USEFUL TIPS

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(1) The importance of psychology in price movement.
(2) How to spot mega trends.
(3) Understanding of technical price objectives.
(4) How to picture price objectives.
(5) How to trade with moving averages.
(6) How to use point and figure trading techniques.
(7) How to use the RSI indicator.
(8) How to correctly use stochastics in your trading.
(9) How to use the ADX indicator to capture trends.
(10) How to capitalize on natural market cycles.

On top of the above, you will learn all about Fibonacci retracements, MACD, Bollinger Bands, and much more.

These 10 free trading lessons will be sent via email.

In order to get this, just fill out the form here. Then you should be able to get it started right away. Hope this info can be useful to you.

Sunday, April 27, 2008

What To Consider When You Are Buying An Overpriced (High IV) Options

In the previous post, we discussed that when IV is relatively low (option is cheap) and is expected to rise, we should buy options (i.e. consider options strategies that allow us to be an option buyer).
On the other hand, when IV is relatively high (option is expensive) and is expected to drop, we should sell options (i.e. consider options strategies that allow us to be an option seller).

However, often we’d like buy options despite the relatively high IV (i.e. options is considered expensive).
For example, for myself, I like playing directional swing trading to take advantage the expected price movement for 1 – 3 days. Hence, in this case, I’ll just buy straight call or put options depending on the expected direction. However, frequently the option is relatively high in IV (“expensive”). Is it all right if I buy the options?
To me, buying options when IV is high is still all right.
However, there are a few things to consider when buying options with high IV:

1) As mentioned earlier, usually IV is high because we're expecting certain events that can cause the drastic price movement (e.g. earnings announcement, FDA approval, M&A, etc.). Before that event happens, the IV normally will not drop drastically, and is also quite likely to rise even higher and peak on the day of the event itself.
So, if I'd like to play swing trading or day trading, I have to make sure that I close my position (sell the options) before the event take places.

2) Assess the Reward / Risk ratio of a potential trade by having different scenarios of IVs, expected / target stock prices & time remaining to expiration (using Options Calculator / Pricer).
By inputting different IV numbers (e.g. the highs, lows, or average, etc.) as a parameter in the Options Calculator / Pricer, you can see how IV can potentially affect your trade under different scenarios.
This could also help you to assess whether it’s better to use ITM (In-The-Money), ATM (At-The-Money), or OTM (Out-of-The-Money) options.
As discussed previously on more understanding about IV, ATM and OTM options are more affected by IV movement than ITM options.

(You can refer to the link for more discussion on how to get IV data)

3) Some traders like to bet with options over the events that can cause the drastic price movement (e.g. earnings announcement, FDA approval, M&A, etc.).
In this case, we have to bear in mind that some degree of price movement has been priced in with the high IV. So, when IV drops considerably right after the announcement, we can only gain if the price movement is big enough to offset the drop in IV. Otherwise, we'll lose money with options even though the stock price moves to the expected direction.
(As discussed more detail in this post).

4) When IV is relatively expensive and you don’t want your options to be affected too much by the IV changes, you may want to consider buying further ITM (In-The-Money) options.
Remember that IV has a considerable effect on the option price, but it affects only the time value component of an option's price, not on the Intrinsic Value
(Please refer to this post: More Understanding About Implied Volatility).
Therefore, the deeper ITM options will be less affected by the changes in IV, as it has less time value component in the option price. The further ITM an option, the lesser time value component it has.

To understand more about Implied Volatility, go to: Understanding Implied Volatility (IV).

Related Topics:
* FREE Trading Educational Resources You Should Not Miss
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Option Greeks
* Learning Candlestick Charts
* Learning Charts Patterns

Saturday, April 19, 2008

Some Trading Wise Words

I found quite a number of good trading quotes from Trading & Motivational Quotes blog.
I think this blog tries to compile the words of wisdom or trading principles from many sources or books.
You can check it out on you own for the whole collections.

