I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Saturday, December 12, 2009

Market Analysis Video: Is S&P 500 Getting Ready to Skyrocket or Collapse?

The market has been moving sideways recently, developing a Rectangle pattern.
Is S&P 500 market getting ready to skyrocket or collapse?
What are the key price levels to watch this week?
Find out more detail in this video for the S&P 500 market updates.

Sorry, it’s been some time since I posted an update on the market analysis.
I was quite held up with things lately. However, when I saw this video, I can’t wait to share it with you. Not only is it informative, but also educational for both experienced & beginner traders. Happy watching! :)

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns
* Understanding Implied Volatility (IV)
* Understanding Option Greeks
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Friday, November 20, 2009

Relationship between OPTIONS GREEK with DEGREE of MONEYNESS, IMPLIED VOLATILITY and TIME TO EXPIRATION: Summary – Part 1

Option Greeks have been one of the main topics that I have previously shared in details in this blog.
I’ve tried to explain each of option greek in a simple way for easy but yet deep understanding. It’s really not easy doing this, but I was very encouraged by many compliments and positive feedback from my readers. I'm happy that many people in fact have benefited from these Option Greeks articles. I'd really like to thank my readers for their continuous support. :)
Here I tried to summarize the main understanding of Options Greeks:

DELTA
Delta is an option greek that measures of the change in the option price due to a change in the underlying stock price.

Delta of ATM, ITM & OTM Options
The delta values for long position will be positive for Calls (0 to 1) & negative for Puts (0 to -1).
At-the-money (ATM) options have deltas around 0.5 (Calls: +0.5, Puts: -0.5).
Out-of-the-money (OTM) options have deltas between 0 to 0.5 (Calls: 0 to +0.5, Puts: 0 to -0.5).
In-the-money (OTM) options have deltas between 0.5 to 1 (Calls: +0.5 to +1, Puts: -0.5 to -1).

Effect of Time To Expiration on Delta:
As the time to expiration is nearing, the delta of ITM options increases (i.e. ITM option’s delta gets closer to 1 for Calls or to -1 for Puts) and the delta of OTM options decreases (i.e. OTM option’s delta gets closer to 0).

Impact of Implied Volatility on Delta:
When Implied Volatility (IV) increases, delta of OTM option will increase, whereas the delta of ITM option will decrease.
However, the delta of ATM option will always remain at around 0.5.

GAMMA
Gamma is an options greek that measures the rate of change of delta due to a one-point change in the price of the underlying stock.
In other words, Gamma estimates how much delta would change if the price of the underlying stock changes by $1.
So, gamma indicates how “stable” its corresponding delta is.
A high gamma means that the delta can change considerably for even a small move in the stock price.
Unlike delta, gamma for long position is always positive for both Calls and Puts. That means delta will increase as the underlying price increases, and delta will decrease as the underlying price decreases.

Gamma of ATM, ITM & OTM Options
Gamma is the largest for ATM options, and gradually decreases as it moves furthers towards ITM and OTM.
This means that the delta of ATM options changes the most when the stock price moves up or down, as compared to ITM & OTM options.

Effect of Time To Expiration on Gamma
As the time to expiration gets nearer, the gamma of ATM options increases (is relatively higher), whereas the gamma of deep ITM and deep OTM options normally decreases (is relatively lower).

Impact of Implied Volatility (IV) on Gamma
When the Implied Volatility decreases, the gamma of ATM options increases, whereas the gamma for deep ITM or OTM options decreases.
When the Implied Volatility is very low, the gamma of ATM options is relatively high, while the gamma for deep ITM / OTM options is relatively low (close to 0).
This is because when the volatility is low, the time value portion of an option is low. However, time value of ATM option is still higher relative to ITM & OTM options, hence the gamma of ATM option is higher as compared to ITM & OTM options.

On the other hand, when IV is high, gamma tends to be stable for ATM option as well as ITM and OTM options. This is because when volatility is high, the time value of deep ITM / OTM options are already quite substantial. As a result, the increase in the time value of deep ITM / OTM options as they go nearer the money will be less dramatic. Therefore, gamma tends to be stable across all strike prices in this case.

Continue to Part 2.

Related Posts:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning / Understanding Candlestick Charts
* Learning Charts Patterns

Saturday, November 14, 2009

TRIPLE BOTTOM PATTERN – Part 2: Important Characteristics

Re-visit Part 1: Triple Bottom Formation

Important Characteristics of Triple Bottom Pattern

Existing Trend:
There should be an established existing DOWNWARD trend prior to the pattern.

Shape of Triple Bottom Pattern:
1) The Three Bottoms:
The bottoms should be sharp and distinct / well separated. The price bottoms do not have to be exactly the same, but it should appear reasonably equivalent to each other.
If the last bottom (3rd bottom) is higher than the middle bottom (2nd bottom), there is a relatively higher chance of stronger price increase. A higher bottom in the last bottom might indicate weaker selling pressures, as the sellers attempt to push the price down to the previous low or make a new low but fail, suggesting that the selling pressures might have started to subside.

2) The Two Peaks:
The highs of the peaks can appear more rounded.

Duration:
Triple Bottoms pattern can be considered a long term pattern.
The duration of the formation of the pattern can take several months, normally range from 3 to 6 months, with an average of about 4 months. Normally, the formation of Triple Bottoms should take longer time and less volatile in price swing than Triple Tops. Hence, bottoms tend to be wider (due to longer duration to develop) and flatter (as a result of less volatile price swing) than tops.
Basically, the longer the time duration the pattern takes to develop, the more likely the pattern could work out as a reversal pattern or the stronger the price might move once the breakout occurs.

Breakout:
Even when the price has risen from the 3rd bottom, the pattern is not completed yet. The chances that the existing downtrend will continue are still higher than the chances of reversal to take place, as it is normal during a downtrend for the price to test a support level a few times, and then bounce up, and then resume the downtrend again.

