Latest Ideas and Comments in the Technical Analysis category

Latest Ideas and Comments in the Technical Analysis category http://www.traderinterviews.com/idealab/category/view/Technical Analysis The latest ideas and comments in the Technical Analysis category Tue, 15 May 2012 22:16:32 -0700 en-us Copyright TNC New Media Inc., 2006 - 2012 http://www.traderinterviews.com/images/traderinterviews_144x19.gif Trader Interviews IdeaLab http://www.traderinterviews.com/idealab 144 16 Comment on Search function http://www.traderinterviews.com/idealab/idea/view/search-function#c146 http://www.traderinterviews.com/idealab/idea/view/search-function#c146 Tue, 15 May 2012 22:16:32 -0700 Comment on The 3 Golden Trading Rules. http://www.traderinterviews.com/idealab/idea/view/the-3-golden-trading-rules#c145 http://www.traderinterviews.com/idealab/idea/view/the-3-golden-trading-rules#c145 Tue, 06 Mar 2012 12:21:39 -0800 Comment on When to use Oscillators http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c144 http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c144 Wed, 15 Feb 2012 17:57:54 -0800 Comment on When to use Oscillators http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c144 http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c144 Wed, 15 Feb 2012 17:57:54 -0800 Comment on When to use Oscillators http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c144 http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c144 Wed, 15 Feb 2012 17:57:54 -0800 Search function http://www.traderinterviews.com/idealab/idea/view/search-function http://www.traderinterviews.com/idealab/idea/view/search-function Wed, 22 Jun 2011 21:00:10 -0700 Comment on When to use Oscillators http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c143 http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c143 Tue, 25 May 2010 17:22:06 -0700 Comment on When to use Oscillators http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c143 http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c143 Tue, 25 May 2010 17:22:06 -0700 Comment on When to use Oscillators http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c143 http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators#c143 Tue, 25 May 2010 17:22:06 -0700 When to use Oscillators http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators
This idea comes from many years of live trading (real money not demo's etc) and sticking to figuring out when the typical (rebased/indexed) oscillators like the MACD and Stochastic.

I don't believe in just entering on a under 20 over 80 type idea but rather when the, for example, Stochastic is under 20 and something else happens - candle pattern, on Fib Retracement, at Support/Resistence etc

*** I use an idea here call market form - this another idea I used which is based one Dow Theory of Higher Highs and Lower Lows for deciding the trend direction and when the market is ranging. ***

When to use
1. The market is ranging with form - long and short trades work with high probability
Here the market is in a range with good form. The Oscillator (Stochastic) in this case works well. For shorts and longs...

2. The market is ranging without form - Oscillator (stochastic) doesn't work well. A lot flatter and not that many profitable trades, more false signals...

3. The market is trending with form - here ony look to take trades in the dirction of the trade. The Oscillator is good for entry only and not exits

4. The market is trending without form - There is no signal in the trend direction and it will give sgnals against the tre but has poor performance.

2. The market is ranging without form - Oscillator (stochastic) doesn't work well. A lot flatter and not that many profitable trades, more false signals...

3. The market is trending with form - here ony look to take trades in the dirction of the trade. The Oscillator is good for entry only and not exits

4. The market is trending without form - There is no signal in the trend direction and it will give sgnals against the tre but has poor performance.

2. The market is ranging without form - Oscillator (stochastic) doesn't work well. A lot flatter and not that many profitable trades, more false signals...

3. The market is trending with form - here ony look to take trades in the dirction of the trade. The Oscillator is good for entry only and not exits

4. The market is trending without form - There is no signal in the trend direction and it will give sgnals against the tre but has poor performance.

I hope this is helpful and stirs up some thinking around the different movements of the market and Oscillators - I have shared 4 of them (2 types each with and without good form). I have foun at least 8...

Thanks!
Brad

]]> http://www.traderinterviews.com/idealab/idea/view/when-to-use-oscillators Tue, 25 May 2010 15:07:14 -0700 Comment on Day Trading for a Living http://www.traderinterviews.com/idealab/idea/view/day-trading-for-a-living#c137 You may be able to skew the odds slightly in you favor by learning to accurately read price action, but for the most part you are seeking the impossible, especially if those fast moves are created by moments of irrationality or program trading.
Of the truly successful traders I know, If I were to ask them which way price is going, they would all reply, "I have no idea".]]> http://www.traderinterviews.com/idealab/idea/view/day-trading-for-a-living#c137 Fri, 04 Sep 2009 23:23:18 -0700 Comment on Day Trading for a Living http://www.traderinterviews.com/idealab/idea/view/day-trading-for-a-living#c137 You may be able to skew the odds slightly in you favor by learning to accurately read price action, but for the most part you are seeking the impossible, especially if those fast moves are created by moments of irrationality or program trading.
Of the truly successful traders I know, If I were to ask them which way price is going, they would all reply, "I have no idea".]]> http://www.traderinterviews.com/idealab/idea/view/day-trading-for-a-living#c137 Fri, 04 Sep 2009 23:23:18 -0700 Comment on Should I ask interviewees how much money they make? http://www.traderinterviews.com/idealab/idea/view/should-i-ask-interviewees-how-much-money-they-make#c129 http://www.traderinterviews.com/idealab/idea/view/should-i-ask-interviewees-how-much-money-they-make#c129 Sun, 14 Jun 2009 14:25:47 -0700 Day Trading for a Living http://www.traderinterviews.com/idealab/idea/view/day-trading-for-a-living Metastock Pro: one minute line charts, in a semilog scale, the one minute IMI, Inertia and RVI indicators, with Standard Deviation channels and, Fibonacci retracement lines to get an idea of the magnitude of the movement in a direction during the day, and trade with Tradient Pro, use that for all the numeric information and some graphic information. Of course I have the neccesary and adecuate comunication, although when I started, Colombia did not have very much in this respect. I never remain invested from one day to the next.

