difference lies in the volume.
(ii) When the head-shoulders-bottom-neckline breaks, it is a real buy signal. Although the stock price has risen by a certain amount compared with the lowest point, the upward trend is only just beginning. Investors who still suggest buying should continue to chase. The method of measuring the least increase is to draw a vertical line from the lowest point of the head to intersect the neckline, and then start at the point where the right shoulder breaks through the neckline, and measure the same height upwards. The measured price is that the stock will rise. The smallest amplitude. In addition, when the neckline resistance breaks, there must be a surge in volume, otherwise it may be a wrong break. However, if the transaction gradually increases after the breakthrough, the pattern can also be confirmed.
(iii) Generally speaking, the head and shoulders pattern is relatively flat, so it takes a longer time to complete.
(iv) After breaking through the neckline, there may be a temporary fall back, but it should not fall below the line. If it falls below the neckline, or if the stock price falls back at the neckline level, the neckline resistance cannot be broken, and it falls below the head, this may be a failed head and shoulders pattern.
(v) Head-and-shoulders bottom is one of the most predictive patterns. Once confirmed, the increase will mostly exceed the minimum increase.
Reversal pattern-compound head and shoulders
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1. [ Figure A & B ]
Shape analysis The compound head and shoulders type is the deformation trend of the head and shoulders (head and shoulders top or head and shoulders bottom), and its shape is very similar to the head and shoulders, except that the shoulder, head, or both appear more than once at the same time, roughly It can be divided into the following categories:
(i) One-head and two-shoulder style: One head has two left and right shoulders of the same size, and the left and right shoulders are roughly balanced. More often is a pair of right shoulders. When the first right shoulder is formed, the stock price does not immediately fall below the neckline, but instead turns to rebound, but the rebound stops below the right shoulder height, and finally the stock price continues to follow the original The trend is down.
(ii) One-head and multiple-shoulder style: The general head-and-shoulder style tends to be symmetrical, so when two left shoulders are formed, it is likely that one shoulder will also be formed. Except for the volume, the left and right half of the graph is almost identical.
(iii) Long-headed and multi-shouldered pattern: During the formation of the head, the stock price has risen again and again, and it has risen to the same high level as last time before falling back down, forming two obvious heads. Trend. One thing must be noted: the volume of the second head tends to decrease compared to the first one.
2. Meaning market
analysis significance complex head and shoulders patterns and common type of head and shoulders patterns as when appears at the bottom, it means that a longer-term rising market around the corner; if appear at the top, that the market will become more fall.
In the initial stage of forming a compound head and shoulders pattern, the volume may be irregular, making the pattern difficult to identify, but after a while, it is easy to see that it is exactly the same as the head and shoulders pattern.
Many people overestimate the expected rise (or fall) power of the compound head and shoulders pattern. In fact, the power of the compound head and shoulders pattern is often weaker than the ordinary head and shoulders pattern. When a mid-term trend appears, the compound head-and-shoulders pattern completes its minimum increase (or decline) and then no longer continues, while the increase (or decline) of the ordinary head-and-shoulders pattern is often the most measured big.
3. Key points
(i) The minimum increase/decrease measurement method of the composite head and shoulders pattern is the same as that of the ordinary head and shoulders pattern.
(ii) It is difficult to draw the neckline of the composite head-and-shoulders pattern, because each shoulder and the falling part of the head (the bottom of the composite head and shoulders is the rising part), not all fall on the same line. Therefore, the two most obvious short-term lows (compound head and shoulders are short-term rebound highs) should be connected to form a neckline. In addition, it may be connected to the neckline at the level where the price has fallen (or rebounded) the most times.
Reversal pattern-single-day (double-day) reversal
=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+=+
1. Pattern analysis [ Figure B ]
When a stock continues to rise for a period of time, the stock price is suddenly and unusually pushed up on a certain trading day, but it is immediately under strong selling pressure, and all the gains of the day are completely reduced. If you fall more and close at the lowest price of the day (or close to the lowest price of the day), this trading day is called the top one-day reversal. Also when it fell, the stock price suddenly fell sharply on a certain trading day, but it was immediately supported by strong buying. All the declines of the day may be increased, and the highest price of the day (or close to the highest price of the day) Price) closes, this is the bottom one-day reversal.
The two-day reversal is a deformation of this pattern. In the process of rising, the stock price of the stock rose sharply on a certain trading day and closed at the highest price of the day. However, after the stock price opened at yesterday’s closing price on the next day, the price continued to fall throughout the day. It is the closing of the lowest price of the previous day, and the performance of this trend is called the top two-day counter. Also when it fell, the stock price suddenly fell sharply on a certain trading day, but the following trading day completely recovered the lost ground and closed at the highest price of the day, which is the bottom two-day reversal.
2. Market implications
Let us take the bottom one-day reversal as an example to explain the cause of this phenomenon.
During the downward phase, as the stock price continued to fall, more and more investors were unable to bear greater losses, so they stopped loss and sold. Their selling further pushed down the stock price, and the lower price made them more eager to sell, which caused the price to fall sharply that day. When they finished selling, the selling pressure suddenly disappeared. Other investors tried to buy because of the lure of new low prices and immediately made profits. Therefore, more investors joined the ranks of buying. The order has been completely digested, so the buying order quickly pushed up the stock price, bringing back all the prices that fell that day.
The market meaning of the one-day reversal pattern has at least two points:
(i) The market temporarily peaks (when the top one-day reversal occurs) or bottoms (when the bottom one-day reversal occurs). The top one-day reversal usually occurs in the late period of a consumable rise; the bottom one-day reversal occurs at the end of the panic selling.
(ii) This is not a signal of a long-term trend reversal. It usually appears at the top of the consolidation pattern, although it may also appear at the peak (or bottom) of the long-term trend.
3. Key points revealed
(i) On the day of the single-day reversal, the transaction volume suddenly increased, and the price fluctuation range was very large, both of which were significantly larger than usual. If the trading volume is not high or the price volatility throughout the day is not large, the pattern cannot be confirmed.
(ii) The volatility of the stock price within one or two hours may be greater than the volatility of the usual three or four trading days. When the top one-day reversal, the stock price opened a lot higher than the previous trading day, but the situation quickly reversed, the price quickly moved in the opposite direction, and the closing price of the last day was almost nothing compared to the previous trading day Variety. The bottom one-day reversal situation is exactly the opposite.
(iii) Generally, 15 minutes before the market closes, there is a sudden increase in trading and the price quickly moves in the opposite direction.
(iv) The volatility of the two-day reversal of the transaction and price is also huge. The top two-day reversal completely falls back to the previous trading day's gain on the second trading day; while the bottom two-day reversal fully returns to the previous trading day's decline.
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Trade Like a Pirate: Ye needs the aRRR!!!!One of the amazing things about trading the financial markets is that it is the only industry where we “common folk” have the potential to EXPONENTIALLY grow our income day after day, week after week, year after year.
All our lives, from opening up our first lemonade stand to landing our first job, we are taught to make LINEAR income: to exchange TIME for MONEY. We are told that we must work “X” amount of hours per day, and you can earn “Y” amount of money. If you want more money, you simply have to work longer and harder: work overtime, work a second job, or start a "side hustle", and though it is true you can increase your earning power through multiple income streams or by climbing the corporate ladder, you are always going to be limited to the amount of money you can make because there are only so many hours in a day that you can work.
As Al Pacino said in Scarface, "Say hello to my little friend…” May I introduce to you, “R”, which stands for “Return”.
There are two powerful paradigms that you, Dear Trader, have access to in our glorious financial markets, and our primary goal needs to be that we MAXIMIZE all we can from them.
Paradigm Number One is a popular reason that we enter the fray: Instead of "working for our money” we trade so that we can "make our money work for us." Instead of clocking into a job where are are assigned duties where we will earn our daily bread, we take our “bread" and we assign it to a company, a commodity, or a currency in the stock, options, futures, and forex markets. We aim to hit “X” dollars per day or “Y” PIPs per day and call ourselves successful traders.