Here are some of the quotes from that site that I really like and I hope it can be useful for my readers:

Turtle Trading Principle
Trade with an edge, manage risk, be consistent, and keep it simple.
The entire Turtle training, and indeed the basis of all successful trading, can be summed up in these four core principles.

Curtis Faith, Way Of Turtle

Why Chart Patterns Repeat Themselves
All through time, people have basically acted and re-acted the same way in the market as a result of: greed, fear, ignorance, and hope.
That is why the numerical formations and patterns recur on a constant basis.

Jesse Livermore, How To Trade In Stocks

Stick To Your Trading Rules
Successful trading is about finding the rules that work and then sticking to those rules.

William J. O’neil

Perfect Speculator
Perfect speculator must know when to get in;
More important he must know when to stay out;
And most important he must know when to get out once he’s in.

Source: Trend Following: How Great Traders Make Millions in Up or Down Markets

Emotional Makeup Is More Important
I haven't seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren't. Many outstanding intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.

William Eckhardt

Emotional Discipline: The Key To Trading Success
The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.

Victor Sperandeo

Human Emotion In Trading
Human emotion is both the source of opportunity in trading and the greatest challenge.
Master it and you will succeed.
Ignore it at your peril.

Curtis Faith, Way Of Turtle

What We Can Learn For Trading From A Fable
A monkey was carrying two handfuls of peas. One little pea dropped out. He tried to pick it up and spilt twenty. He tried to pick up the twenty and spilt them all. Then he lost his temper, scattered the peas in all directions and ran away.

Fables, Leo Tolstoy

Friday, April 11, 2008

Follow Your Trading System

Previously, we have discussed the important components of a trading system.

When you have built or found a trading system that suits you, it is recommended that you test the trading system through paper / virtual trading before you trade it using real money.

Once you’ve had a proven & tested, profitable trading system, you yourself & your discipline will be the key determinant whether the system will be a success and a failure. Successful traders are those who are psychologically prepared and have the discipline to stick with their system through good times and bad times. You can never reach your goal as a trader if you can’t maintain the self-discipline to trust and stick to the rules you’ve chosen.
Follow the rules of your system, no matter what your emotions are telling you.

Mark Douglas, the author of The Disciplined Trader: Developing Winning Attitudes suggested:

As a trader it is more important to know that you will always follow your rules than it is to make money, because whatever money you make, you will inevitably lose back to the markets if you can't follow your rules.

Dr. Alexander Elder in his book, Come Into My Trading Room: A Complete Guide to Trading, also suggested likewise, as discussed in this post.

However, there is a caveat to this concept. You need to have a proven & tested trading system with a positive expectancy (average gains higher than average losses) which will produce a positive expected return over the long term.
If your system has a negative expectancy (not profitable over the long term), then sticking to your system would only lead you to your ruin. That’s why it’s also important to always monitor your trading performance over time. That’s where trading journal plays an essential role.
Sticking to your system doesn’t mean you cannot refine it.
As what Trader X suggested:

Don’t jump from strategy to strategy, timeframe to timeframe - pick something and stick with it! That does not mean you cannot refine it - you SHOULD constantly refine and improve what you do. But that is different from changing things completely.

Related Posts:
* Why Trading Psychology Is Very Important
* Why Being Right In Your Trading Does Not Necessarily Mean Making Money
* The Psychological Need To Be Right vs. Making Money
* The Fear Of Losing Money

You might also be interested in the following topics:
* Learning Candlestick Charts
* Learning Charts Patterns
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Tuesday, April 1, 2008

TWEEZER BOTTOM VS. TWEEZER TOP

Both Tweezer Bottom & Tweezer Top are reversal patterns.
Whether a pattern is bearish or bullish reversal, it depends upon whether it appears at the end of a downtrend (Tweezer Bottom) or an uptrend (Tweezer Top).

