Options Trading Blog

Thursday, July 18, 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 has 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 two to five days as a rough average. Clearly that is not a hard and fast rule with many trades lasting a lot less or more time. Because many option traders consider themselves swing traders, 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 tradeoff 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 was just a quick but effective example on 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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Friday, July 5, 2019

A Helpful 'Cheat Sheet' for Average Ranges

Around holidays, especially in the summer, the participation rate often decreases, and subsequently so do volume and ranges. The typical seasonal lulls and end of each quarter are ideal times to do research and update statistics. I keep a spreadsheet with statistics covering average ranges over the most frequently analyzed time frames: day, week, month and quarter.

The spreadsheet (cheat sheet) helps me project how far a move is likely to extend once momentum (direction) has been determined. These vertical measurements can be used to define when a market is overbought/oversold. I frequently use a percentage of the average ranges to define risk and set profit objectives.

Generally, if the range over a 24-hour period spans 175% of an average day range, it constitutes an OB/OS signal. Or when the range over a 48-hour stretch extends the length of an average week, the pace is too great and thus favors a period of consolidation or sideways choppy trade. On the other hand, when the ranges over a few days are well below the norm, odds increase for a vertical move.

We use these stats often during the daily futures class. They can be used to time breakouts, as well indicate when a trend has run its course.

The spreadsheet below shows average true ranges in a few time frames for most commodities, some popular ETFs and Dow Jones 30 stocks. It can be a handy guide when creating strategy.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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Thursday, June 27, 2019

Go-To Strategies for Any Market

As you probably know, there are several option strategies available to option traders depending on what the trader thinks the market and underlying will do. Of course, there are market risk, implied volatility bid/ask spreads and other factors to take into account as well. But every option trader should have a few go-to strategies depending on the outlook. Here are a few to consider.

Bullish

If you are bullish on the market or underlying (let’s hope both), consider long calls, bull call spreads and bullish calendar or diagonal spreads.

Bearish

If you are leaning toward bearish and a move lower for the market or underlying, look at long puts, bear put spreads and bearish calendar or diagonal spreads.

Neutral

One of the benefits of using options is to be able to capitalize from a neutral outlook on the market or underlying. Certainly, that cannot be done with a long or short stock position. Here you can consider iron condors (and condors), butterflies (and iron butterflies), calendar spreads and vertical credit spreads. Investors can think about covered calls and cash-secured puts.

Non-Bullish

For this outlook, you might not be bearish, but you don’t think the market or underlying will move in a bullish manner. You can consider bear call spreads or time spreads like a put calendar or diagonal. In addition, investors might look at covered calls.

Non-Bearish

For this outlook, you might not be bullish, but you don’t think the market or underlying will move in a bearish manner. You can consider bull put spreads or time spreads like a call calendar or diagonal. Investors might use cash-secured puts effectively too.

By no means was this supposed to be a thorough breakdown of all the option strategies. But your trading plan should have at least one for every conceivable environment out there. It will go a long way toward your potential success if you do.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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Saturday, June 22, 2019

How to Improve Trade Entry and Exit

One of the more difficult issues traders face is choosing prices that are apt to be extremes, or highs and lows, over a given time frame. Pinpointing daily entry and exit levels, also known as support and resistance areas, requires a view of recent history of the market you are trading.

When charting, it is important to label prices where momentum kicks in. Areas where buyers take control of momentum often provide support when retested. Resistance levels form where sellers previously emerged to force the market lower.

Extremes (highs or lows) made in the first hour of regular trading hours are often clues of whether the institutional traders are bullish or bearish.  Generally, the highest volume and most liquid time of the trading session is the first hour of the day. Large orders from professional traders tend to be executed when volume is at a peak. When these prices are retested reversals often occur.

Extremes often form when previous high volume or fair prices are retested. The chart below shows the S&P in a consolidation phase just before rising sharply on 6/18. Note that the low was made at the high-volume price (2890) of the consolidation phase.

Extremes also regularly form when old very low volume prices are retested. That is shown in the chart as well. Note the low on 6/19 was made when a very low volume price from the day before was retested. Keep tabs on high volume prices and very low volume prices on your charts. By doing so you should become more adept at pinpointing entry and exit levels.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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Thursday, June 6, 2019

Key Candles to Add to Your Trading Toolbox

All technical tools work at times, but none work all the time. The trick to technical trading is to identify when an indicator is likely to detect a high percentage trade. I have studied many charting techniques and tools in my 30-plus years in the commodity markets. Whenever I came across a setup that seemed to payoff often, I put it in a notebook. I made a collection of the best signals from many disciplines to build my own personal technical style. I categorized the signals into three types of setups: directional, consolidation and breakout.

Here are some of my favorite candlestick patterns. First, let’s look at a directional signal called a bullish engulfing setup. This setup works best after a couple of candles with below average ranges, followed by an above average range that surpasses both the low and high of the previous candle. This is also known as an outside day. Bear engulfing candles work just as well, but the close is lower than the open.

Another reliable tool is called a hammer. A bear hammer has a long wick from the high and closes very near the open of the candle. This structure often leads to lower prices going forward. Of course, a bull hammer would have a long wick from the low and an open and close that are very near each other.

The last candle is one that indicates neutrality. It frequently precedes large directional moves or trends. This candle is called a Doji. It is usually below average in length with an open and close that are the same or very near each other.

To build your own personal trading toolbox, search many disciplines and choose the signals that fit your style. If you like to sell option premium, look for markets that are overbought or oversold. If you prefer to trend trade, these candles should help with timing the entry of a trade.

John Seguin
Senior Futures Instructor
Market Mentor Mentoring, Inc.

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Thursday, May 30, 2019

How to Trade This Options Market

This is just a little blog to remind you about your options trading management. Everyone needs reminders, especially option traders. I will often say in my Group Coaching class to know exactly what you will do no matter what happens before you enter any trade. The same can be said about the trading environment we are currently in.

Not only is it important to understand the different option strategies and the option greeks, you have to know and have a feeling what the trading environment is so you can make more educated decisions as far as management goes. This, of course, addresses the most important part of trading in my eyes: management.

I take into consideration what the market is doing before placing a trade. I generally consider the market for about a third to half of my decision-making process. For example, if you are bullish to non-bearish on the market, I consider more bullish than bearish trades. If you are accustomed to taking profits over a certain length of time or a certain percentage, consider altering that especially when market conditions change. For example, consider lowering your profit potential percentage or time in the trade.

Understanding the market environment is just one of many things an option trader needs to know when he or she is active in the market. What it really boils down to is smart and active management and, to me, that is where money is made or lost more often than not.

John Kmiecik
Senior Options Instructor
Market Taker Mentoring, Inc.

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