Paradigm Number Two is where the magic is, and is the topic of this article: let's “kick it up a notch” as Emeril likes to say. Instead of trying to earn "so many dollars per day," let us instead set our sights on achieving a certain “R” per day.
“R" is a measure of *return* based upon the amount of ‘risk’ we are willing to take on any trade. A good rule of thumb is that with any trade, you should never risk more than 1% of your account equity and you should never get into a trade without at *least* a 3-to-1 expectation of Reward if you are correct. This is known as the "reward-to-risk ratio”, or “R”. The working principle behind this is that we want to keep our risk *small* (i.e. you won’t blow up your account with a bad trade) and our reward *large*, where your winning trades will give you a minimum of three times what you are risking.
In this scenario of 3:1 you don’t have to be the best of traders to be a profitable trader. Say you do 3 trades per day and you were a mediocre trader, where you are only batting one out of three. You can only have a 33% hit rate, only winning one of every 3 trades, and if that were the case you would win 3%, lose 1%, and lose 1%, netting 1 “R" for the day. (3-1-1 = 1)
"1R? What good is that?" you might ask? Well here’s where we start talking about the *miracle* of compounding. On Day 1 with a $10,000 account you would look at risking $100 per trade to win $300. If you lost 2 and won 1, your account now has a value of $10,100. So on day 2 you aren’t risking $100, but $101. Every day you place 3 trades and win at least 1, your account grows not linearly, but *exponentially*. Each week you are making more and more money EVEN THOUGH YOU ARE DOING THE SAME AMOUNT OF WORK. By week 34 you are risking $500 to make $1,500. At the end of the year, (theoretically of course) that $10,000 could be worth over $120,000 - Your account has now grown in an order of *magnitude* from where you started. And all you are doing is placing 3 trades per day. Day in. Day out.
Do it again for year 2 and see what you come up with! Every day you are doing the same amount of work, but every day you are generating an increasing amount of cashflow as the 1% you are risking grows each and every day.
What does it take to get these kind of results? First, it takes a system of trading that you can follow that can give you at least a 1-in-3 success rate. Second, (and this is the hard part...) it’s all about YOU. Every day you don’t trade is anther day your net worth doesn’t grow… another day you will have to WAIT to achieve your dreams, whatever reason it was that you decided to become a trader.
But once you start realizing the power of R you will NEVER want to trade time for money again: you will want to increase your net worth by 1R, 2R, 5R per day until you reach that Magic Number you need to say “I’m done… I’ve got all the money I need to live as long as I need to enjoy the lifestyle I desire.”
TradingView makes it super-simple to put this philosophy into practice. Using the Long & Short Position tool, you can map out your trade, right-click the tool, select “Create Limit Order” and then change the “% Risk” field to 1%, 0.25%, or whatever your trading plan requires. (My personal “R” is one quarter of one percent, .025). For stock trading, the tool then automatically fills in the number of shares that will satisfy your risk percentage. For futures, it automatically calculates the number of contracts, and for Forex (most brilliantly!) it will automagically perform the necessary currency conversion and calculate the number of Units you can trade. THIS FEATURE ALONE is why I became a Premium subscriber to TradingView to trade through my Forex and Futures brokers - no more position sizer spreadsheets!
If you are not using the Long and Short position tool to place your orders you are missing out on a great resource. I will leave a link to a TradingView blog post on how to use it below.
A great exercise to get you excited about trading like a pirate is to create your own trading spreadsheet and calculate like a Pirate: Calculate your “aRRRRRRR” in multiple scenarios. There are 250 trading days per year give or take. What if you grew by 1R per day and you traded every day? What if you grew by 3R per day but you only traded 2 days per week? What if you were an options trader and you only traded on Mondays but you gained 7R per week? What if you threw in a home-run 20R trade every 3 weeks? (Yes, they do happen!) What’s your end retirement goal? $2 million? $7 million? When can you calculate that you will get there? By estimating your exponential growth you will be able to estimate the you will reach your life target.
Although these scenarios are idealized (we’re not *always* going to have a “Green Candle Day”) we need to have a PLAN for our trading activity. Having a *plan* and matching that with a *vision* will give you a *passion* to DO what you need to do so you will GET what you want to get.
As Louis Carrol said, “If you don’t know where you are going, any road will get you there.” And as Norman Vincent Peale said, "Shoot for the moon. Even if you miss, you'll land among the stars.” Make you plan, and work your plan. And having an exciting Vision will help you wake up early, stay up late, and stay on track.
I hope this lesson helps you bring out your inner pirate… I’ll see you on the high seas of the financial markets!
Trade Hard, and trade well… Till next time…
-Anthony
www.tradingview.com
Learn the "Gann Fan" in just 3 StepsGann theory has been widely used in various fields of finance. To learn to apply the Gann angle line, two problems need to be solved, namely, point selection and volatility. The question about volatility is in the Gann angle line. This article will mainly talk about the problem of selecting points.
The selection point of the Gann angle line is generally selected from the important top and bottom. When selecting, you can judge which point to choose based on your actual operating experience. But depending on the long-term trend, you can choose the Gann angle line starting from zero, which will play a very important role in future predictions.
We took NASDAQ as an example. In the chart, We have learned how to apply the Gann fan to a chart or the trend. It's complicated, but I tried to make it easy to understand and easy to apply. I have used only 2 to 3 things to perfectly apply the Gann Fan.
Gann fan is useful to all the traders, It can be applied to all the time frame.
In the investment process, Many investors like to buy bottoms. This is everyone's ultimate pursuit. That's because every market has important tops and bottoms. Analysis of this position is to make your own funds safer, with minimal risks and greater profits. These will use the Gann angle line confluence position. The force formed at the intersection of the rising angle line and the falling angle line can often form a reversal trend.
In " Financial Analysis Trends ", the grades are divided as follows:
1×1 intersects with 1×1
1×2 intersects with 2×1
1×3 intersects with 3×1
1×4 and 4×1 intersect
1×1 intersects with 1×2 or 2×1
1×1 intersects with 1×3 or 3×1
1×1 intersects with 1×4 or 4×1
1×2 intersects with 1×4 or 4×1
Above is the information about the Gann fan for education purposes only.
Are you "The Unexamined Trader"?Socrates famously said “The unexamined life is not worth living.” Why do we do what we do, why do we feel the way we feel about something, or what is our purpose in life? These questions brought about generation after generation of journals, diaries, and random thoughts from some of our greatest thinkers from Socrates himself, to Jonathan Edwards in early America, and maybe even yourself. If we look at the information, meditate on it, we *should* take future actions that will be purposeful and not live day-to-day mundane lives. We want lives of purpose, of meaning, and of growth and satisfaction.
The same thing goes for our trades. So many of us trade willy-nilly, never looking back as to WHY we took a trade, what was the PURPOSE of the trade, what did we LEARN from that trade, and what are we NEVER going to do again or what will I CONTINUE to do in my future trades?
Just as an unexamined life is not worth living, the unexamined trader should not be trading.
“Why do I keep making the same mistakes?” “How come I let my emotions get the best of me?” “Why do I always seem to miss out on best trades with the monster returns?”
Ask yourself, do you examine each and every one of your trades? At the end of each trading day, do you look for patterns of profit and signs of “The Suck” that draws your account down day after red-candle day? Can you look at the psychology, feel the emotion of why you planned a trade, why you got in a trade, how were you feeling during a trade, and why did you get out of a trade when you did? After that, did you ask “What did I learn?” “What will I continue to do?” and “What mistake will I eradicate from my mindset and NEVER do again?”
There are three kinds of people: Those who make things happen, those who watch things happen, and those who ask “What happened?” The same goes for trading. If you never look back at the trades you took, especially the ones that were losers, you will consistently ask “What happened? Why am I always a loser?” If you watch things happen *plus* examine all the factors that went on during the process, your trading ability will grow inch by inch, yard by yard, which will turn you into one of those top traders who MAKE things happen. You will be able to *see* the money on the chart. And once you learn to identify patterns by analyzing trade after trade after trade, you find there are *limitless* opportunities to make money. (I paraphrased that last sentence from Mark Douglas, Trading in the Zone, which I highly recommend.)
