Options Trading Blog

Friday, May 24, 2019

Trade Talk and Tweets: the New Fundamentals

Fundamental data are also known as event risk. Professional traders keep a close eye on the economic calendar for events or reports that could alter a trend or start a new one. A treasury trader might hedge a long position by buying 10-year note puts or selling calls just before employment or inflation reports. Many stock market traders use options for protection just before earnings reports. Farmers frequently use futures as insurance before supply and demand data are released (WASDE). These are all examples of regularly scheduled events. Economists and their teams work diligently gathering statistics to calculate a consensus estimate for each piece of fundamental news.

Long before a scheduled report is released a consensus number has already been priced in. It means, if the report is near expectations, the news should have little or no impact on the markets. Bullish and bearish reports are already widely known. It is the difference between actual and consensus data that make markets move. For example, if an inflation figure was much higher than expected, treasury futures would likely drop steeply. When treasury futures go down, interest rates rise. The Fed raises interest rates to stem inflation. A rise in interest rates makes the dollar more attractive and a stronger dollar means investors will likely buy dollar assets, like stocks. Do you see how one report that is out of line with expectations can start a chain reaction that ripples through the financial sectors, commodities and ETFs?

Now let’s talk about the new fundamental data. The last three Sunday nights have seen some volatile moves in equities. For stocks, three consecutive Fridays saw solid price action and finished near the weekly highs. Then by Sunday night or early Monday morning stocks have taken big hits to open acutely lower each Monday. So what has changed? Trade talk and tweets have become the new fundamental data. Currently, markets are far more sensitive to unplanned negotiations or tweets. The point of all this is to stress how important it is to be properly hedged for the weekends, now more than ever.

Tensions with China and Iran seem to escalate every weekend. So, if there are no unpleasant words exchanged this weekend, the indexes might start this week with a bid for the first time in May.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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Wednesday, May 8, 2019

Support and Resistance on the 15-Minute Chart

If you know me even a little as a trader, you know how I feel about support and resistance when it comes to trading. I feel knowing that support and resistance have a better chance to keep the underlying advancing gives the trader a much needed “edge.” As traders, we want to put the odds on our side as much as we can to be successful. Counting on support and resistance to hold is just one way to do it.

Many option traders swing trade, which means the expected length of time is anywhere from 2 to 5 days as a rough average. Clearly that is not a hard and fast rule with many trades lasting a lot less or a lot more. So many option traders consider themselves to be swing traders that they pay no attention to smaller time frames like the 15-minute chart, which happens to be my favorite. Take a look at the three charts below.

Each one is a 15-minute chart meaning that every candle represents a 15-minute time frame. Each one has very distinctive potential support (below where the underlying is) and potential resistance (above where the underlying is) levels. How could this not be beneficial for option traders? Whether you are looking for areas to manage the trade-off of for targets or stop loss exits, or mapping out an area for a time spread, this smaller time frame could be just what you need.

Once again, this is just a quick but effective example of how I like to use a smaller time frame despite being a “swing trader.” Adding this to your technical analysis arsenal could really improve and help define your management.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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Thursday, May 2, 2019

How to Save Time Analyzing Markets

Since leaving the trading floor at the Chicago Board of Trade I've been tethered to my desktop computer. My office is my workshop, and all the tools I need are there. Since the futures markets virtually never close except on Saturday, the leash to my tools is short and therefore constrictive. My vacations have been limited to three maybe four days over the past decade and a half. Last week I was forced to adapt during a weeklong trip with the MTM team to Northern California.

I write newsletters every day and have for many years. I was nervous about this trip because I thought I might not be able to service my clients with daily market updates. I had to adapt. First there is a two-hour difference between Chicago and California so to get my newsletters out I had to get up very early in the morning. My alarm was set for 2:45 a.m. PST to release my morning updates.

I was able to publish my reports, but I had to adapt to a shorter version. To do that, I had to make a list of priorities to publish trade ideas with limited time and access to my tools in a suburb of Chicago.

I know what traders want from me. They need to know which direction to favor and where support and resistance levels are or levels to buy and sell.

If you have limited time to analyze markets, and most of us do, take these steps at the end of every day to prepare for the next.

First and foremost, check for event risk. That includes economic reports, earnings and supply reports if you're a commodity trader. Fundamentals move markets, but if there are no fundamental data, we have to turn to technicals.