Before going into more detail about the trading methodology, this year I've had a lot of trouble anticipating moves. The market is making many short fast moves in one direction and changing direction just as fast. I know that the indicators that most traders use are for longer term trading, probably mostly for trend trading. I would like to exchange ideas with other day traders.]]> http://www.traderinterviews.com/idealab/idea/view/day-trading-for-a-living Wed, 06 May 2009 10:34:12 -0700 Day Trading for a Living http://www.traderinterviews.com/idealab/idea/view/day-trading-for-a-living Metastock Pro: one minute line charts, in a semilog scale, the one minute IMI, Inertia and RVI indicators, with Standard Deviation channels and, Fibonacci retracement lines to get an idea of the magnitude of the movement in a direction during the day, and trade with Tradient Pro, use that for all the numeric information and some graphic information. Of course I have the neccesary and adecuate comunication, although when I started, Colombia did not have very much in this respect. I never remain invested from one day to the next.

Before going into more detail about the trading methodology, this year I've had a lot of trouble anticipating moves. The market is making many short fast moves in one direction and changing direction just as fast. I know that the indicators that most traders use are for longer term trading, probably mostly for trend trading. I would like to exchange ideas with other day traders.]]> http://www.traderinterviews.com/idealab/idea/view/day-trading-for-a-living Wed, 06 May 2009 10:34:12 -0700 Comment on MAC/D Histogram with Support and Resistance http://www.traderinterviews.com/idealab/idea/view/macd-histogram-with-support-and-resistance#c123 http://www.traderinterviews.com/idealab/idea/view/macd-histogram-with-support-and-resistance#c123 Mon, 20 Apr 2009 04:22:09 -0700 Comment on Short Puts vs. Bullish Butterfly http://www.traderinterviews.com/idealab/idea/view/short-puts-vs-bullish-butterfly#c122
Actually, there are some things you can do. Stock have bounced so strongly lately, that you'd think be bear market is over. WIth so many bullish trades, it is even hard to be selective. I pick stocks that jump >10% in one day (there have been quite a few as of late). Then I set the butterfly with just above the current stock price.

Normally, a butterfly would be 3 strikes wide (for example, 30-35-40). Well, I make my butterflies wider, with 5 strike prices (such as 35-45-35). This has worked well for me lately.

I do not risk more than 1-2% of my capital, but my reward could be 4-8% of my capital, so a few of these and my potential gain could be high. I close the butterflies 10-4 days before expiration, since a strong move in either direction too close to expiration and my profit could be lost.

I also like to use the broken wing butterfly with a wider space between the lower wing and the body. Take for example this butterfly on DNDN a stock with the highest implied volatility I have ever seen:

BTO 10 May 17.5 call at 3.4
STO 20 May 22.5 call at 1.87
BTO 10 May 25 call at 1.38.

I think that if this stock is go to higher, it will probably do it rather quickly. With this broken wing butterfly, profits are assured on any rally, be it slow or fast. We'll see...

If I am wrong, however, We can lose all our capital, so it is important to keep the risk low.]]> http://www.traderinterviews.com/idealab/idea/view/short-puts-vs-bullish-butterfly#c122 Wed, 15 Apr 2009 03:43:26 -0700 Short Puts vs. Bullish Butterfly http://www.traderinterviews.com/idealab/idea/view/short-puts-vs-bullish-butterfly
I have been hearing a lot of chatter about shorting puts. I have heard highly regarded traders talk about the strategy on beaten down stocks including some Dow components under the assumption that the bottom has been reached. With implied volatility (IV) at record highs why not sell premium, they may say, on stocks such as GE.

Look at the chart below. I have included the price action the 200 and the 50 day moving averages and the implied volatilities (right axis). IV well over 100% is certainly a record high for a blue chip, Dow component such as GE. The stock price hits new lows at just below $6 well below the moving averages but the stock shows signs of life after forming a candlestick reversal pattern. Now if the point of owning stocks is to buy low sell high why not buy GE when the reversal seems to be in place? Better yet why not sell puts?!