All that said, DO YOU JOURNAL? The trade journal is often the most overlooked tool in the trader toolbox. There are several ways to do so, and there are a plethora of traders on YouTube who share their ideas on how to journal your trades, and I recommend that you try several methods to find what’s right for you. The method I like is to screenshot of my trade and document the fool out of it right there on the chart. Then I “tell the story” via text boxes and arrows, and I number each one of them to walk myself through the story. Yes, each trade has a *story* to tell. I include the FACTS of the trade (the levels of Supply and Demand, the RSI, the trend, whatever factual decisions that went into the trade), the PSYCHOLOGY of the trade (how did I feel when price started going sideways right when price went to 2/3 towards my target?) and the results of the trade (what did I learn, what did I do great that I will continue to do, and what did I not do well that I should remove from my plan or my psychology).
The proof is in the puddin’ as they say… The Covid lockdowns of early 2020 were the "best worst thing" to happen to my trading career. I was a Covid Casualty, as my employer shut down in part as a result of the Covid lockdown requirements. I was mad, upset, depressed, that I couldn’t go out to a coffee shop, bar, or cigar lounge. My friends all hunkered down in their domestic bunkers and wouldn’t come out. After 6 weeks of feeling sorry for myself I had had enough and decided to backtest / backtest / backtest and journal / journal / journal for 8+ hours per day for 30 days. I backtested the top 2 Futures contracts by volume in each category on the 15 minute chart. (2 metals, 2 indexes, 2 meats, 2 energies, etc.). 300-some-odd trades later, I felt like Neo when he woke up out of the Matrix and saw Cypher looking at all the green gobbledygook on the screens … instead of a nonsense of symbols Cypher told Neo that now he could see “Blondes, Brunettes, and Redheads” in the patterns.
After 300 trades, simulating, backtesting, and journaling, I could “see” the money on the chart… the patterns of cashflow… the areas of value traded by the big institutional traders so I could follow them in their footsteps.
I went from backtesting to forward testing, testing with live data in a simulated account using everything I had learned, and three weeks in a row I had a green week.
And then I went live.
Do this yourself and I promise, it will be like taking the Red Pill. You will never see the Matrix, you will never see the charts, in the same way. Instead of blondes, brunettes, and redheads, you will see opportunities, traps, and the footprints left by the market makers… And we can then *follow* in their footsteps.
I leave you with a screenshot of one of my trades from last week… I hope it will inspire you to do the same. If you are not yet a consistent, profitable trader, learn to “see through the noise’ by journaling.
If you want to see the scene I referenced from the Matrix, click here and enjoy! (And clicking the ‘Like’ and “Share” buttons wouldn’t hurt either if this article was edifying to you!) If you like it, I’ll write some more!
If you want to show off your journaling prowess, leave a comment with a picture!
Trade hard, trade well...
A quick look at funded trader prop firmsI hear alot about those and I see alot of ads and get e-mails for certain of those and I am stubborn and refuse to acknowledge the existance of something if they annoy me through ads but I was genuinely curious (that's what they want us to think) because to me "I'm a professional prop trader" sounds alot like "I'm a professional poop sucker".
Is this prop trading really for the experience very good traders? Well from my research no it is not.
You get more funds to trade cool ok, with a regular broker you also get more funds to trade it is called leverage.
You can change the name all you want it's still the same thing.
Either:
1- They let you put your money at risk by requiring you to have a small stake in the whole pot (drawdowns eat up your part of the pot not theirs)
2- They entirely fund the account but actually not really, I explain in the next paragraph
Here is 1 example (this is one of the best reviewed ones the bottom ones are not even worth looking at or yes but just for laughing):
After asking you questions like "what do you plan if you lose 10 in a row", you know this kind of things, and more, and after a demo period of a few weeks or months , they will put you on an account with certain rules. Early on you have more restrictions like smaller max position sizes until you reach a certain profit.
In this example to trade a $25000 account there is a $150 monthly fee and also I think a 150 evaluation fee at the start. There is a trailing drawdown stop of $1500 (6% drawdown), so after a couple months of paying subscriptions and making profit for them their "regular" risk is gone (not the swissie one). They do provide some content, like data feed (I don't remember how much brokers charge for this it's in the same area w/e). So they are not taking all the risk, clients (? what should we call them?) pay to cover the risk.
Another example is really troll. Like I don't even see why they ask traders to write up so much and go through huge courses (no matter who they are even George Soros has to take the course) and then spend months on demo to be "really sure" and then they put you on a 1k account then 10k after 2 green months, then 20k after 2 green months jesus it takes forever to get some size. And the funny part? They expect you to fund part of the account like 20% and that's your drawdown limit basically (not written in any contract I don't think but they'll just cut you off when you run out of your own money). So you take basically all the risk and they keep 30% of the profit. I don't even get why they go through all these double checks...
Most of their risks are with:
- new random traders (they double check these guys but there is only so much they can do)
- some idiot that scalps the swiss franc for 1 point above the floor and blows the whole account
- the typical trash strategy that keeps winning until it does not and then it's the road to zero (the program ends once drawdown is reached)
So the major advantages are:
- access to leverage you get with any broker,
- rogue traders with the discipline of a meth addict get something out of it which are all sorts of restrictions (so... useful for most people actually),
- sometimes access to experienced traders & people that can help you out, depending how autistic they are or not,
- proprietary tools, all sorts of goodies like a chart with the calendar directly on it,
- Some serious capital obviously the biggest one, without the whole risk associated, which also means less stress (still don't get a salary so...),
- also I guess telling clueless people you are a "professional" to help you sell courses & EAS weeell I mean if they have traded with the firm for a few months they have made some money and didn't drawdown 3% or whatever the limit is but doesn't mean they are Jim Chanos of forex most likely they have a trash system that works until it doesn't (not that bad if you stop using it when it drawdowns too much as those firms are doing).
Seeing that some profitable "investors" (over a few months or years at most imo) end up joining the ones that let you take all the risk and charge you for the priviledge really tells that yes an idiot with the rational analytical abilities of a potato can come up with a profitable strategy if he puts the hours in. But trust me, the road will be hard and the individual won't become a "big short" hero or Soros.
Kweku said he knew he wasn't the smartest but he made sure if someone put 1 hour in he'd put 2. He got promoted too fast, they pushed him for more performance, he was afraid of getting deported and then he went full commando and lost billions and got deported to Ghana. Now he give seminars where he whines that bankers are really mean people or something. I don't know what really happened, couldn't he put his foot down? I hate bankers too but I haven't heard bank traders complain only rogue psychopaths at least Nick Leeson or whatshisname Nikkei futures gambler that tried to manipulate the market and "averaged down" (lmao) didn't come up with all these excuses. Reminds me SocGen where I worked (not as a trader) are just so damn annoying with security now, and I read a comm from them where they invested (in hindsight, it's always in hindsight) I don't know how many millions into failsafes and risk management etc. Should have invested way less millions and way earlier than this guys 😬
They won't make you profitable (ok unless what's keeping you from making it is you are a psychopath that can't help it or as they call it "undisciplined"), but you have less risk than if you just went *100 on mex, your risk will be spread over time through the money you made for them and a part of the monthly fees.
It's not that bad but it's not that great either. I didn't go into the full calculations you'd have to check risk over time and so on.
The coolest part is the ease of mind (chf) but I couldn't care less I live in Europe and we got negative balance protection and guarenteed stops haha what a scam for brokers.
Hey actually I already abused that with Oil a few months ago my broker ate the full losses and I got the full win on my other broker.
Wups my bad I'm a retail trader no one told me Oil could go negative (really) I thought I clic then lambo.
It is not crazy either for the company I don't think. All in all both sides get something out of it.
It is better at the start for traders and better as time goes by for the firm in my eyes. They invest time and take most risks at the start, then month after month cash in with less and less risk.