Triple Bottom pattern is only completed and confirmed when the price increases and closes above the highest highs of the peaks in between the 3 bottoms, which serves as the key resistance level in this pattern. This highest high is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is downtrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing above the Confirmation Point, accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Triple Bottoms pattern.

In addition, as Triple Bottoms is forming, the formation may also resemble few other patterns. Before the 3rd bottom is formed, the pattern may look like Double Bottoms (reversal pattern). The three equal lows may also be seen in Rectangle pattern (neutral pattern) or Descending Triangle pattern (bearish continuation pattern).
Nevertheless, all these patterns have similar principle to follow, which could help differentiate between the above patterns or avoid jumping the gun: Always wait for the decisive breakout to occur before entering into any trade.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches above the Confirmation Point, but then it moves back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes ABOVE the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Volume should be higher during the formation of the 1st bottom and then get lighter as the pattern develops the subsequent two bottoms, showing an indication that the selling pressures are getting weaker.
The volume may sometimes pick up when the price hits each of the bottoms, but overall, volume tends to be diminishing as the pattern is forming.
During & after the breakout of the Confirmation Point, the volume should significantly increase again.
When during the increase from the 3rd bottom, the price experiences an accelerated rise, perhaps with a gap up or two, accompanied by an expansion in volume, this might give a good sign, as the price increase tends to rise further, and hence it may provide higher chances that the pattern is bullish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The distance between the lowest low of bottoms (which serves as the support) and the highest high of the peaks (i.e. the Confirmation Point, which serves as the key resistance).
2) To compute the potential price target: Add the result to the Confirmation Point (i.e. the highest high of the peaks).

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new support level before continuing their moves in the direction of the breakout. (Remember that the resistance now has become a new support level).
This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Wednesday, November 4, 2009

Market Analysis Video: Has the S&P Index Broken Final Support?

In the previous video on the S&P 500 last week, it was indicated that this market may have topped out for the year.
As a follow up, this latest video shares some ideas that could potentially come into play for this market, such as potential downside targets and pattern that may evolve in the next several weeks.
Hope you can benefit from this. :)

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns
* Understanding Implied Volatility (IV)
* Understanding Option Greeks
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Saturday, October 31, 2009

Market Analysis Video: Has the S&P Index Topped Out for the Year?

Have we seen a top in the S&P index? This short video shows some analysis that indicates we may potentially be going to see a correction in this index.
Watch this video and see if you will agree with the arguments in regards to this market.

By watching the video, you’ll also learn more about the following:
* Trend line
* Fibonacci Retracement
* MACD Divergences

Although I posted this video a bit late, I’m sure you can still learn something from this due to its rich educational values in technical analysis. Happy watching! =)

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns
* Understanding Implied Volatility (IV)
* Understanding Option Greeks
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Thursday, October 22, 2009

Market Analysis Video: Is the NASDAQ Now in Thin Air?

The major indexes have made some interesting moves lately, but the NASDAQ is currently at an interesting spot, as pointed out in this new video.

The video would give you some examples about Bearish Engulfing candlestick, Fibonacci Retracement and MACD Divergences. See how it can help you sharpen your technical analysis skills.
Happy watching. :)

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Friday, October 16, 2009

TRIPLE BOTTOM PATTERN – Part 1: Formation

Triple Bottom Pattern is a bullish reversal pattern that normally forms after an extended downtrend, which marks a shift in trend from bearish to bullish.

The Formation of Triple Bottom Pattern



Triple Bottom Pattern contains three consecutive, distinct & sharp bottoms at about the same price level, with two moderate peaks in between the bottoms, followed by a breakout through a resistance.
This pattern forms when the price is in an existing downtrend. It occurs when the price drops to a support level (forming the 1st bottom), then increases (forming the 1st trough), and then return to the support level (forming the 2nd bottom), then increase again (forming the 2nd trough), and then drop back to the resistance level again (forming the 3rd bottom), before subsequently increase further.

Although the price bottoms do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price increases and closes above the highest high of the two peaks, which serves as the key resistance level in this pattern. This highest high point is called the “Confirmation Point”.

This pattern occurs because the sellers attempt to push the price lower, but are not able to do so as they are facing support, which prevents the continuation of the downtrend. After three failed attempts, the sellers in the market exhausted and gave up, and the buyers begin to be more aggressive to take control of the market and drive the price higher, pushing it up into a new uptrend.

To be continued to Part 2: Important Characteristics of Triple Bottom pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Friday, October 9, 2009

Trading Quotes from “Way of Turtle” by Curtis Faith – Part 2

Go back to Part 1.

Some more good trading quotes from "Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders" by Curtis Faith.

Don’t spent all your time admiring the fancy tools in the magazine.
First learn how to use the basic ones well. It’s not the size of your tools that counts but how you use them.

Keep it simple. Simple time-tested methods that are well executed will beat fancy complicated method every time.

Trading with poor methods is like learning to juggle while standing in a rowboat during the storm. Sure, it can be done, but it is much easier to juggle when one is standing on a solid ground.

Trading is not a sprint; it is boxing. The market will beat you up, screw with your head, and do anything it can to defeat you. But when the bell sounds at the end of the twelfth round, you must be standing in the ring in order to win.

The market does not care how you feel. It will not prop up your ego or console you when you are down.
Therefore, trading is not for everyone. If you are unwilling to face the truth about the markets and the truth about your own limitations, fears and failures, you will not succeed.

I always say that you could publish my trading rules in the newspaper and no one will follow them.
The key is consistency and discipline.
Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick with those rules even when things are going bad.
(By Richard Dennis, quoted in 'Market Wizard' by Jack D. Schwager)


Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns

Saturday, October 3, 2009

Trading Tips Video: Is DIVERGENCES Developing in Apple (AAPL)?

Following up the educational video on understanding Divergences a few days ago, here is another example about Divergences in Apple (NASDAQ_AAPL), one of the biggest tech stocks in the world.

