Options Trading Blog posts page 2

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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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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