By selling puts you bring some premium so long as the stock remains above the strike price but if it falls below the strike close to expiration you may get assigned. Therefore you must have sufficient cash in your portfolio in the eventuality that you are assigned. Think of it this way how many shares of stock are you willing to own if you are assigned every short put that you sell short. Let’s say that I have a $50,000 and I am willing to put about 10% of my capital on GE at $7.5. That is $5250 or about 700 shares. You can then wisely sell 7 March puts at $0.72 to bring in $504 in premium into your account.

How about your risk? good question. The theoretical risk is the same as the risk you would acquire by buying the stock minus the premium you brought in. That is $5250 - $504 = $4746 of course the commissions are already gone. If GE was to fall to zero overnight you will lose $4746. OK you can argue that that is not going to happen fine. But the fact is that your Max Profit/Max Risk is about 11%. Yet professionals (floor traders) do this all the time. We mere mortals have to think of the effectiveness of our trading. Even if our buying power is reduced by a fraction of that capital at risk do we really want to play this game?

The whole point of options is leverage and risk management at least in my mind. What you are doing with this trade is the exact opposite as we remove all leverage and risk management in favor of the probability of expiring. But because the reward is so small you could not do this profitably unless you do many of these trades. Eventually that “Black Swan” will happen and you can lose a great deal of money. In fact the Black Swan has already happen hasn’t it? The markets have lost over 50% since the peak of October 2007.

I suggest a smarter way to take advantage of the high implied volatility in stocks that have been beaten down that have historically high IV and that are likely to bounce. However, let us risk small to profit big instead of risking big to profit small. Enter the bullish butterfly.

Following the same historical example of GE at that apparent short-term bottom suppose we enter a butterfly just above the market. This time we will risk about 1% of our $50,000 account or $540 to make up to $1959.92 or 363% return on capital, which in this case is the same as the return on risk.

You may say that it is a long shot but the philosophy is not much different than that of the short put: you are expecting a small to moderate move up by March expiration. However in the worst case scenario you will lose $540 in the case of the butterfly but potentially a great deal of capital in the case of the short put. I grant you that the break even point in the case of the put is much lower at $6.78 compared to the $8.04 for the butterfly. WIth the stock at $7.41 either one could happen very quickly.

But what if the stock does go up significantly? Well here is what actually happened since I was merely back testing these strategies side by side:

As of Friday one week to expiration the butterfly has yielded a profit of $1090 well over 2x the profit in the short put $462. Needless to say that having 2x the profit for 1/10th the risk is my kind of trade.

The issue here is that the retail public has an advantage over the floor trader: we KNOW technical analysis. We spend countless hours studying patterns learning techniques such as candlestick patterns etc. The professional trader focuses on IV selling expensive options and trading with the greatest probability of expiring based on the Black-Scholes or other option pricing model. We retailers have a different background.

You may say that this retrospective analysis is all fine but now that the bounce has occurred the opportunity to either sell puts or buying bullish butterflies is probably gone. My response to you is prepare for the next opportunity to come in the next few weeks. Here is why: There is no bottom until there is a retest of the lows. A retest does not mean necessarily that the markets will go down to the previous lows or break below them. No, it just needs to go down to make a higher low. But even if the markets DO go down and make a new low there will be some stocks that will make a higher low at a time when the indices may be making new lows. In either case even as the markets rally strongly as they have over the last few days the test of the lows will occur soon and that would be a great time to go bottom fishing for those opportunities.

We can certainly pick the (formerly) blue chips of the DOW but take a look at fundamentally sound companies that have been reaching 52 week lows recently. Here are some that I would consider right now close to their 52 week lows and have liquid options:

TAP RTN COP GD RIMM LMT DO NOC K TM SLB UPL FDX ISRG BNI BA UNP ECA UTX HNZ PG SIAL APA MCD PEP COST RIG CL KMB BAX GENZ UPS TD EOG.

Remember the secret is to locate among these the ones that make a higher low when the market indices make either a new low a double bottom or a higher low. Use the Candlestick reversal patterns to identify the reversal points thus getting in early.

But why bottom fish when you can follow the very same approach with companies that are exceeding their 200dMA in recent days? Yes there are such companies and they would be good candidates as they have defied the trend in search of new highs. Here is a list:

MYGN FDO ESI ORLY AZO HANS NFLX GOLD AAP DLTR WYE DNA APOL ROH GVA AMZN CERN TEVA ILMN.

This list is rough and requires that you be selective. The idea is to risk small to profit big. Be sure that you can enter the trade without concern of losing all the capital in the trade, and let time do its trick.

In my opinion the best features of options are leverage and risk management. Retail traders have the advantage over professionals of a deeper knowledge of technical analysis and a more analytical approach to the selection of candidate stocks. Take advantage of that!
]]> http://www.traderinterviews.com/idealab/idea/view/short-puts-vs-bullish-butterfly Mon, 16 Mar 2009 21:53:29 -0700