This four-minute video about APPL explains some potential negative divergences that are developing for this stock. The negative divergences do not mean that Apple is going to collapse, as the major positive trend in the stock still looks strong. However, it could indicate that Apple may be at a high point, at least for the time being.

Hope the video can give you more understanding about the use of Divergences in analysing the market. Enjoy! :)

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Thursday, October 1, 2009

Trading Tips Video: Understanding DIVERGENCES Using the S&P 500 Market

Divergences have been widely used by the traders / investors using technical analysis to find the clue of a potential market turning.
Do you understand how Divergences work in the market?

This video has done a very good job in explaining how Divergences (in MACD indicator) work using the recent S&P 500 market analysis. Short and sweet …. straight to the point and clear.
Don’t miss this short video to gain better understanding of Divergences and how to make use of it to help in your trading.

Also, if you’d like to enhance your trading / technical analysis knowledge even more, you may want to learn from these 10 Trading Lessons as well. They are informative and educational. More importantly... it's FREE.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Sunday, September 27, 2009

Trading Quotes from “Way of the Turtle” by Curtis Faith – Part 1

About 25 years ago, trading guru Richard Dennis reportedly said to his long-time friend William Eckhardt, a friend and fellow trader. Dennis believed that successful trading could be taught. This started a bet between them about whether great traders were born or made. To settle this debate, Dennis recruited and trained 21 men and 2 women, and this became a legendary trading experiment.
Dennis trained his Turtles, as he called them, for only two weeks. Then he gave each of them a million dollars of his own money to manage, and turned each one loose on the markets. When his experiment ended five years later, his Turtles reportedly had earned an aggregate profit of $175 million.

Curtis Faith is one of the Turtles. One of his book is Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders.





Found good trading quotes from this book… with deep meaning.
Here they are:

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.

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.

Good trading is not about being right, it’s about trading right.
If you want to be successful, you need to think of the long run and ignore the outcomes of individual trades.

Trading with an edge is what separates the professionals from amateurs.
Ignore this and you will be eaten by those who don’t.

Edges are found in the places between the battleground between buyers and sellers.
Your task as a trader is to find those places and wait to see who wins and who loses.

Mature understanding of and respect of risk is the hallmark of the best traders.
They know if you don’t keep an eye of risk, it will set its eye on you.

Ruin is the risk you should be concerned with the most.
It can come like a thief in the night and steal everything if you’re not watching carefully.

Continue to Part 2.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns

Tuesday, September 22, 2009

Market Analysis Video: What’s Going to Happen in the S&P 500 Market?

The S&P 500 has made remarkable recovery from the lows that were seen earlier this year.
However, is the recent upward price move going to continue?
There are two major technical indicators that are colliding at a crucial point and time.
The upward moves might potentially come to an end as the market approaches this strategic level.
Unless you’re aware of these indicators, it could be very expensive.

So, watch this video to find the analysis on this market.
I believe you’ll benefit from this interesting video, and also learn something from it.

In addition, if you want to improve your trading knowledge even more, do learn from these 10 Trading Lessons as well. It’s FREE, informative and educational.

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Trading Video: FIBONACCI RETRACEMENT RULES
* Trading Tips Video: Using TREND LINES in Analyzing the Market
* Trading Tips Video: Fibonacci Retracement, Support/Resistance, Stop Loss, Price Target
* Learning Candlestick Charts
* Learning Charts Patterns

Monday, September 14, 2009

Trailing Stop Limit Order

Trailing Stop Limit Order is similar to Trailing Stop Order, whereby the Trailing Stop Price will be “trailing” below or above the movement of the security’s market price, depending on whether it is on a long or short position, to maintain the set distance, which is either stipulated as an absolute dollar or as a percentage of the market price.

The main difference is that for Trailing Stop Limit Order, when the Stop Price is passed, the order will be converted into a Limit Order, whereas for Trailing Stop Order, it’ll convert into a Market Order.

Hence, for Trailing Stop Limit Order, when the market price hits or passes the Stop Price, the order would convert into a Limit Order to buy / sell the security at the specified Limit Price or better.

As a result, Trailing Stop Limit Order carries a big risk, as the order may never get filled if the market price is worse than the Limit Price. As a result, the position can continue falling with no more protection for the position. This makes Trailing Stop Limit Order a very insecure stop loss method, particularly for the extremely volatile stocks that often experience a gap up or gap down in prices.
Due to this risk, using Trailing Stop Limit Order to protect a position is not advisable.

Depending on the position on the market you have (long or short), there are 2 types of Trailing Stop Limit Order:
a) Sell Trailing Stop Limit Order (Trailing Stop Limit to Sell)
This is the trailing stop order when you have a long position on a security.
In this case, the Trailing Stop Price is placed at a set distance (e.g. Trailing Amount) below current market price of the security.
In addition, the Trailing Limit Price will also need to be specified as a certain distance (e.g. Limit Offset) from the Stop Price, whereby the Limit Price should be at a least the same or lower than the Stop Price.

The Stop Price will then rise as the market price increases (i.e. The Stop Price will be trailing the increasing market price from below: Stop Price = Increasing Market Price – Trailing Amount).
However, the Stop Price will remain the same (will not go lower) when the market price decreases.
Once the market price hits or passes Stop Price, the order would convert into a Limit Order to sell the security at the Limit Price (Limit Price = Stop Price – Limit Offset) or better (i.e. at Limit Price or higher, because for selling, the higher the price, the better).

b) Buy Trailing Stop Limit Order (Trailing Stop Limit to Buy)
This is the trailing stop order when you have a short position on a security.
In this case, the Trailing Stop Price is placed at a set distance (e.g. Trailing Amount) above current market price of the security.
In addition, the Trailing Limit Price will also need to be specified as a certain distance (e.g. Limit Offset) from the Stop Price, whereby the Limit Price should be at a least the same or higher than the Stop Price.

The Stop Price will then move lower as the market price decreases (i.e. The Stop Price will be trailing the decreasing market price from above: Stop Price = Decreasing Market Price + Trailing Amount).
However, the Stop Price will remain the same (will not go higher) when the market price increases.
Once the market price hits or passes Stop Price, the order would convert into a Limit Order to buy the security at the Limit Price (Limit Price = Stop Price + Limit Offset) or better (i.e. at Limit Price or lower, because for buying, the lower the price, the better)

Note:
When placing Trailing Stop Limit Order for an Option, the order will be triggered based on the market price of the option, NOT the market price of the underlying stock. Therefore, the Stop Price should be set based on the option’s price as well.

Therefore, just remember how the price of Call and Put options are related to the underlying stock price:
For a Call option, the option’s price increases when the underlying stock’s price increases, and decreases when the underlying stock’s price decreases (positive relationship).
On the other hand, for a Put option, the option’s price increases when the underlying stock’s price decreases, and decreases as the underlying stock’s price increases (negative relationship).

Example:
Suppose the stock price ABC is on a downtrend. You expect that the stock price ABC will continue to drop further. To take advantage of this opportunity, you short-sell the stock at $20, and place a Buy Trailing Stop Limit order with Trailing Amount = $0.3 and Limit Offset = $0.2.
In this case, the initial Buy Stop Price will be $20.3 and the initial Limit Price is 20.5.
When the stock price falls to $19, the Buy Stop Price will adjust accordingly to $19.3 and Limit Price to $19.5.
If the stock price continues to drop further to $18, the Buy Stop Price will adjust to $18.3 and Limit Price to $18.5.
Suddenly, the stock price stops to drop and begins to increase. In this case, the Buy Stop Price will remain at $18.3. Once the Stop Price of $18.3 is hit, the order will convert into a Limit Order to buy back the stocks at the price $18.5 or lower.
As with the risk of Stop Limit Order, this order may never get filled if the market price is worse than the Limit Price. Hence, the position can continue falling with no more protection for the position.
In this example, suppose the stock price gaps up to $27 and continue to increase, the order will never get filled. This makes Trailing Stop Limit Order a risky method for protecting a position / taking profit, and hence not advisable.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns

Wednesday, September 2, 2009

Market Analysis Video: Where is Nasdaq heading to?

Nasdaq market is showing a negative divergence on the MACD indicator. Is it really a sign that the market may potentially move back downward?
Find out more detailed analysis on the current Nasdaq market in this video.

Learn how to use MACD Divergence to find the clue of a potential market turning, and how to combine the analysis with Fibonacci tool.
Hope you can benefit from this. :)

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Candlestick Charts
* Learning Charts Patterns

Friday, August 28, 2009

TRIPLE TOP PATTERN – Part 2: Important Characteristics

Go back to Part 1: Triple Top Formation.

Important Characteristics of Triple Top Pattern
Existing Trend:
There should be an established existing UPWARD trend prior to the pattern.

Shape of Triple Top Pattern:
1) The Three Peaks:
The peaks / tops should be sharp and distinct / well separated. The price peaks do not have to be exactly the same, but it should appear reasonably equivalent to each other.
If the last top (3rd peak) is lower than the middle top (2nd peak), there is a relatively higher chance of stronger decline. A lower top in the last peak might indicate weaker buying sentiments, as the buyers attempt to reach the previous high or make a new high but fail, suggesting that the buyers might have been drying up & exhausted.

2) The Two Troughs:
The lows of the troughs can appear more rounded.

Duration:
Triple Tops pattern can be considered a long term pattern.
The duration of the formation of the pattern can take several months, normally range from 3 to 6 months, with an average of about 4 months.
Basically, the longer the time duration the pattern takes to develop, the more likely the pattern could work out as a reversal pattern or the stronger the price might move once the breakout occurs.

Breakout:
Even when the price has declined from the 3rd peak, the pattern is not completed yet. The chances that the existing uptrend will continue are still higher than the chances of reversal to take place, as it is normal during an uptrend for the price to test a resistance level a few times, then retreat, and then resume the uptrend again.

Triple Top pattern is only completed and confirmed when the price declines and closes below the lowest lows of the troughs in between the 3 peaks, which serves as the key support level in this pattern. This lowest low is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is uptrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing below the Confirmation Point, accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Triple Tops pattern.

In addition, as Triple Tops is forming, the formation may also resemble few other patterns. Before the 3rd peak is formed, the pattern may look like Double Tops (reversal pattern). The three equal highs may also be seen in Rectangle pattern (neutral pattern) or Ascending Triangle pattern (bullish continuation pattern).
Nevertheless, all these patterns have similar principle to follow, which could help differentiate between the above patterns or avoid jumping the gun: Always wait for the decisive breakout to occur before entering into any trade.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches below the Confirmation Point, but then it moves back up again & resumes uptrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes BELOW the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Volume should be higher during the formation of the 1st peak and then get lighter as the pattern develops the subsequent two peaks, showing an indication that the buying pressures are getting weaker.
The volume may sometimes pick up when the price hits each of the peaks, but overall, volume tends to be diminishing as the pattern is forming.
During & after the breakout of the Confirmation Point, the volume should significantly increase again.
When during the decline from the 3rd peak, the price experiences an accelerated drop, perhaps with a gap down or two, accompanied by an expansion in volume, this might give a good sign, as the price decline tends to drop further, and hence it may provide higher chances that the pattern is a bearish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The distance between the highest high of peaks (which serves as the resistance) and the lowest low of the troughs (i.e. the Confirmation Point, which serves as the key support).
2) To compute the potential price target: Subtract the result from the Confirmation Point (i.e. the lowest low of the troughs).

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new resistance level before continuing their moves in the direction of the breakout. (Remember that the support now has become a new resistance level).
This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Sunday, August 16, 2009

TRIPLE TOP PATTERN – Part 1: Formation

Triple Top Pattern is a bearish reversal pattern that normally forms after an extended uptrend, which marks a shift in trend from bullish to bearish.

The Formation of Triple Top Pattern



Triple Top Pattern contains three consecutive, distinct & sharp peaks / tops at about the same price level, with moderate troughs in between the peaks, followed by a breakout through a support.
This pattern forms when the price is in an existing uptrend. It occurs when the price increases to a resistance level (forming the 1st peak), then decline (forming the 1st trough), and then return to the resistance level (forming the 2nd peak), then decline again (forming the 2nd trough), and then return to the resistance level again (forming the 3rd peak), before subsequently decline further.

Although the price peaks do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price declines and closes below the lowest low of the two troughs, which serves as the key support level in this pattern. This lowest point is called the “Confirmation Point”.

This pattern occurs because the buyers attempt to push the price higher, but are not able to do so as they are facing resistance, which prevents the continuation of the uptrend. After three failed attempts, the buyers in the market exhausted and gave up, and the sellers begin to be more aggressive to take control of the market and drive the price lower, sending it down into a new downtrend.

To be continued to Part 2: Important Characteristics of Triple Top pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Sunday, August 9, 2009

Trailing Stop Order

Trailing Stop Order is a Stop Order that continually adjusts the Stop Price as the market price of the security moves (i.e. trailing the security’s market price).
The Trailing Stop Price is placed at a set distance (either as an absolute dollar or as a percentage of the market price) below or above the market price, depending on whether it’s on a long or short position.
The Trailing Stop Price will then adjust as the market price of the security moves, maintaining the set distance.

If the market price hits or passes through the Stop Price, the order would convert into a Market Order, and will be filled at the best available price in the market at that time.
The same advantage & disadvantage of Market Order apply to Trailing Stop Order as well.

The advantage of Trailing Stop Order is that it can allow traders/investors to let the profits run (as long as the price does not fall to the Stop Price), while at the same time, limit the losses without continually having to adjust and place new Stop Loss orders.

Depending on the position on the market you have (long or short), there are 2 types of Trailing Stop Order:
a) Sell Trailing Stop Order (Trailing Stop to Sell)
This is the trailing stop order when you have a long position on a security.
In this case, the Trailing Stop Price is placed at a set distance (either as an absolute dollar or as a percentage of the market price) below current market price of the security.

The Stop Price will then rise as the market price increases (i.e. The Stop Price will be trailing the increasing market price from below: Stop Price = Increasing Market Price – Trailing Amount).
However, the Stop Price will remain the same (will not go lower) when the market price decreases.
Once the market price hits or passes through Stop Price, the order would convert into a Market Order to sell the security at the best available price in the market at that time.

b) Buy Trailing Stop Order (Trailing Stop to Buy)
This is the trailing stop order when you have a short position on a security.
In this case, the Trailing Stop Price is placed at a set distance (either as an absolute dollar or as a percentage of the market price) above current market price of the security.

The Stop Price will then move lower as the market price decreases (i.e. The Stop Price will be trailing the decreasing market price from above: Stop Price = Decreasing Market Price + Trailing Amount).
However, the Stop Price will remain the same (will not go higher) when the market price increases.
Once the market price hits or passes through Stop Price, the order would convert into a Market Order to buy the security at the best available price in the market at that time.

Note:
When placing Trailing Stop Order for an Option, the order will be triggered based on the market price of the option, NOT the market price of the underlying stock. Therefore, the Stop Price should be set based on the option’s price as well.

Therefore, just remember how the price of Call and Put options are related to the underlying stock price:
For a Call option, the option’s price increases when the underlying stock’s price increases, and decreases when the underlying stock’s price decreases (positive relationship).
On the other hand, for a Put option, the option’s price increases when the underlying stock’s price decreases, and decreases as the underlying stock’s price increases (negative relationship).

Example – Trailing Stop as an Absolute Dollar:
Suppose the stock price ABC is on a downtrend. You expect that the stock price ABC will continue to drop further. You bought Put option contracts of that stock at $3/contract, and place a Sell Trailing Stop order, with an absolute Trailing Amount at $0.5. That means the initial Stop Price is set at $2.5.
When the stock price ABC is falling and, as a result, the price of the Put option has increased to $4, the Stop Price will adjust accordingly to $3.5.
If the stock price ABC continues to drop further, and the price of the Put option then rises to $5, the Stop Price will adjust to $4.5.
Suddenly, the stock price ABC stops to drop and begins to increase. Consequently, the Put option’s price will drop. In this case, the Stop Price will remain at $4.5.
Once the Stop Price of $4.5 is hit, the order will convert into a Market Order to sell the Put option contracts at the best available price in the market at that time.

Example – Trailing Stop as a Percentage:
Similar as above, except that you place a Sell Trailing Stop order as Trailing Percentage at 20%.
In this case, the initial Stop Price will be set at $2.4 (= 3 – 20% x 3 = 3 – 0.6).
When the stock price ABC is falling and, as a result, the price of the Put option has increased to $4, the Stop Price will adjust accordingly to $3.2 (=4 – 20% x 4 = 4 – 0.8).
If the stock price ABC continues to drop further, and the price of the Put option then rises to $5, the Stop Price will adjust to $4 (= 5 – 20% x 5 = 5 – 1).
Suddenly, the stock price ABC stops to drop and begins to increase. Consequently, the Put option’s price will drop. In this case, the Stop Price will remain at $4.
Once the Stop Price of $4 is hit, the order will convert into a Market Order to sell the Put option contracts at the best available price in the market at that time.

As you can see here, when setting Trailing Stop as a percentage, the Trailing Amount will get bigger as the Market Price of the security increases.
On the other hand, when setting Trailing Stop as an absolute dollar, the Trailing Amount will remain the same.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns

Thursday, July 30, 2009

Trading Educational Video: Technical Tips from Dan Gramza

Good news for everyone, particularly for those who have missed the chance to learn from the trading experts (for free) through the 4 trading educational videos I shared previously.

There is a new free trading educational video from Dan Gramza.
If you’re interested, you may want to grab this opportunity soon, so as to prevent disappointment from losing the chance to learn something to enhance your trading knowledge.
What is this video about? Here is the introduction of the video...