A Tweezer pattern forms when two or more candlesticks touch the same bottom / low price (for Tweezer Bottom) or the same top / high price (for Tweezer Top).
In standard technical analysis, this pattern can be comparable to the Double Bottom or Double Top.

The Tweezer can be composed of candlesticks with real bodies, shadows, and/or doji candlestick.
They also may occur on consecutive or nearby trading sessions.
When the Tweezer occurs on two consecutive trading sessions, not only would it be easier to spot, the pattern also carries higher chances of reversal.

TWEEZER BOTTOM (BULLISH)
Tweezer Bottom
is a bottom reversal pattern / bullish reversal pattern.
It could be formed at the end of a downtrend, or during a pullback within an uptrend, or at the support.

Tweezer Bottom is formed when two or more candlesticks touch an identical bottom (low price), and then the price bounces higher.
The candlesticks can be composed of candlesticks with real bodies, shadows, and/or doji candlesticks.
For the candle’s body, the color of the body is not very important. It can be white (bullish candle) or black/red (bearish candle).

Some possibilities of Tweezer Bottom pattern:
* Two real candlestick bodies with the same low price.
* The lower shadows of two consecutive candles (e.g. two Hammers) touch an identical bottom level.
* The real body on the 1st day and the lower shadow of the following day hit the same low price.
* The lower shadow on the 1st day’s candle and the real body of the following day hit the same bottom level.



A Tweezer Bottom pattern is considered to be more significant when the two candlesticks that comprise the Tweezers pattern also form another candlestick reversal patterns.
For example:
If the two candlesticks of Harami Cross Bullish (or Harami Bullish) hit the same low price, it could be an important bullish reversal signal, as the same two candlesticks form a Tweezer Bottom as well as a Harami Cross Bullish (or Harami Bullish).

Basically, Tweezer Bottom implies that at the bottom level, bears (sellers) were not able to push the price lower. As a result, the pattern signifies a short-term support level and signals a possible turning point.
The price action immediately after the Tweezer Bottom candles should be watch carefully.
If the bottom / low price formed by the two candles is penetrated, then price is likely to decrease to at least the next important support level.
If the bottom / low price hold, then the Tweezer Bottom may provide a potential reversal signal.
A confirmation should be needed in terms of the price to continue to rise and even close higher.

TWEEZER TOP (BEARISH)
Tweezer Top
is a top reversal pattern / bearish reversal pattern.
It could be formed at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

Tweezer Top is formed when two or more candlesticks touch identical tops (high price), and then the price drops lower.
The candlesticks can be composed of real bodies, shadows, and/or dojis.

Some possibilities of Tweezer Top pattern:
* Two real candlestick bodies with the same high price.
* The upper shadows of two consecutive candles (e.g. two Shooting Stars) touch an identical top level.
* The real body on the 1st day and the upper shadow (or doji’s high) of the following day hit the same high price.
* The upper shadow (or doji’s high) on the 1st day’s candle and the real body of the following day hit the same top level.



A Tweezer Top pattern is considered to be more significant when the two candlesticks that comprise the Tweezers pattern also form another candlestick reversal patterns.
For example:
If the two candlesticks of Harami Cross Bearish (or Harami Bearish) hit the same high price, it could be an important bearish reversal signal, as the same two candlesticks form a Tweezer Top as well as a Harami Cross Bearish (or Harami Bearish).

Tweezer Top implies that at the top level, bulls (buyers) were not able to drive the price higher. As a result, the pattern signifies a short-term resistance level and signals a possible turning point.
The price action immediately after the Tweezer Top candles should be watch carefully.
If the top / high price formed by the two candles is penetrated, then price is likely to increase to at least the next important resistance level.
If the top / high price hold, then the Tweezer Top may provide a potential reversal signal.
A confirmation should be needed in terms of the price to continue to drop and even close lower.

To read about other Candlestick Patterns, go to: Learning Candlestick Charts.

Related Posts:
* A Chance to Learn from World Class Trading Experts For FREE You Should Not Miss
* Learning Charts Patterns
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks