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Weekly Option Trading Wisdom

 This publication is your money saver – and on top, it is free. 

Option trading is fantastic, when you know what you are doing – it is dangerous if you don’t.

Why? 

Multiple variables and instances define the price of an option and you can apply various option strategies to trade at specific price constellations of an underlying. 

The inspiration for this article came from reading a publication, where a trading educator proclaimed the ultimate wisdom to “Instant Options Income”. 

The referring trading strategy was a credit spread with weekly options and after eight days (the time used in the example), you keep the premium made. A high probability trade setup was found by some moving average crossings and underlined by the trading strategy, where you will be profitable if the share price goes up, slightly retraces or moves sideways. The trade had the following components: 

  • 10 Bull Put Spreads: You expect the price of the underlying to stay above a defined minimum price level to keep the premium received
  • Every contract controlled 100 shares
  • The obtainable premium received was $230
  • The spread of the option strike prices was $2.50

 In the shown example, the trade was made and the premium kept. It all sounded good; however, to evaluate this trading example, in respect to repeatability, let us consider the following: 

  • $30 average commission to open the trade and in case you have to close it, you again pay $30
  • The risk of the trade (Spread x Contracts): $2.50 x 10 x 100 = $2,500
  • Potential net-return of the trade (Premium – Commission): $230 – $30 = $200

For every trade, an odds approximation is essential: In this example, let us take 10 trades and out of those nine winners and one loser: What will be your trade balance?

  • The expected net return of $200, times nine positive trades = $1,800 (gain)
  • If you get caught once with a max loss = $2,500 + $30 = $2,530 (loss)
  • Even so you had nine out of ten positive trades, your trade balanced = -$730 (loss)

 In essence, the potential risk of the trade is not in balance with the potential reward.

To quantify the real probability of this trading strategy and what it probably will do to your trading account: Take the at-the-money Straddle plus Strangle premium, divide it by two, add and subtract this result to and from the actual stock price. This will give you the 1-Sigma price range, where the market maker expects the price of the underlying to end up being at expiration. When using a Gaussian distribution the 1-Sigma range contains the final price of the underlying at expiration with a 68% probability.  

Rounding the 1-Sigma range to 70% and relating seven winning trades and three losers, your trade balance after 10 trades might end up being: $1,400 – 3 x $2,530 = -$6,190 (loss).

This is how quickly a high probability weekly option trade setup can end up draining your trading account and with this article we want to help you to stay out of such trading strategies. 

Does that mean, weekly options are not good to trade? 

Absolutely not, they can be a perfect trading instrument, if you use limited risk and high upside reward strategies; however, you always need to consider that the weekly option deteriorates about 20% of its time value per day you hold it. 

In the NeverLossTrading mentorships, you will learn applicable trading strategies for Stocks, Options, Futures and Forex. 

Check our offering for details: http://neverlosstrading.com/Classes_Overview.html

Schedule a personal consulting our: Call +1 866 455 4520 or contact@NeverLossTrading.com

Good trading, 

Thomas

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February 19, 2014 at 8:06 am Leave a comment

Trade Significant Changes in Stock Ownerships

The happening, we share with you in this educational newsletter is a situation where stocks in one-day find a strong change in ownership, mostly associated with news announcements. In the following charts, we highlight this happening by a Cyan Volume Bar, which highlights extraordinary high volumes associates with a big price move of the stock.

Cyan Bar: Extraordinary High Volumes Exchanged for GOOG

NeverLossTrading Cyan Volume Bar

Two types of happenings are differentiated:

Type-1: Strong upside price move associated with an extraordinary high exchange of stocks.

Type-2: Strong downside price move associated with an extraordinary high exchange of stocks.

To identify this happening, we recommend developing a specific scan, which lets you know on a daily basis stocks with a strong volume and price move. Here are the scan results for December 13, 2013.

Stocks with a Significant Change in OwnershipNeverLossTrading Cyan Bar Stocks for December 16, 2013

After recognizing the happening, what are potential trading strategies?

Strategy-1: Trade with the Strong Upside MoveNeverLossTrading Strong Cyan Bar Up Move

This is the easiest strategy to follow. A stock produces positive news, opens higher with extraordinary volume and the price move is followed through by other institutional investors. We then use our genius and trade along with the move.

The target for the trade shall be set at 2-SPU’s (two Speed Units = 2 x the expected daily price move at the cyan volume bar).

Another way to trade this situation is to trail the stop; however, after a 3-SPU-price-move, following the trade initiation candle, there is an 85% chance for a retracement where you might sacrifice already booked profits. Hence, profit taking is the right measure.

Strategy-2: Trade with the Breakout

NeverLossTrading Cyan Volume and Breakdown

Even so the stock reported better earnings, the stock price broke down. Our Strategy:

  • Mark the high and low of the breakdown candle
  • Trade along with the price-breakout from the price range defined by the high/low of the breakdown candle.

In case the price breakdown gets followed through, we also trade along with the new price move for 1-SPU or 2-SPU’s.

NeverLossTrading Cyan Volume Bar Breakdown and Follow Through

Strategy-3: Trade Exhaustion on the Top

Cyan Volume Bar Exhaustion Move

The price shows a strong upwards price move and produces what we call a trend exhaustion candle. This candle ends the uptrend, produces new owners, who quickly run away from the stock when prices fall. Our trade strategy again is easy: We trade along with the price move, when it breaks the low of the Cyan Bar Candle.

The Significant Change of Ownership is just a small trading strategy and scan, we provide for our students and members. If our publication triggered your interest in NeverLossTrading, check which type of trading system will suite you best and we are glad to provide you with a personal consultation: Call +1 866 455 4522 or contact@NeverLossTrading.com

December 15, 2013 at 4:17 pm Leave a comment

What Makes You a Successful Trader or Investor in 2014?

Prior to answering this key question, let us clarify the difference between a trader and an investor:

From a top-down perspective, there are many elements where both do the same: Participating in the financial markets with assets like stocks, commodities, currencies, treasuries and their derivatives: Futures and options. However, there are behavior differences, where the action of the one is very different to the other: The investor usually takes a longer-term perspective and mostly only makes money when an asset bought, increases in market value. A trader focuses on participating in the short-term price moves of assets and mostly uses methods and trading instruments, which allow making money when prices move up or down.

Trading Success

Successful traders and investors manage the following challenges:

Challenge-1: Finding assets with a future perspective price move.

Challenge-2: Applying a method of protecting profits.

Challenge-3: Managing risk.

Given the circumstances that some assets have price developments: With-, separate from, or against the markets, makes Finding Assets with a price move potential a key challenge. When those are found, the second challenge is to define how far their price move will reach to realize profits or find forms of protection prior to a potential reversal price move.

In general, there are two basic methods to identify trade- or investment potentials:

Fundamental Analysis: Where you equate financial and other business factors of an observed asset to decide for its future perspective. This is the arena of smart people working for the big investment firms, constantly analyzing the world’s markets and finding assets to invest in. As a private investor; however, if we try to replicate the same; we are facing a hard time in keeping up with the information base and point of view of institutional investors. Their managers have contact to the world leaders of business and politics and use pre-information constantly to their benefit.

Technical Analysis: If applied right, a sound chart analysis helps you to spot and follow the action of institutional money moves with a trading system which equates the happening in price, volume and volatility for identifying asset in supply or demand, for you to trade along with the referring price moves.

Given the magnitude of more than 40,000 investment instruments in the US-markets only, you might want to find a service, helping you to identify assets with institutional attention, fundamentally or technically.

Take a look at NeverLossTrading Alerts and you see how we can help you to find assets on the move if you are a day trader, swing trader or long-term investor, reducing your effort from hours a day to minutes a day to know what you want to trade or invest in.

Trade Alerts Picture

Protecting Profits

The equation to consider is: Protecting Profits = Making Profits. A common saying is: “You trade with the trend until it comes to an end”. However, there are two fundamentally different ways of making and keeping profits:

Way-1: You find a systematic to trail a critical price level along with the price move of an asset and when the price direction reverses to this level, you either exit your trade or you apply a method of profit protection against a potential counter price move.

Way-2: You define positive trade exit price levels by equating the minimum and maximum expected price move from trade entry. When those critical price levels are reached, you either exit or you apply a form of protection to assure that the gains you made cannot disappear from your account.

Both of those methods are applied in the systems of NeverLossTrading and TradeColors.com, where you either trade for momentum price moves or with developing price trends. Check the graphics below to further investigate which system would suit your trading style best.