Talking about the ones that aren't complete scams obviously this does not apply to "put 10% in that's your max drawdown" these guys for real? 😆
They have some additional rules, for example you might not need to pay for the data (if you already have it via tradingview for example), oh and if you just afk for several days they fire you (you are allowed to take holidays relax but you have to warn first). I'm not sure but I think those are mostly for day traders. They can't sit with someone for 3 years before knowing if he is good or not so wouldn't make sense otherwise.
This depressing grind is not soon over for me I'm afraid. Slow feedback sow growth. And without any upside. Not a day trader at all but I STILL have to check charts every day and do research all the time oh gosh why oh why I tried to write down a process and use combos of indicators to make it as easy as possible but I STILL have to scan through 40 charts all the time AND set alerts AND not overfocus one 1 strategy then miss out AND check these alerts over and over AND make a full preliminary TA I estimate on average once a day (2 charts a day so it's not that bad) then full TA set entry etc then watch my position over the day I don't just abandon them and if I look away that's when they'll move and need my attention.
10*40 = 400 alerts a year so about 2 a day (not counting the "other" alerts obviously, only the initial part that is really anoying)
Little deviation here xd
Why can't I just press a button and have it do every thing for me?
I don't want to miss anything, I don't want to spend to much time on boring repetitive tasks,
I don't want to forget doing my boring repetitive tasks,
but there is no hope there is no cure there are no tricks.
Grind the charts, grind the account size.
Basically I can make it quite simple I don't need to go draw every level and everything.
So I get 40 signals a month or what? I end up having to TA 40 times a month, mostly false signals.
Opposed to this I just TA everything - 35 charts - the week end, and then not sure if I keep it like this charts get dirty or re-TA.
Damn the result is almost the same. As much work. No way around it I have to TA false signals I thought of 10 other methods it always comes back to the same.
With the alerts first it is better I TA useless things less, but I won't see as much, but I will because when I get an alert I do my TA regardless, and only in one direction not both so I gain something.
I just want to hire a wagecuck intern to do the dumb boring part xd Found a use for these 80 IQS that society left on the side road. Wait no they'll mess it up 100%.
Maybe I can put dancing squirrels shouting motivational orders on my screen to get me through it. Or give myself a reward. Help plz someone I'm desperate this bores me so much.
Ok that's it not going to make a full in depth review either just wanted to throw my 2 cents in.
6 IRRATIONAL BEHAVIOR AND THINKING PATTERNS - THINKING CLEARLY !Hello everybody and welcome,
I hope you'll have a pleasant time reading this. And I also hope it'll somehow be useful to you.
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Let's face it, your biggest enemy in trading is not the market, not the hedge funds, not the banks, it's you. Thinking clearly is one of the hardest things to do when trading/investing.
We've all, at least once, done something and asked ourselves afterwards, "why did I do this ?" or "how didn't I see this" ? Did you know that this is called the "Hindsight bias" ? Yes, it's a well-known phenomenon in psychology.
Before we begin, let me explain the diagram. Developing clear thinking takes time. You'll find it very hard at first, but as time goes by, if you keep your focus on it, you'll notice your performance increasing exponentially (this also applies to your life in general !).
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1. Confirmation bias
The confirmation bias, is the distortion of information to make sure that it fits our beliefs. Let's think about it that way : if you think that the world is an awful place, you'll find facts to back your belief about the world. What happens when you encounter a fact that denies your belief ? You either ignore it or distort it in order to make it fit your belief.
It's about the same thing when you're trading. Sometimes, especially new traders, hold bags, meaning that they hold on to losing positions for a long time, hoping for a recovery. No matter what, the trader will find himself putting more weight on the information that confirm his belief (that he's right) and will ignore the information that refutes it (that he's wrong and should sell).
In order to avoid the confirmation bias, you need to weigh every new information the same way .
2. Hindsight bias
The hindsight bias, is directly correlated to the confirmation bias. We tend to understand things better in hindsight than we do in the present moment. To take the previous example of the trader that holds bags a little further : what happens when the trader decides to cut his losses ? He immediately says : "Oh, all the information I had indicated a clear downtrend, why didn't I cut my losses earlier ?". The hindsight bias. In hindsight, everything appears to make sense.
In Trading, the best way to avoid this bias, is to react to the market information that's available to you, rather than trying to predict it or to hope for something to happen. In other words, when you have an edge, you trade your edge and you remain open to any information the market gives you, be it information that confirms or invalidates your initial belief.
3. Loss aversion
We feel better losing nothing than winning something - say hello to loss aversion. Overall, humans are more sensitive to negative things than to positive things. Think about how much we complain. Sometimes, it's justified, but often it isn't. We complain about things we don't have, but omit to be grateful for everything we have.
In trading, loss aversion, is the pattern that makes us hold on to a losing position for a long time. After all, an unrealised loss is less painful than a realised one. To avoid loss aversion, you have to work on your mindset and start thinking in probabilities.
4. Outcome bias
This is another very, very important psychological trait that messes with our trading. Human beings tend to judge a decision by its outcome, rather than gauging the decision process. In the best case scenario, you have an edge and you act on that edge every single time you see it appearing on a chart.
The problem is, because trading is all about probabilities, sometimes, your edge won't work. Does this have something to do with the process ? Absolutely not, it's just how trading works. But, when you aren't aware of it, you start questioning your trading strategy, even though, the outcome is not correlated with the process. Just be aware that the outcome is not a reflection of the process .
5. Action bias
Whenever we do something to compensate for our inaction, we fall for the action bias. We rather do something useless than nothing at all. If you watch football, you've probably witnessed this bias a lot of times. When the opposing team shoots a penalty, the goalkeeper, either dives left or right, even if chances are that the opposing player shoots right in the middle. Why ? Well, diving looks way better than just standing still, whatever the result is.
As Jesse Livermore would say, " Money is made by sitting, not trading ". Considering this bias, for us human beings, it is hard to sit and do nothing. Just think about what you do when you have to wait, be it in a waiting room or at the bus stop. This could be an explanation why most traders fail. They struggle letting their trades unfold and get caught into thinking that their inaction is harmful. Eventually, they end up overtrading, taking trades they otherwise wouldn't, to avoid inaction.
"All of humanity's problems stem from man's inability to sit quietly in a room alone", Blaise Pascal.
6. Overconfidence effect
Overconfidence is a very evil trait to trading. When we are overconfident, we tend to overestimate our knowledge and take bigger risks. Financial markets are unforgivable with overconfidence. Markets really are unpredictable, therefore we shouldn't even try to predict them.
We need to go with the opporunities that the markets make available to us . The best traders are aware of it, therefore they try to be humble and respect the markets. As an example, we could imagine a trader that is on a 5-trade winning streak. He feels great, he feels invincible. What happens ? He takes bigger risks and one day he'll inevitably issue a huge loss.
Tutorial: Super simple buying and selling stocks in Trading ViewJust thought I would create a quick video to show how easy it is to buy and sell stocks within Trading View.
I use Trade Station as the broker - Note: You need to use the US Trade Station. I dont think the International Trade Station works with Trading View.
If you would like to sign up to Trading View would be great if you could use my link so we both get $30 towards our trading.
www.tradingview.com
Growing an accountOn year 1 you were accumulating knowledge & playing around.
On year 2 you were building a strategy and tweaking it and making it work.
Then on year n=3 you spend the first months applying your strat correctly, making sure it keeps working. You are still looking for what works best what works less well, but there are no more major tweaks, it does not change much from here.
And after a few month you can start scaling up.
So after 5 years you get to the point where you can make decent money, enough to live off and put some in your account to still grow it, and you have enough history to know you are rather consistent.
You can continue like this, or I think it would also be possible to find a job doing this with those 3 years, provided there is no big drawdowns say the biggest is below 10%, and the variance is not absurd.
I see some people, it seems even 5 years is too long for them. They would rather work as a slave for 40 years making no progress never having even a chance as getting rich, and then maybe retire after 40 years of 9-5. Probably not because the government is broke. But 5 years is way too much, got to day trade and get poor quick.
To get 5R is not impossible, and it is not even needed to try hard to catch every move. A handful of good high probability trades in a month is all it takes.
