Options Trading Blog

Thursday, December 5, 2019

Traders Deserve a Break

This is my usual blog that I write every soften where I implore you to take some time off from trading. The market will be there when you get back. No matter what you do or did for a living, everyone needs some time off to energize themselves. Trading is no different.

I recently told my class that I was not going to trade the week of Thanksgiving. It had nothing to do with expected lighter volume but more with giving myself a mental breather. I don’t know if you know this, but trading can sometimes be stressful. Of course, I say that facetiously because many would agree and already know that.

You have probably heard the saying or have been told “everything in moderation.” Why would trading be any different? Exercising is important for everyone and especially for someone who trades. But over-exercising can do more harm than good. Be disciplined, but also listen to your body. Traders need to do the same.

When taking a break from trading, consider working on or adjusting your trading plan when the market is closed. Review past trades and you might be shocked at what you find. Those credit spreads that you thought you loved, may have ended up ruining your year. Again, this needs to be done when the market is not open and your mind is not allowed to wander.

The best gift a trader can give him or herself is some planned time off throughout the year and especially over the holidays. Trust me, it will make you a better trader. And isn’t that the goal of every trader out there?

 

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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Wednesday, November 27, 2019

How to Enhance Trade Entry

I learned long ago that keeping a trade journal not only helped me recognize patterns that suited my personality, but it also taught me how to avoid repeating mistakes. The journal, through diligence and repetition, permitted me to develop a short-term entry strategy to enhance the timing for catching longer-term trends.

One of my biggest weaknesses was entering positions before momentum became apparent. A favorite pattern of mine requires a market to be in a consolidation phase for three to five days with severe overlapping prices and below day ranges. This pattern frequently leads to breakouts that extend about twice the length of an average day range or more.

The entry signal for this trade requires patience. I frequently guessed which direction the market would take and often entered a position about midrange. I would then get stopped out because a direction was not clear. When momentum did become clear, my confidence was low because I had already taken a loss and I would miss the breakout trade. So, I set out to create a signal to avoid midrange trades and enter when either bulls or bears revealed dominance.

The gold chart below illustrates the ideal pattern and entry method. It is called maximum high and minimum low.

In this example, gold was in consolidation mode for three sessions, then accelerated lower after taking out the minimum low of the consolidation phase. The short position is taken when the low over the three days is violated. In this way it became apparent that sellers were the dominant force. As illustrated in the graph, the target is twice an average day range or more. If the max high had been violated, then a long position would be executed.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.

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Thursday, November 21, 2019

My Favorite Option Things

Every year Oprah releases a list of her favorite things ahead of the holidays. According to her magazine, she has selected 79 perfect presents and one bonus selection for 2019. I also have a list, but it is not seasonal. It is a few phrases I like to use that I think can make you a better option trader. I am just going to cover three of them in this short blog and I will explain briefly what I mean for each of them. Consider this my present to you for the holidays. In a future blog, I will cover more of them.

Money Lying in a Corner…

The first saying I like to use is taken from a quote from Jim Rogers. It is part of a bigger quote, but I have narrowed it down to trigger a response from traders. When I say “money lying in a corner,” I mean that I want to take a trade I deem to be overwhelmingly in my favor. Let’s face it, as traders we try to put the odds on our side to extract money from the market. Easy money is money that is lying in the corner. So, what I am trying to elicit is that you feel confident putting this trade on because you deem the odds to be on your side and you are taking the trade for no other reason. It is a reminder to think about the trade before execution.

Think of Yourself as a Risk Manager First

Many of you have probably heard the saying that the first rule in trading is to protect your capital. And most likely you thought, no, the first rule is to increase your capital. Who could blame you as a new trader? But once you realize how trading works, it starts to make sense. Essentially when you think about removing risk first, profits are sure to follow if you are managing things properly. That is the notion I try to ingrain in my students’ heads, and it needs to come instinctively. You need to properly manage your trades and know when to remove risk, and then trading can become a whole lot easier.

When a Stock Enters a Target Area, You Need to Do Something

This last saying for today is pretty simple, and it should be straightforward too. What I mean is, when stocks trade into support and resistance areas, traders need to take action. When I look at a chart, I see several potential areas for the stock to move in the intended direction. For me, these areas are usually support for bearish trades and resistance for bullish trades. Knowing that support and resistance have a better chance to hold than not, the stock might have trouble moving in the same direction and might possibly reverse too. I want traders to consider taking some profit at those levels if applicable, or at least moving their mental or hard stops up.