Trail Your Stop (Way-1)

Trailing Stop

Approximate Min and Max Price Expansion (Way-2)

Two and Three Time Price Expansion Move TradeColors

Managing Risk

Managing risk builds the foundation for successful trading or investing. Only when you are able to prevent major draw downs in your trading/investing account, you will be suited for staying long-term in the trading/investing business. If the foundation of your trading system/plan is not standing on solid ground, your temple of success will quickly fall: Always be aware that there is no risk-free trade and the higher you put your return expectation, the higher the risk will be to accept a trade or investment. At the end of the day, a million dollars is a million dollars; however, if you are able to build up a trading plan, where you keep a constant low risk, while producing constant returns from multiple trades, you are better on than aiming for a onetime high return with an associated high risk:

Imagine a trader with a $20,000 account, if he aims for a onetime return $10,000 and an associated risk of $10,000. When he fails, 50% of the account holdings are gone and the trader needs a 100% return on the remaining capital to just breakeven. Instead, if he is striving for a $1,000 return/trade with an associated risk of $1,000, he has a much higher probability to being long-term successful, as long as he constantly finds and trades assets with high-probability trade setups.

The key question arises: How to define an appropriate risk in relation to the considered return?

Our recommendation is to consider two risk levels:

The minimum risk is the one you need to accept to allow for a price move in the desired direction, considering the natural price distribution of the asset to trade: Finding this price level prevents that you will be stopped out even so the price moves in your desired direction. If you continuously experience being stopped out and afterwards you see the price taking off, your risk tolerance was too narrow. Best is when a computer programs measure the statistical volatility of an asset at the time to trade, giving you a clear-cut approximation, where to put the stop- or trade adjustment level. Aside from this, you can surely pick a major support or resistance level where the price haltered in the past, at which your base hypothesis of the directional price move will no more have validation when it is surpassed.

In addition to the minimum risk, you need to decide for a maximum risk to allow for accepting a trade, with the implication: When the maximum risk level is touched, a trade adjustment is necessary, which can be released or enforced, depending on the continuation of the price development. If your experience from the past was: Small gains, small gains and big losses, your risk tolerance was too wide and you face the danger to drain your account by either having no trade adjustment or stop level or an inappropriately wide risk tolerance, which is not in relation to the potential reward of the trade you entered. For any trader, if the relation from the maximum risk to the expected return is not in your favor, just do not accept the trade. Price levels, where the prices remained for a longer period in the past, can be used to define maximum risk levels. However, you can also help yourself finding those levels by letting your computer build the associated volume-price-relations, so you can see on the chart where the critical price levels are.

Sounds more complicated than it is. With the right trading system, you can find the required risk levels right on the screen.

       NeverLossTrading Concepts: Red Lines, Box Lines, Horizontal Lines.

       TradeColor.com Concepts: Above/Below the High/Low of the Trade Initiation Candle.

For a personal consulting hour call: +1 866 455 4520 or contact@NeverLossTrading.com

Prepare for your trading success by installing the elements of asset selection, profit protection and risk management. The knowledge how to apply those instruments to your benefits is not widely accessible, however with the help of this article, you can check and balance where you stand today and how you can create your trading future by gaining the necessary knowledge and obtaining the referring instruments, helping you to develop yourself into the trader or investor you want to be.

December 11, 2013 at 5:15 am Leave a comment

Algorithmic Stock Market Evaluation

Spotting and trading institutional money moves is a favorable way for the private investor to be on the right side of a trade. Times move ahead and private investors do no more need to rely on 100-year-old trading techniques. Today’s software and computer technology allow you to apply the most advanced algorithmic trading techniques from the comfort of your home or wherever you want to be.

NeverLossTrading indicators, studies and algorithms spell out price thresholds, which have to be surpassed to indicate a directional institutional price move: The crowd follows the leaders.

Buy> $169.50 means exactly what is says: Only enter a trade when the next or second next candle surpasses this price threshold. Else the direction is not confirmed and you don’t want to be in a trade.

Take a look at the SPY chart below. In the last 5 days, you can see four potential directional trade indications, but none was confirmed, hence, we apply a wait strategy until the market has mapped out a new direction.

No guessing: Trade What You See!

SPY Development: July – October 2013 See the development of SPY on NeverLossTrading

In the aim of finding confirmation for the strength of a move, we are looking at the volume bars: When they show a different color than gray, institutional buying or selling is detected (you learn the meaning of the color coding in our mentorships).  