If I were making on average 7R per month I would be aiming for 5, better to have an average target that is a little under what is achievable, than too high and try forcing bad setups.
With the 4 hour or above chart, there is time to look at a good dozen different assets (a couple of currencies + a couple of commodities) and not just "look" but follow what is going on.
This means being able to pick the very best from each. And costs are cheaper than lower timeframes, and it is easier to let them run, and it is not necessary to be as precise.
So starting with only 2000 currencies (200,000 Y) it is achievable to make decent returns of about 2000 $/£ a month after 5 years. Without risking more than 2% ever.
Starting with 10k, those can be reached much faster so it is a good idea to start life by getting a job and saving up a little. And not blowing up all lifesavings on trying to get rich quick.
High reward compared to risk is really ez pz I think, because you just lose all the time, so you get so used to it, you'll always think "oh well here goes another loss".
Wins are happy surprises, and you do not need many happy mistakes to make your month/year. Even if it starts going green "just another loser doing some noise first".
Once it goes green ALOT, more than say maybe halfway target then you start thinking "oh hey it might be one of those rare winners", and until then you were not worried of it being one of those rare occasions you actually win.
Of course if you are this fool that will get all excited the second it goes his way and snatch away his tiny profit then you cannot even cross one of the easiest obstacles and the machine gun just mowed you down, you are dead lay down.
10R is pretty high, and to expect a smooth consistent growth is not realistic at all. So to get to that target of making decent returns, one has to be able to go through the drawdowns, the more boring periods too. Provided the drawdowns are just bad luck streaks, then in a couple of years zooming out they'll look like nothing.
This is yet another obstacle where plenty will get stopped.
But one day you'll be able to look back and say "I made it". You'll sort of look dumb because you'll still be in the middle of the obstacle course (it never ends), but you'll be a happy idiot 😊.
LONG & SHORT POSITION TOOL📚An In-Depth Look at Using This ToolThis illustration explains the functionality of TradingView's Long/Short Position Tool and is intended to help new people looking for more information on this tool in a "novice friendly" format. TradingView’s position tool will aid you in pre-planning and pre-evaluating trades and as such should be an essential part of every trader's toolkit .
Note:
At its simplest, the position tool can quickly show you the R:R (Risk-To-Reward) of a single trade. By doing a little extra work, you’ll be able to then use this tool to properly plan for the risk of all trades you are taking compared to your total account size.
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Important terms:
Tick = A tick is a measure of the minimum upward or downward movement in price.
Trade outcome statistics = Used to track the outcome of a trade.
Example:
“Current XYZ position closed
+5.25% gain
10840 account balance after trade impact”
P&L = A representation of current Profit & Loss. Be careful where you position the tool, as the P&L is calculated based on the position of the tool.
Here are two uses for the Position Tool:
1. Only R:R = To quickly find only the R:R of a trade. This method does not bother changing account balance and such is only acceptable if you are tracking your current account balance and doing risk calculations off-platform in something such as a google spreadsheet.
2. Risk+R:R = To ensure your current trade idea meets both your R:R and max risk tolerance (risk amount; in our case, 1%). This is achieved by changing the “Account Size” option every time you are building a new position. This is the advised method to use, since like your trade journal, it’ll help keep you accurate and accountable.
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We will now explain the options contained within the tool’s input on-chart menu:
Account size = The current available balance within your account, the keyword here is available. If you are using the "Risk" option explained below then this needs to be updated upon starting to create a new trade setup.
Risk = Your max tolerable risk amount (either in absolute numbers or as a % of your account size). The default option is "absolute numbers," this uses the base currency of the on chart asset (If you were on ETHBTC, then the base currency would be BTC; for SPX500USD it is USD since this asset is displayed in its USD value). As you know, we suggest you stick to %.
Entry Price = The price you will be entering the position at.
PROFIT LEVEL:
Ticks = The tick difference from the entry price to the profit target.
Price = The take profit price.
STOP LEVEL:
Ticks = The tick difference from the entry price to the stop loss.
Price = The stop losses price.
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We will now explain all metrics being displayed on the tool while it is plotted on the chart:
Top info panel:
1. The difference in base currency (USD) from the entry price to the take profit price.
2. The difference in percentage change from the entry price to the take profit price.
3. The difference in ticks from the entry price to the take profit price.
4. The hypothetical account balance after the take profit target is achieved.
Middle info panel:
1. Simulated P&L from the entry price to where the current live price is.
(Displayed in the base currency of the on chart asset, USD in this example)
2. The quantity of the asset that should be purchased at the entry price.
This is calculated as follows: Qty = Risk / (Entry Price – Stop Price)
3. The risk to reward ratio, this is how much you could gain compared to how much you could lose.
The calculation is as follows:
Risk/Reward Ratio = ((Take profit price - Entry price) / (Entry price - Stop loss price))
Bottom info panel:
1. The base currency (USD) difference from the entry price to the stop-loss price.
2. The difference in percentage change from the entry to the stop-loss price.
3. The difference in ticks from the entry price to the stop-loss price.
4. The hypothetical account balance after the stop-loss is hit.
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Lastly, we will explain how Position Size and Account Balance are being calculated by TradingView:
Long Position Variant
Position Size:
Qty = RiskSize / (EntryPrice - StopPrice)
Account Balance when a position is closed after reaching the Take Profit level:
Amount = AccountSize + (ProfitLevel – EntryPrice) * Qty
Account Balance when position is closed after reaching the Stop Loss level:
Amount = AccountSize – (EntryPrice – StopLevel) * Qty
Short Position Variant
Position Size:
Qty = RiskSize / (StopPrice - EntryPrice)
Account Balance when a position is closed after reaching the Take Profit level:
Amount = AccountSize + (EntryPrice - ProfitLevel) * Qty
Account Balance when a position is closed after reaching the Stop Loss level:
Amount = AccountSize – (StopLevel – EntryPrice) * Qty
AccountSize:
Initial account size specified in the settings
RiskSize:
If the "Risk" option is set to "absolute numbers" = Risk
If the "Risk" option is set to "percentage of account size" = Risk / 100 * AccountSize
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Reference: www.tradingview.com
If we made any mistakes please let us know in the comments. There was a lot of formatting we needed to do to best display all of this information for you guys!
Enjoy. :)
Tips to review currency correlation with the same direction Usually when we check the currency group in 8 charts to tell the stronger pair and weaker pair,
it's not easy to tell the strength of EURUSD and USDCAD for in opposite direction.
Now you can use Invert scale to invert the downtrend to the uptrend or the uptrend to the downtrend.
Hope this helps,welcome comment.
Tracking MOC vs SPY (also potential Long Signal)First off, MOC and MOC Imbalances are two things I am still in the process of learning and understanding better, so I am not claiming to be an expert on the topic. Please chime in if I have wrote anything incorrect or if you have something valuable to contribute!
A Market-On-Close (or "MOC") order is an order sent to trigger near the market close. We see this pretty routinely trigger 10 minutes before the closing bell, and it often produces some fireworks with sudden, spiky moves in one direction or the other. There is often an imbalance in one direction-- Buy, or Sell-- which can sometimes seem random, but when smoothed can help show flows into the market or out.
I took a little bit of time to just color the periods on SPY in the last year or so for the 4 scenarios of the 20 day moving average of MOC imbalance. They are as follows-
DARK RED MOC is Below 0 and Increasing in that direction --> Sell Imbalance
LIGHT RED MOC is Below 0 and Decreasing/Reversing
LIGHT GREEN MOC is Above 0 and Increasing in that direction --> Buy Imbalance
DARK GREEN MOC is Above 0 and Decreasing/Reversing
I think you could generally say these phases of the MOC Imbalance correlate with SPY. The two phases of Light Red and Light Green (moving from a Sell Imbalance to Buy Imbalance) have generally shown to be good old fashioned bull fun. Dark green often is a profit taking phase. Dark red is usually when its too late or just the start of the descent.
Here are crude measurements of the light red and light green phases, their gains and length of time-
+4.39% in 44 days
+7.27% in 50 days
+4.22% in 30 days
+4.50% in 24 days
+4.55% in 45 days
+25.00% in 31 days
+15% in 24 days
Presently, so far: +4.15% in 15 days
The times I did not include, which are obviously the recent outlier, is from February to early March. If you had a good chart of the 20sma MOC in front of you like I do, you could see there were a couple times when it looked like the MOC had reached its bottom and was going to start reversing and heading towards a Buy Imbalance, only to get rejected and keep selling. The actual confirmed bottom never happened until March 20th, so you could say that was the true start of this light red colored area, but I felt it was relevant to still color those as if it was a real-time scenario. It also helps show how that crash really manifested itself, with a lot of traders/investors thinking the end of February is just a dip or buying opportunity, to manifest into a rug pull.
Myself and others have been thinking this week and last that a melt-up is on its way, and the MOC turning above 0 today to a Buying Imbalance could be a great bit of data to possibly confirm this.
Where do you find MOC Reports? I only started looking at them recently from Market Chameleon so unfortunately I do not have any great resources to point people towards other than Market Chameleon. I hear that its publicly disseminated information, though.
Here's their -free- daily report- marketchameleon.com
They also have a more aggregated report, which is what I used, but that is behind a pay wall.
Using the Strategy Tester to Evaluate a StrategyThis video idea explains how to use the strategy tester on TradingView to evaluate the performance of your strategy. We go over all of the data presented for you regarding your strategy, and if we make mistakes along the way you can always check out the TradingView help section that is specifically for the Strategy Tester.
I highlight the overview of your strategy, dive into the details of the performance summary for your strategy, and show how we can review all of our trades including our commission paid.
Finally, we show how changes to the strategy can alter your Strategy Tester results and how accounting for commission(fees) and selective testing windows can alter perceptions on strategies.
FINDING THE BEST ROI BETWEEN SIMILAR ASSETS 📚 With Alpha's PoP💬Introduction :
Today we are comparing the Dow Jones, NASDAQ, and the S&P by their annual performance to show how our open source indicator "Alpha Performance of Period" (PoP) can be used and why the results are useful. We will also look at other markets later in the writeup to see how they compare and to get a sense of which markets provide the best risk-to-reward and ROI.
The idea here is to compare highly correlated markets over time to see which of these markets preforms the best overall represented by a period chosen by the user. This will help tell us which of these indexes is the best/worst to trade/invest with on average.
For this article we will assume "best" equates to "best for long positions", but the indicator could be used for other purposes such as best shorting opportunities (largest drawdown amounts).
Comparing these indexes shows that the NASDAQ has historically outperformed, while the DOW underperformed, and the S&P has been somewhere in the middle since the tech bubble on a year-over-year basis.
You can also see this on the chart as represented by the indicator's metrics contained within its label, but we will summarize it below:
NOTE: The figures below are rounded up to the nearest .01%, see charts for exact %'s.
Equity Indices Total Annual performance results: (main chart)
(Jan. 2000 - present)
SPX = +111.79%
NDX = +156.10%
DJI = +117.65%
Now let's look at the quarterly and monthly performance:
Equity Indices Total Quarterly performance results:
(Jan. 2000 - present)
SPX = +104.57%
NDX = +160.75%
DJI = +111.65%
Equity Indices Total Monthly performance results:
(Jan. 2000 - present)
SPX = +91.22%
NDX = +125.274%
DJI = +101.68%
Equities Summary:
While the NASDAQ has had periods of underperformance (for example the dot com bubble burst), on each of the charts you can see that not only has the NASDAQ outperformed (and the Dow underperformed) over time, the NASDAQ has also generally outperformed during each different period measurement. We won't do the math for each period here as that's the main purpose of this indicator, but you can apply the indicator on your own chart and take a look at it yourself.
The main takeaways for us are this:
1. You are better off trading and/or holding the NASDAQ when compared to the 3 main indexes.
2. You are better off trading the S&P than the DJI.
3. The performance of the NASDAQ during COVID isn't an anomaly, and it doesn't necessarily indicate a tech bubble, outperformance in a specific period and overtime is the norm with this index.
Now that you see how this works on the indexes, let's showcase how it can work for other markets.
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RARE EARTH METALS~
Rare Earth Metals Total Annual performance results:
(Jan. 2000 - present)
GOLD = 193.87%
SILVER = 186.72%
PALLADIUM = 361.27%
Rare Earth Metals Total Quarterly performance results:
(Jan. 2000 - present)
GOLD = 201.80%
SILVER = 197.60%
PALLADIUM = 304.04%
Rare Earth Metals Total Monthly performance results:
(Jan. 2000 - present)
GOLD = 206.59%
SILVER = 209.60%
PALLADIUM = 283.25%
Rare Earth Metals Summary:
As you can see, despite the general public's love of Gold, Palladium vastly outperforms it. Meanwhile, we can confirm Silver underperforms. Many people wouldn't suspect Palladium was superior, but we now know from the resulting data (Hooray!).
-----
FOREX~
Main Forex USD pairs Total Annual performance results:
(Jan. 2000 - present)
EURUSD = 19.48%
GBPUSD = -9.03%
AUDUSD = 23.90%
Main Forex USD pairs Total Quarterly performance results:
(Jan. 2000 - present)
EURUSD = 20.75%
GBPUSD = -16.53%
AUDUSD = 20.98%
Main Forex USD pairs Total Monthly performance results:
(Jan. 2000 - present)
EURUSD = 19.57%
GBPUSD = -16.70%
AUDUSD = 21.93%
Forex Summary:
As you can see against a USD base-pair, GBP is the worst performing from the 2000's by all periods. One might assume the more popular EUR pair preformed better than for example AUD, but the reality is AUD takes the cake and preformed better than both EUR and USD by each period over time.
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CRYPTOCURRENCY~
Main Crypto USD(T) pairs Total Annual performance results:
(Jan. 2017 - present)
BLX = 1351.18%
ETHUSDT = 8967.62%
LTCUSD = 5012.80%
Main Crypto USD(T) pairs Total Quarterly performance results:
(Jan. 2017 - present)
BLX = 504.60%
ETHUSDT = 1124.81%
LTCUSD = 824.44%
Main Crypto USD(T) pairs Total Monthly performance results:
(Jan. 2017 - present)
BLX = 357.63%
ETHUSDT = 739.39%
LTCUSD = 530.67%
Crypto Summary:
Crypto has the largest period losses, but it also has the largest period gains (by far). Of all the crypto pairs, ETH offers the best ROI. Interestingly, ETH offers the best ROI of all markets mentioned in this article as well (although it also has the biggest losses and highest risk associated with its uptrends). Some might find it odd that Litecoin outperforms Bitcoin (although like with ETH, the drawdown is notably more intense).
-----
Conclusion:
Use "Alpha Performance of Period" (PoP) to compare markets for what is best suited to your portfolio depending on your individual risk appetite. It is meant to be used on highly correlated markets, but as you can see you can also compare different sets of markets together to get a sense of which offers the best risk-to-reward, ROI, etc. This tool thus has many uses related to figuring out which markets you want to trade based on historical data and offers a simple way to quickly compare past performance. Hope you guys enjoy it! :D
Resources:
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KEY price action candlestick THAT ACTUALLY WORKS!Some key price action candlesticks we look for when entering a trade.
Pinbars: Sign for weakness/rejection, in the correct context, it can be a powerful trend reversal candle
Inside Bar: Short retracements / losing momentum, in the correct context, it can show whether a trend is continuing
Engulf Candle: opposite from the inside bar, this usually shows strength in either the bears/bulls. With the correct context, it can show signs of reversal too
Marubozu: 'Power' Candle, can be shown with or without a wick, Normally found in trend continuation, a big spike with a bias towards one side of the market. With proper and valid entry timing, it can be a good signal to ride the trend.
Doji: Exhaustion candle, bulls & bears fought for position, can be found in high volatility market, when a doji is formed, it is not recommended to enter a trade..