Next on the list is defining momentum. There are many ways and indicators to define momentum. My list includes these three intraday signals. The first is when the high or low of the day is made. If a high is made in the first hour of the day that indicates sellers are in control, and if the low for the day is made in the first hour that means bulls have the edge. The next indication of momentum is if the market extends higher after that first hour signaling bulls are in charge, or an extension lower after the initial hour indicates sellers have gained the advantage. The last direction indicator relates to what quadrant of the day range the market closed. A settle in the upper quadrant means bulls are in control and higher prices are likely the next session. Conversely, a close in the lower quadrant of the day range indicates that prices are apt to extend down the next day.

The last task in this abbreviated version of analysis is to pick entry and exit levels or support and resistance areas. This is the toughest part and an art. Markets tend to reverse when they revisit old high-volume prices. They also tend to reverse when revisiting old very low-volume prices.  

When time is restricted, and you have many markets to analyze, follow these steps to save time. More time away from your computer allows more time with family, hobbies and travel.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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Thursday, April 25, 2019

Option Traders Need a Plan

When I became a retail option trader, I was told by many that I needed to write and follow a plan. Although many of you know this as well, you may have either not written or finished your plan. As I always like to say, if you were opening a restaurant, would you do it without a plan? The answer is, of course not. So why do most option traders not have a solid trading plan? You need to answer that for yourself.

Before you start writing a trading plan, ask yourself if you are truly motivated to succeed. It may sound insulting to ask that, but traders really need to find out. Will you put in the time to make it as a trader? There are going to be highs and lows along the way. Will you be able to handle those? And will you be disciplined enough to write and follow a trading plan?

To make it as easy as possible, I tell traders a good place to start is to write down their strengths and weaknesses. Who is going to know you better than yourself? This can formulate, based on your personality, what type of trade plan would best suit you. Are you patient or impatient? If you are impatient, maybe longer-term trades are not for you. Are you a risk taker? If you are, selling premium on options where losses can be substantial may be an option for you.

Now you have something to work with, and that can give you the motivation you need to continue on and finish your plan. Next you will have to complete sections such as goals, strategies, management and post-mortem, just to name a few. In later blogs, we will talk about them too.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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Wednesday, April 17, 2019

How to Catch Directional Moves

One of my chores is to write a weekly piece that enlightens traders. At times my interpretations are spot on, almost prophetic. And sometimes I am clueless. My 30 years of experience in the futures markets has taught me to accept, almost embrace, being wrong. Traders must embrace risk. No one likes being wrong, but accepting the possibility of a bad trade is a huge step for a trader. This industry requires us to accept that market movement is uncontrollable and unpredictable. It is a trader’s job to find the moments when probability favors a bullish or bearish wager.

Trading is a battle and a sport. Both require discipline. If you prefer to make directional or trend-type trades, make a list of conditions to increase the odds of catching directional moves.

Here are some of my favorites:

  • A series of five days with below average day ranges

  • Two weeks where the range is below the weekly norm

  • The closes are about midrange over a three-day period

When all these conditions are met, odds favor a breakout or vertical type trade.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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Thursday, April 11, 2019

A Bullish Trade Setup to Consider

The market remains predominantly bullish, and there are several potential bullish trades we have considered in our Group Coaching class. One setup I continue to love is the 2-bar bullish break from a bullish base.

A bullish base is created when a stock moves considerably higher usually over a short period of time and then begins to trade sideways. If the stock does not pull back more than two-thirds of the move higher, it is considered a bullish base. The 2-bar close is two consecutive bullish closes in a row, with the first bar closing above the resistance level of the base and the second closing above the first candle’s high. This works on all time frames. Of course, the bigger the time frame the bigger the expected move higher.

Take a look at this recent example of Dominion Energy Inc. (D).

The stock has moved higher since the beginning of February and has maintained a fairly bullish base after testing the $77 level. That area acted as resistance in the past and is doing so currently. Although the stock has been on a bullish watchlist, it has never had the 2-bar close (2 consecutive bullish closes) trigger. So in this case, it is still a waiting game.

Determining what a bullish base is can be fairly easy if you know what to look for and consider. Just because it is a bullish base does not mean it will eventually move higher. Being patient and waiting for the 2-bar trigger can immensely improve your odds. As traders we always want to put the odds on our side, and for me that would be a break above the resistance level of the base.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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