**************

Hello everyone, this is Dan Gramza and welcome to Gramza Market Studies Technical Tip.

Well today we're going to be talking about selling rallies. Now what does it mean when people say, "sell the rally" when you want to get into a trade? Or they sell a pull back? Or you hear things like, "The Trend Is Your Friend?"

Well we're going to explore this here in just a minute. I want to show you the technique and I want to show you some examples of how these markets behave in those settings.

I want to show you an example, but before I can talk to you too much about this example I need to define a few things for you. First candles... the approach that I use with Japanese candle charts, and that is what you're looking at here, is not the standard approach. So from my perspective, I don't focus on patterns, I focus on behavior. If we see a green candle that represents buying, that means that the closing price is higher than the open. If you see a red box that represents selling it means that the closing price is below that opening price. If you see a white line on top that's called a shadow, I think that represents selling. If you see a White line on the bottom that represents buying. Now with that in mind, the sizes of the bodies and the shadows tell us about the degree of buying or selling.

Now let's talk about this set-up here...

To get the rest of the tips, please visit this link and WATCH me!

Update as at 15 Jan 2010:
The above video is no longer available for free. Sorry if you've missed this opportunity. However, there are even more interesting videos available for FREE.
Find out more here.

Saturday, July 25, 2009

Market Analysis Video: How high the S&P market can potentially go?

The S&P market has been moving very strong. But the question is how high the market can potentially go?
Find out the market analysis and prediction in this video.

Also, learn how to use MACD Divergence to find the clue of a potential market turning.
Hope you can enjoy & learn something from it.

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Candlestick Charts
* Learning Charts Patterns
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value

Saturday, July 18, 2009

Paper Trading Experience with tradeMONSTER Online Brokerage (Review)

Recently, I tried the free online paper trading platform from tradeMonster. Just want to share my experiences with the readers here.

What I like about the trading platform:
* Very easy customization of interface, really user-friendly.
If we want to customize / change the layout of the screen, it can be done just by one click.
This easy customization is offered in each screen.
For example:
In the Option Chain screen, with just one click, we can expand/collapse the Calls/Puts sides of the Option Chain.
When we expand the Calls side (and collapse the Puts side), for instance, we can see all information about Bid/Ask Price, Volume, Open Interest, Implied Volatility (IV), etc. for various strike prices, all can be viewed in one page. We can even choose to view all those info for different expiration months.
In addition, in case we want to customize (add/remove) the column/s (e.g. add High and Low Price, Greeks info, such as Delta, Gamma, Vega, Theta, Rho), we can simply check or uncheck boxes provided. Marvelous!

* Real-time, streaming data throughout the trading platform, such as Quotes, Charts, Option Chains, Time & Sales, etc.
It allows quick monitoring of the fast changing market and also helps to make trading a lot more convenient, e.g. for setting the limit price.

* Browser-based trading platform.
We don’t need to download any software to start the application and, therefore, can trade from anywhere. I like this, because it is particularly convenient when we need to work on a few different computers (e.g. office and home computers), or when we want to change from old to new computer. We don’t need to reset our preferred interface settings all over again when we need to use another computer.

* Easy click trading.
Whenever we want to trade, we can simply click on the symbol (whether stock or option), and then a new window will pop up to allow for a quick trade. We can do this at any page/window we’re in, such as Watch List, Option Chain, Market View, Quotes.
With this quick trade window, we don’t need to type in the symbol when we want to trade, so it’s much easier and faster, especially for trading options (e.g. spreads, strangle, straddle, condor, butterfly, etc.)
I believe that option traders who like to trade more complicated strategies as mentioned above would love this!

* There are brief descriptions/explanations about the technical indicators just below it.
It helps to give some ideas (e.g. what it is for, how it is derived) before applying the study to complement chart analysis.

* Provide comprehensive research and fundamental analysis about a company.

* Provide comprehensive & clear Help menu.
It even has pretty cool introduction videos that show all the capabilities of the interface.
So, it’s very easy to learn and familiarize ourselves with how to do certain things using this interface.

* Provide free Investor Education, including live webinars, articles, and interactive courses.

Areas of Improvement:
* The Technical Analysis studies for chart analysis are currently still rather limited.
For example, there is no Fibonacci tool for chart analysis. Of course, this limitation may be subjective. This may not matter to other people, because they might not need to use this analysis tool as I normally do.

* The use of chart is not as convenient as the other interfaces.
For example, when I’m interested to analyze the particular area of the chart, I cannot zoom in to that particular area to by simply dragging the cursor. Also, I cannot show and monitor several charts for different symbols simultaneously in one screen. However, these can easily be done using Prophet’s JavaChart.

* While there is an advantage of being a browser-based trading platform, there is also disadvantage.
When clicking some tabs / buttons, it takes some time (a few seconds) to load the application. The loading speed will depend on our internet connection. The faster the internet connection is, the faster the loading speed will be. However, once the application is already uploaded, we need not go through the loading process again, as the interface is already “cached”.

Wish Lists:
If I could wish, it would be even much better if the trading platform provide the following:
* Screener for Stock and Chart Patterns
* Options Calculator / Pricer

This is particularly useful for those who like to use technical analysis to help their trading and option traders. As if most their needs can be fulfilled in one integrated application.
Though they are not available yet now, I heard that many improvements for trade analysis tools are under development.

PRICING:
The commission charges for Options are $0.50 per contract, with a minimum commission of $12.50 for single leg orders, and $7.50 per leg for multi-leg orders.
For Stocks, the commission charge is $7.50 per trade (regardless how many shares bought), unless trading in after-hours where there is a 1.5 cent per share added charge.
Here are the tables for some comparison:

For Options – Single Leg Order:


For Options – 2-Leg Option Spread:


For Stocks:


As comparison, for options trades, my broker (Interactive Broker) charges commission $0.70 / contract, with minimum per order is $1.00.
So, for those who usually trade 18 contracts or more per trade, TradeMonster will be cheaper.
For those who trade less than 18 contracts per trade, Interactive Broker would be cheaper.