Bollinger Band Snaps (BBS)Bollinger Band Snaps (BBS)
Timing of options trades are elusive, especially during dynamic price trends. There is one technique, however, that reliably and consistently allows you to time trades. The Bollinger Band Snap (BBS) signal occurs at very precise moments during a bullish or bearish trend, and vastly improves timing of both entry and exit.
The chart of Chipotle (CMG ) is highlighted with three examples. The first occurred in late February, when price moved below the lower Bollinger band for two sessions. The move then “snapped” back into range, which is predictable. Price rarely remains outside of the Bollinger Band range for long.
The second event occurred in mid-March, when price moved below the lower Bollinger band. In this case, the expected retracement (snap) happened the next market day.
The final incident was the longest of the three, from mid-May into end May. Price traded above the upper band for six consecutive sessions before snapping back into range.
The signal is reliable because a retracement back into the Bollinger Band’s two-standard deviation range is inevitable. It can take a longer or shorter period, but it eventually occurs. The signal provides both an entry flag (when price moves outside of the band) and an exit flag (when it moves back into range).
Trading this signal is also apparent at the time it begins to develop. A move outside of the Bollinger trading range generally is going to snap back within a few sessions in each instance. In the February case, price was approximately $755 per share. With the expectation of a snap back into range, a bull credit spread could be opened with puts. Buying one 735 put and selling a 740 put would have set up a small credit. Using the weekly expirations ensures rapid time value decay.
In the second example, price was approximately $465 per share. A call could be opened using 4 – 6 weeks to expiration and opening an at-the-money strike.
The credit spread strategy could also be applied in mid-May when price began advancing above Bollinger’s upper band at $998 per share. Buying one 1030 call and selling a 1025 call for a credit.
In all of these instances, the entry point is easy to identify. It is seen where price moves outside of the two standard deviation range marked by the upper and lower bands. The exit point then occurs when price snaps back into range.
Bollinger BandsBollinger Bands
Timing for options trades relies on many price signals and confirmation. Even so, knowing when trends are likely to continue or to end is a skill of its own and many traders have timed entry and exit poorly because the trend was misread. One signal helps overcome this problem.
Bollinger Bands (BB) track the trend with three bands. The middle band is a simple moving average of 20 sessions, and the upper and lower bands are each two standard deviations of that average. This sets up a great visual, forming a “probability matrix” of both price and trend.
Because price is not likely to trade above the upper band or below the lower band for very long, any move outside of this matrix is likely to be followed by a retreat back into range.
However, BB is not just a price-specific analytical tool. It also sets up a version of resistance and support as a dynamic factor rather than the traditional straight line. The chart of the Nasdaq 100 Index shows this relationship between the upward-moving trend and resistance.
It is possible to draw straight lines to identify resistance or support as well as times of breakout. BB tends to provide a dynamic version, which is more accurate and more predictive. As the price trend is upward-moving, the upper band tends to track resistance with extreme accuracy. And as a trend moves downward, the lower band tends to track support
In the NDX chart, three examples of the relationship between the upper band and the dynamic price movement are circled. The most revealing aspect of this is how accurately the band points to both entry and exit. As the price moves close to the upper band, it marks the beginning of a strong bullish move. This is seen in all three of the highlighted examples. These are highly reliable entry points for bullish trades such as long calls or short puts.
The bullish trend ends as price moves away from the upper band. This is also seen clearly in all these instances on the chart. Logically, this marks an exit point, but not necessarily the start of a bearish move. Unlike most reversal signals, the move of price away from the upper band signals only the end of the price move. The next phase could be resumption of the trend, retracement, or reversal. To decide, requires a new set of signals.
The interaction between the bands and identification of the trend also works when a dynamic trend ends and moves into a period of consolidation. This occurred at the beginning of December. Notice how strongly the band width narrows, going from 600 points in beginning November down to under 250 points. This shrinking band width signals a likely period of consolidation, which serves as a rest between dynamic trends, a plateau before trend resumption or reversal. This also points to the timing for a different type of option trade, which exploits a range-bound tendency in the short term. In fact, consolidation may be the most profitable trend for short-term trading because breakout is easily identified. Look for a widening of the band width to anticipate a new dynamic move. It does not matter whether that will be bullish or bearish; the issue is that a widening band width signals likely end to consolidation.
Entering a consolidation-type trade like an Iron Condor (with strikes far outside the band width), a short covered straddle, are well-timed as consolidation begins, but should be closed as consolidation ends. At that point, a new trade can be opened to exploit dynamic price movement, such as synthetic stock (long or short) or simply a long option.
The issue to keep in mind in all of these timing decisions is that BB provides more than a reliable tracking device for price. It also marks the nature of short-term trends, whether dynamic or sideways-moving. It is one of the most reliable predictive signals options traders can find.
Trader's Guide to Options Part 3The information in this guide is intended to get you started with your understanding of options, the terminology, and their basic characteristics. In addition to this guide, it is recommended that you study all information available under the education section of your broker’s website. Most brokers who cater to options traders provide good information that will help you learn.
Intrinsic Value
In-the-money
Call options are in-the-money if the stock price is above the strike price.
Put options are in-the-money when the stock price is below the strike price.
The amount by which an option is in-the-money is referred to as intrinsic value .
At-the-money
Options are at-the-money when the stock price is trading at or very near the strike price.
Out-of-the-money
Call options are out-of-the-money if the stock price is below the strike price.
Put options are out-of-the-money when the stock price is above the strike price.
If an option is out-of-the-money it has no intrinsic value .
Time Value
Options have two parts that comprise their value; Intrinsic Value and Extrinsic Value. Extrinsic value is also known as time value. When an option is in-the-money (ITM) it has intrinsic value equal to the amount it is ITM. Option price - intrinsic value = time value.
XYZ stock is trading at 181.72
The 180 call strike is 1.72 points ITM so, there is $1.72 of intrinsic value.
$5.85 is the ask price. $1.72 of this is intrinsic value.
$4.13 of the $5.85 ask price is time value.
Time value decays as expiration approaches. The closer to expiration, the faster time value decays. Sellers of options use time decay as part of their winning strategy. Time decay is a benefit for option sellers and a problem for option buyers.
The Reality of Trading
In the real world, investors very rarely exercise their option contracts to take profit from a trade. Instead, they simply BTC or STC the options prior to the expiration date. The advantage of doing so allows them to capture some of the time value of an option, in addition to the intrinsic value. It also allows them to use the leverage of options that do not require the larger amounts of capital required to actually buy and sell the underlying stock.
Let’s analyze some examples to become familiar with common terminology:
AAPL is trading at $360 and the following shows a BTO of 3 call contracts of the September $355 strike at an ask price of $27.40:
The underlying Apple stock value is $360 per share.
The expiration date of the call is the third Friday in September.
The strike price is $355.
The call is in-the-money because the stock price is above the strike price.
The premium is $27.40 per share.
There is $5.00 of intrinsic value (in-the-money)
There is $22.40 of time value (out-of-the-money).
Number of shares represented is 300 (3 contracts x 100 shares per contract).
Buyer is hoping the stock rises, increasing the intrinsic value and causing the value of the option to also increase.
Since the expiration is about 3 months out, on a move higher the position is not subjected to rapid time value decay.
MA is trading at $294 and the following represents a STO of 2 put contracts of the July $290 strike at a bid price of $9.50:
The underlying Master Card stock value is $294 per share.
The expiration date of the put is the third Friday of July.
The strike price is $290.
The Put is out-of-the-money because the stock price is above the strike price.
The premium is $9.50 per share.
Number of shares represented is 200 (2 contracts X 100 shares per contract).
Seller is hoping that stock remains above $290 at expiration. This will result in time value decaying thus, reducing the price of the option. Since it was STO for $9.50, when time value decays, the seller will be able to BTC for less than $9.50 and lock in a profit.
Spreads
Call and Put options can be bought and sold in combinations that offer other investment strategies. Some of these include credit spreads, debit spreads, and combination options spreads, to name a few. For example, when opening a spread, one option will be STO and a different option will be BTO. Spreads can be an excellent way to mitigate risk.