Those are just a few sayings I like to use in my teaching. I hope they make sense to you and you can use them or consider them in your own trading. Have a happy Thanksgiving and enjoy the holidays!

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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Thursday, November 7, 2019

Fed's Stance Sparks Fundamental Shift

Over the past week we saw a subtle fundamental shift, but sometimes that is all it takes to get a trend rolling. It started with the Fed hinting at a more neutral stance. A fourth interest rate cut had been widely expected in the December FOMC meeting. That may not happen now as some members believe the accommodative stance has run its course. Furthermore, the recent data support moving from a dovish position to neutral. Last week’s job report was stronger than expected, and the revisions showed even more job growth than was previously reported. That news incited a rise in rates and stocks, while gold, yen, and interest rate futures and ETFs fell.

Normally, the nonfarm productivity and unit labor cost report has little if any impact. But this week’s report saw a big unexpected uptick in labor costs. That may be a sign of impending inflation. For this reason alone, the Fed might take a bit more hawkish stance. On top of this, Chicago Fed President Charles Evans mentioned that after three rate cuts, policy has been accommodative enough. To add to the euphoria, talks with China have improved, and there were some rollbacks of recent tariffs.

Looking ahead to next week, we get inflation and sales data. If these numbers come as expected or higher, stock indexes should remain steady to firm and the usual ETF havens (TLT, IEI, GLD, SLV, FXY) should either stabilize or continue lower.

Option spreads are probably the best approach for this environment because the speed of the recent moves in many markets is well above the norm. When markets get overbought/oversold, shoot for some theta.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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Friday, November 1, 2019

Is Option Trading Easy?

Let’s answer that question right now before we go any further…no! It takes a lot of work and patience to be a profitable option trader. Getting started by putting some cash into a trading account is easy. But that is where the easy part ends. Not only do you have to learn about calls and puts and the different strategies, you also need to know the option greeks. Then comes management. Managing a trade and the psychological aspects of trading are, in my mind, the hardest part about trading.

As humans we are not particularly designed to be traders. The emotional aspect of trading is huge. Many traders and investors are not prepared for it, and most do not overcome it. I hired a trading psychologist myself, and it was the best money I ever spent. So aside from what options can give and not give you, one needs to ask oneself, can I handle trading? That being said, options can lower an investor’s or trader’s risk and produce profits and losses as well.

Options cannot perform miracles, and you definitely can lose money trading them. But options allow you to hedge, use leverage and generate income.

Hedge

Hedging essentially reduces risk. Options can protect individual trades or your whole portfolio if need be. To me, that is invaluable.

Leverage

Options also provide leverage. You can use less money to have more exposure to a stock’s piece movement, especially an expensive one such as Amazon Inc. (AMZN). This in turn gives you more flexibility.

Income

And lastly, options can generate income. Reducing risk is the most important attribute to options, but being able to increase your profits is not such a bad thing. The best part about options is that there is a strategy for whatever your outlook may be. With stocks, you simple can’t make money from a sideways position solely on the underlying.

Yes, trading is difficult and especially option trading because there are more moving parts with options than, say, buying and selling stock. But if you are disciplined, option trading opens so many potential profitable and protection scenarios that, in my opinion, are well worth it.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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Friday, October 18, 2019

How Will Brexit Affect Markets?

I was writing my daily commodity market updates early Thursday morning and just as I was ready to hit send, stock indexes and interest rates rose abruptly. The euro and pound rallied while the dollar dipped. Gold fell as well. These immediate reactions were reversed later in the day when it appeared not everyone in the Brexit deal with the European Union was on board.

Even though the market reversed there is a valuable lesson here. When and if Brexit becomes a reality, we know that it will likely be bullish for equities and bearish for interest rate and precious metal ETFs as well as the dollar index.

For months we have endured sudden sharp moves in many markets when China trade talks have supposedly improved or been postponed. When we are told the negotiations are going well, stocks do fine while the usual safe havens (ETFs TLT, GLD and Japanese yen) falter. After reality sets in and the truth comes out that nothing new has been agreed upon, the markets often do an about face. Again, the lesson here is that news, true or not, moves markets and teaches us how the markets will likely react when the fundamentals become clear.

When you see sudden spikes in price either up or down, check the headlines. By doing so you will prepare yourself to make the right trade in each sector quickly when a major fundamental event occurs. Rapid responses save time and money.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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