However, the good thing about TradeMonster is that there is no minimum monthly fee. Hence, in case you’re on holiday and do not trade at all or do not actively trade for that month, you don’t need to pay any fee. Whereas for Interactive Broker, there is a minimum monthly fee of $10, even if you don’t trade at all for the month.

In addition, for Interactive Broker, if you make any cancelation or modification to the order (that has not been executed yet), it will charge you some fees as well. However, no such fees will be charged by TradeMonster.

Closing Note:
Actually, it’s rather difficult to describe how easy and simple the customization of interface is. Like when I was trying to explain about how easy and simple to customize Option Chain, actually words are still not good enough to describe. Of course, it’ll be much better if one can experience it himself. Hence, if you’re interested, you may want to try the free paper trading provided from this broker. One good thing about its paper trading platform is that it allows you to execute trade during non-trading hours. So, you can try it anytime, during the weekend or your own free time.

Opening a paper trading account is very easy. You don’t need to open the real account or fund the account first. You just simply apply by filling up some particulars, then the free paper trading account will be open instantly, no need to wait for approval process, etc.
Happy trying! =)

Friday, July 10, 2009

DOUBLE BOTTOM PATTERN – Part 2: Important Characteristics

Go back to Part 1: Double Bottom Formation

Important Characteristics of Double Bottom Pattern

Existing Trend:
There should be an established existing DOWNWARD trend. The downtrend should be fairly long and healthy (at least about 3 to 6 months).

Shape of Double Bottom Pattern:
1) The Two Bottoms:
* The bottoms can be either sharp & narrow (like V) or a bit rounded looking & wider. Ideally, the price bottoms should be the same. However, some difference in the price bottoms is still acceptable.
Although the price bottoms do not necessarily need to be exactly the same, but it should appear near the same price level. The price difference between the two bottoms should be less than 3%.
If the price difference between the two bottoms is more that 3%, the pattern may not be Double Bottom.
* If the low of the 2nd bottom does not hit the low of the 1st bottom, it is less worrying.
However, if low of the 2nd bottom is even lower than the low of the 1st bottom, we should be more cautious, as the probability that the downtrend would resume is still higher.

2) The Peak:
The height of the peak between the two bottoms should be around 10% - 20% from the bottom (It could be even more than 20%, but it should not be less than 10%).
In general, the higher the peak between the two bottoms, the better the performance of the pattern.
If the two bottoms are not exactly the same, the higher bottom should be used as the benchmark for the height measurement.

Duration:
Since Double Bottom is an intermediate to long term reversal pattern, the pattern should not be formed in just a few days.
The duration of time period between the two bottoms may vary from a few weeks to many months (generally about 1 to 3 months). Normally, the formation of Double Bottoms should take longer time and less volatile in price swing than Double Tops. Hence, bottoms tend to be wider (due to longer duration to develop) and flatter (as a result of less volatile price swing) than tops.
Basically, the longer the time duration between the two bottoms, the more likely the pattern could work out as a reversal pattern.
Hence, we should be extra cautious if a pattern only has a few days apart between the two bottoms.

Breakout:
Even when the price has increased from the 2nd bottom, the pattern is not completed yet. The chances that the existing downtrend will continue are still higher that the chances of reversal to take place, as it is normal during an downtrend for the price to test a support level a few times before resuming the downtrend again.

Double Bottom pattern is only completed and confirmed when the price increases and closes above the highest point of the peak in between the 2 bottoms, which serves as the key resistance level in this pattern. This highest point is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is downtrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing above the Confirmation Point, with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Double Bottoms pattern.

Nevertheless, sometimes the price may also make a deceptive/invalid breakout whereby it touches above the Confirmation Point, but then it goes back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes above the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Usually, volume is lower during the formation of the right bottom than the left bottom, showing an indication that the selling pressures are getting weaker.
In general, volume tends to be diminishing as the pattern is forming. The volume may pick up when the price hits the 2nd bottom, but it is often only a slightly higher than the average volume during the peak.
When the price is breaking out the Confirmation Point, it should happen with an increase in volume.
Monitoring volume for Double Bottoms is more crucial than for Double Tops, as a breakout from the key resistance (i.e. Confirmation Point) accompanied by an expansion in volume may indicate increased buying pressures and a potential change in sentiment from selling to buying. Hence, it may provide higher chances that the pattern is a reversal pattern.
It is even better when the price is rising from the 2nd bottom, the price experiences an accelerated increase, perhaps with a gap up or two.

Potential Price Target:
1) Compute the height of the peak: The distance between the bottom (support) and the Confirmation Point (resistance).
If the two bottoms are not the same, the higher bottom should be used for this calculation.
2) To compute the potential price target: Add the result to the Confirmation Point.

Hence, the above formula implies that the higher the peak between the two bottoms, the larger the potential of the increase.

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new support level before continuing their moves in the direction of the breakout. (Remember that the resistance now has become a new support level). This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value

Friday, July 3, 2009

Market Analysis Video: Potential Head & Shoulder pattern in the S&P market?

Are we potentially looking at the Head and Shoulder pattern in the S&P market?
Find out the answer in the comprehensive in this video.
Not only you benefit from the current market analysis & tips, but more importantly, learn how to do the analysis itself.
Hope you can learn something from it.
Enjoy! :)

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Candlestick Charts
* Learning Charts Patterns
* Option Greeks
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Saturday, June 27, 2009

DOUBLE BOTTOM PATTERN – Part 1: Formation

Double Bottom Pattern is a bullish reversal pattern that normally forms after an extended downtrend, which marks a shift in trend from bearish to bullish.
Sometimes, this pattern is called “W pattern” because it looks like one.

The Formation of Double Bottom Pattern



Double Bottom Pattern contains two consecutive, distinct bottoms at about the same price level, with a moderate peak between the bottoms.
This pattern forms when the price is in an existing downtrend. It occurs when the price increases to a support level (forming the 1st bottom), then increase (forming the peak), and then return to the support level again (forming the 2nd bottom) before subsequently the price increases further.