This concludes the Trader's Guide to Options. Please let us know if you have any questions.
Trader's Guide to Options Part 2The information in this guide is intended to get you started with your understanding of options, the terminology, and their basic characteristics. In addition to this guide, it is recommended that you study all information available under the education section of your broker’s website. Most brokers who cater to options traders provide good information that will help you learn.
Types of Options:
Call Options:
Call options increase in value when the underlying stock rises.
Buyers of calls have the right, without any obligation, to buy the underlying stock at the strike of the options contract. They retain their right until the option no longer exists, defined by the expiration date.
Call buyers anticipate the value of the underlying stock will rise. When it does, the value of the option will also increase at approximately the rate of the Delta. Buyers pay for the right to buy the stock in the future, sometime before expiration of the option. When buying the option, they pay the ask price. The premium they pay is less than buying the stock, yet they will still benefit from any appreciation in the value of the stock.
Say you wanted to buy XYZ stock because you think it is going to move up from its current price of $84. Instead of buying the stock a trader could buy a call option for a fraction of the price of the stock. Remember, all the trader is doing is buying the right to buy the stock without any obligation to actually buy it. The option only costs $4.00 for the right to buy the stock at some future date. Buying 1,000 shares of the stock would require $84,000 but buying 10 options contracts would only cost $4,000.
Call Options – The Sellers…
Sellers of call options are selling to someone else the right to buy the underlying stock from them. When/if the buyer chooses to buy the stock from the seller, (remember, the buyer has no obligation to do so) it is referred to as an exercise…the buyer is exercising the right to buy the stock. The seller is obligated to deliver the stock to the buyer. A seller’s obligation ends when the stock is exercised, the option expires, or the option is bought to close (BTC).
Call sellers receive a premium from the buyer. The buyer is paying the seller for the right to buy the stock in the future. Sellers want the price of the stock to go down. Why? If the price goes down, the buyer will have no reason to exercise since they could buy the stock for less at the current market price. In this case, the seller gets to keep the premium paid by the buyer.
So, what does this mean in plain English? The concept of a call option is present in many situations. For example, you discover a painting that you would love to purchase. Unfortunately, you will not have the cash to buy it for another two months. You talk to the owner and negotiate a deal that gives you an option to buy the painting in two months for a price of $1,000. The owner agrees, and you pay the owner a premium of $50 for the right to buy the painting.
Consider two possible scenarios that can impact the value of this “option”:
Scenario 1: It is discovered that the back of the painting has a signature of a famous artist, which drives the value of the painting up to $10,000. Because the owner sold you an option which gives you the right but no obligation to purchase the painting at the previously agreed price, he is obligated to sell the painting to you, the buyer, for $1,000. The buyer would make a profit of $8,950 ($10,000 value – $1,000 purchase price – $50 for the cost of the option).
Scenario 2: After closer review of the painting, it is discovered that the signature on the back is not of a famous artist, but is the brother of a famous artist. This actually drives the value of the painting down to $500. If the buyer exercised their option to purchase the painting it would cost $1,000. This would not make sense because the buyer could instead just buy it at “market price” for just $500. Since the buyer had no obligation to purchase based on the option contract, the agreement, or contract, would just expire and the buyer would lose the $50 premium paid.
The example demonstrates two important points. When you buy an option, you have a right, but not an obligation, to do something. You can always let the expiration date pass, at which point the option becomes worthless. If this happens, you lose 100% of your investment, which is the money you paid for the option.
Put Options
Put options increase in value when the underlying stock decreases in value.
Buyers of puts have the right, without any obligation, to “put” the underlying stock to someone else at the strike price of the options contract. They retain their right until they sell to close (STC) the option or it no longer exists, defined by the expiration date.
Put buyers anticipate the value of the underlying stock will go down. When it does, the value of the option will increase at approximately the rate of the Delta. Buyers pay a premium for the right to be able to put (sell) the stock to someone else in the future, sometime before expiration of the option. When buying the option, they pay the ask price.
Say you thought XYZ stock is going to move down from its current price of $84. Buying a put with a strike of $85 gives the buyer the right in the future to sell or put the stock to someone else at $85. So, if the stock declined to $75, the buyer of the option could buy the stock at $75 and immediately exercise their right to sell/put the stock at $85, making a $10 profit. Remember, all the trader is doing is buying the right but has no obligation.
Put Options – The Sellers…
Sellers of put options are selling to someone else the right to sell/put the underlying stock to them. When/if the buyer chooses to put their stock to the seller, this is referred to as being assigned……the buyer of the put option is assigning the stock to the seller. The seller is obligated to buy the stock based on the strike price of the contract. A seller’s obligation ends when the option expires or the option is bought to close (BTC).
Put sellers receive a premium from the buyer. The buyer is paying the seller for the right to sell the stock to the seller in the future. Put sellers want the price of the stock to go up. Why? If the price goes up, the buyer will have no reason to assign the stock since they could sell the stock for more at the current market price. In this case, the seller gets to keep the premium paid by the buyer.
Exercise and Assignment
Most stocks and ETF’s are American style options. This means that if the buyer of an option chooses to exercise or assign their rights they may do so at any time prior to expiration.
Indexes such at SPX , NDX and RUT are European style options. This means that any exercise or assignment may only occur at expiration.
Who wins when the stock moves?
1. Buyers of Calls – win when the stock goes up
2. Sellers of Calls – win when the stock goes down
3. Buyers of Puts – win when the stock goes down
4. Sellers of Puts – win when the stock goes up
Are you new to options trading? Stay tuned for Part 3 of Trader's Guide to Options which will include in-the-money, at-the-money, and out-of-the-money options as well as the reality of trading.
Trader's Guide to OptionsThe information in this guide is intended to get you started with your understanding of #options, the terminology, and their basic characteristics. In addition to this guide, it is recommended that you study all information available under the education section of your broker’s website. Most brokers who cater to options traders provide good information that will help you learn.
What is an option?
An option is a financial contract between a buyer and a seller. It is an agreement to buy or sell the underlying equity (stock or index) at a set price by a pre-determined date. Instead of buying the stock a trader could buy an option for a fraction of the price of the stock.
Options have the following characteristics:
Traded as contracts and each contract represents 100 shares of the underlying stock or index.
Pre-set expiration dates. Standard monthly options expire the third Friday of each month. Some index options like TVC:RUT , TVC:SPX , and TVC:NDX cease trading on Thursday before the third Friday. Weekly options expire each Friday.
Price points, referred to as the strike price, are the prices at which buyers and sellers trade option contracts. Options are, usually, available to trade in standard price increments of $5 and $10.
Quotes to buy or sell an option are presented as the bid and ask. When selling an option, the bid price is used. When buying an option, the ask price is used. Sell the bid / Buy the ask.
Delta is the change in the value of an option relative to each $1.00 change in the value of the underlying stock. If an option has a Delta value of .45, it will change in value by 45 cents for each $1.00 change in the value of the stock.
- NASDAQ:GOOG is trading at 1445.
-The 1445 call strike has a Delta of .50
-GOOG goes down $10
-The 1445 call will decline in value by $5.00 = ( $10 * .50)
The Options Chain:
All option information for any stock or index is listed on an options chain. The options chain can be found on the website of the broker you use to trade. The chain will list all available strikes and expirations, the Delta, and the bid and ask prices. It will also display both Call and Put options.
Ways to trade Options:
There are four actions that could possibly be taken when trading options:
1. Buy To Open (BTO) - buying an option as part of opening a new position.
2. Sell To Open (STO) - selling an option as part of opening a new position.
3. Buy To Close (BTC) - buying back an option that was originally sold to open
4. Sell To Close (STC) - selling an option that was originally bought to open
When a position is Bought-To-Open, it is referred to as a long position .
When a position is Sold-To-Open, it is referred to as a short position .
When a position is Bought-To-Open, it is done for a debit .
When a position is Sold-To-Open, it is done for a credit .
Are you new to options trading? Stay tuned for Part 2 of Trader's Guide to Options which will include teaching about call and put options.
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