The bottoms can be either sharp & narrow or a bit rounded looking & wider.
Although the price bottoms do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price increases and closes above the highest point of the peak in between the 2 bottoms, which serves as the key resistance level in this pattern. This highest point is called the “Confirmation Point”.

Double Bottom Deception
Although Double Bottom is viewed as a common pattern and quite easy to identify, it’s actually not the case. Many people have actually incorrectly identified patterns that look like “W” shape as Double Bottom, but in fact it is not a Double Bottom formation.
Actually, this pattern can be quite difficult to identify correctly. Even when a pattern follows the characteristics of a Double Bottom, the failure rate is still high particularly when one never waits for the breakout. However, one waits for the breakout through the Confirmation Point, the failure rate would be considerably lower.

Therefore, one should pay close attention & take proper steps to analyze the characteristics of Double Bottom in order to minimize / avoid deceptive Double Bottom.
Some important characteristics of a Double Bottom that need to be paid more attention are the duration / time taken to develop the formation, the height of the peak, the volume during the formation of the pattern, and the breakout from the Confirmation Point

All these characteristics will be discussed in more detail in the next post.

To be continued to Part 2: Important Characteristics of Double Bottom pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Option Greeks
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Thursday, June 18, 2009

Trading Video: Combining Various Technical Analysis Techniques

In analysing market using Technical Analysis, various techniques are often combined to complement and support one another.
This video of the current S&P 500 market analysis shows an example of that.

Some of the analyses mentioned in the video are as follow:
* 200 Moving Average & 50 Moving Average Crossover
* Doji candlestick
* MACD Indicator
* Trendline
* PSAR (Parabolic Stop and Reverse)
* Double Top reversal pattern
* Fibonacci Retracement

(In case you need more information about the above analysis, you can click the links above to the articles in this blog that discuss further about those topics)

Other than learning the tips how to make use & combine various technical techniques to complement and support certain analysis, from this video you can also get some useful tips for your trading.

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Candlestick Charts
* Learning Charts Patterns

Saturday, June 13, 2009

Stop Limit Order

Stop Limit Order is an order (buy/sell) to close a position that only executes when the current market price of an option/stock hit or passes through a predetermined price (i.e. Stop Price).
Once the Stop Price is passed, the Stop Order becomes a Limit Order, and can only be executed at a specific price (i.e. Limit Price) or better.

As you may have noticed, Stop Limit Order is almost similar to Stop Order. The main difference is that in Stop Limit Order, when the Stop Price is passed, the order will be converted into a Limit Order, whereas for Stop Order, it’ll convert into a Market Order.

Depending on the position on the market you have (long or short), there are 2 types of Stop Limit Order:
a) Sell Stop Limit
This is the stop limit order when you have a long position on a security.
In this case, the Stop Price is placed below current market price of the security, and the Limit Price should be placed at least the same as or lower than the Stop Price.

b) Buy Stop Limit
This is the stop limit order when you have a short position on a security.
In this case, the Stop Price is placed above current market price of the security, and the Limit Price should be placed at least the same as or higher than the Stop Price.

Characteristic & Risk of Stop Limit Order:
Stop Limit Order will remain inactive until the Stop Price is passed. Once the Stop Price is passed, the order will be activated as a Limit Order to buy/sell at the specified Limit Price or better.
Therefore, the advantage of Stop Limit Order is that it provides control over the price at which the order will get filled (i.e. at the Limit Price or better).
However, the disadvantage is that a Stop Limit Order may never get filled if the market price is worse than the Limit Price. As a result, the position can continue falling with no more protection for the position. This makes a Stop Limit Order a very insecure stop loss method, particularly for the extremely volatile stocks that often experience a gap up or gap down in prices.
Due to this risk, using Stop Limit Order to protect a position is not advisable.

Example:
Suppose a Sell Stop Limit order were placed to protect a long position on an option with a Stop Price at $2/contract and Limit Price at $1.5. The current market price is $2.5/contract.
This order would remain inactive, unless the price reaches or drops below $2. When that happens, the order would then turn into a Limit Order.
As long as the order can be filled at $1.5 or higher, the order will be filled.
However, in case the market price gap down at $1 and then continue to fall, the order will not be filled.

The Difference between Stop Limit Order and LIT Order:
Stop Limit Order is actually quite similar to Limit-If-Touched (LIT) order.
The difference between Stop Limit Order and LIT order is basically on the placement of predetermined price that triggers its execution (i.e. “Stop Price” for Stop Limit Order and “Trigger Price” for LIT Order) and Limit Price relative to the current market price.

* For Sell order, the Stop Price & Limit Price for a Sell Stop Limit Order are placed below the current market price, whereas the Trigger Price & Limit Price for a Sell LIT Order are placed above the current market price.

* For Buy order, the Stop Price & Limit Price for a Buy Stop Limit Order are placed above the current market price, whereas the Trigger Price & Limit Price for a Buy LIT Order are placed below the current market price.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns
* Getting Started Trading

Monday, June 8, 2009

Market Analysis Video: Is S&P Losing Momentum on the Upside?

While the market still seems to be higher, it also appears that it is losing momentum on the upside.
This can be seen in the market’s second attempt to close above the 950 level.
In addition, some of the momentum indicators are also showing negative divergences.
This means that while the S&P 500 is making new highs for the move, the momentum indicators are not making new high, but instead showing lower high.
The appearance of negative divergences could often be the first indication of a potential market correction.
See the video for more detailed analysis.

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Saturday, May 30, 2009

Market Analysis Video: S&P 17 Week Cycle

Found an interesting video on S&P 500 analysis.
You can watch and see whether you agree with the analysis.
Personally, I just feel that in June and July we might need to be extra cautious in trading, as the market is already extended and it’s possible that correction may happen in the near future.
Certainly, no one knows whether it’s going to happen. Only time will tell.

Take care... and meanwhile, have a good weekend! :)

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