However, we cannot trade blindsided and pure technical. This is why we call it:

Algorithmic Trading with Human Interaction

Take a look at the September-18-price-development: NLT Light Tower Candle (cyan dot) on the high, which is a clear indication not to follow the institutional intended price move. A typical trend exhaustion candle is portrait on high volume (you learn this in our mentorships). At this instance, less informed traders get lured to go long, buying SPY on the high. Then, bars right after, you can spot two strong sell signals; again confirmed by volume: Our signal to go short. Finally, where to end the trade? The moment, we got in the congested price area, where we are in now, we left the trade and are ready for the next, when institutions make a new directional commitment. Here is the reason why:

When you look at the volume bars of September 30, October 1 and 3, institutional acting is highlighted, indicating a potential stronger exchange in ownerships of SPY stocks. When the new stock owners decide what they want to do with their shares: Buying more or selling them back to the market, our indicators will tell us to get ready to trade with the evolving direction.

Why do we use SPY as reference index?

The value of SPY is represented by real stock holdings, while the S&P 500 index and its futures are more objects of manipulation or speculation. However, when we look at the Emini S&P 500 index, it portraits the same picture as the SPY.

Emini S&P 500 Development: July – October 2013 S&P  Emini on NeverLossTrading Charts

At times, people compare the NeverLossTrading Price-Volume Indicator with the Wyckoff’s volume spread analysis and we can only say: “Yes, Richard D. Wyckoff and his findings were inspirational for the development of our algorithms”, which paints institutional action on the volume- and price bars. However, our algorithms operate real time and use 2013’s computer technology for a high level of precision and speed, portraying institutional money moves immediately on your chart when they happen; moving from tape reading to vector graphics and algorithmic trading.

What does this overall market assumption say for individual Stocks?

About 75% of the stocks show price developments, directly correlated with the S&P 500. However, every day institutional money moves happen in and out of individual stock holdings, giving you the chance to constantly spot and participate in the markets.

With the launch of NeverLossTrading Alerts, where we communicate assets with institutional attention, you can decide to be informed early on a price happening. Considering the different needs of day traders and swing traders, we offer:

·         Long Term Investor Alerts: Oriented towards moves in the next 1-10 weeks.

·         Stock Trader Alerts: Price move indications for the active stock trader.

·         Day Trader Alerts: Fish, where the Fish are! Find the hot spots of money moves for day trading.

Putting you in the position to spot on your chart where institutional money moves start and where they potentially end, we offer multiple classes for the day traders and swing traders, which include software installations, teaching and 6-month coaching. Check out two examples:

·         NeverLossTrading Top-Line: Trade with strong institutional moves and spot them early.

·         NeverLossTrading HF-Day-Trading: Participate frequently in up- and downside moves.

                                                                                             

For more details: Call +1 866 455 4520 or contact@NeverLossTrading.com

October 6, 2013 at 1:37 pm Leave a comment

1 Way Ticket to Profitable Trading

Financial market investors and Traders, who struggle becoming successful, do not consider what is shared in this article.

You are closer than you think to become a master of the Financial Markets.

  • Stocks
  • Commodities
  • Currencies
  • Treasuries

Consider the following

Risk Control

The most a trader/investor can control is the risk accepted in a trade.

Do you know the appropriate risk to accept when entering a trade?

Have you experienced, that you been stopped out even so the price moved in your direction?
If this happened, your risk tolerance was too narrow in respect to the natural price distribution of the asset traded. Best is when a computer programs measure the statistical volatility of an asset at the time unit observed, giving you a clear-cut approximation, where to put the stop- or trade adjustment level. In many cases there is no need to leave the trade, however, when the maximum risk level is touched, a trade adjustment is necessary, which can be released or enforced, depending of the continuation of the price development.

Did you experience small gains, small gains and big losses?

In this case, your risk tolerance is too wide and you face the danger to drain your account by either having no trade adjustment or stop level or an inappropriately wide risk tolerance, which is not in relation to the potential reward of the trade you entered.

Sounds more complicated than it is. The required risk levels can be found on your trade screen. Examples can be found at:

  • NeverLossTrading Concepts: Red Lines
  • TradeColor.com Concepts: Above the High/Low of the Trade Initiation Candle.

Defined Trade Goal

How to approximate the potential reward level of a trade?

Successful traders have a way to approximate how far the price will expand prior to retracing. However, most trading system have no way of estimating the potential price behavior of a trading instrument. NeverLossTrading and TradeColors.com are giving you a continues approximations of the expected price move at any time unit observed and for every asset class, considering the following statistical price behavior pattern:

  • 65% likelihood of prices to retrace after the first price expansion move, giving you 50% less or no profits, even so the price moved in your direction.
  • 75% likelihood of the price to retrace after the second price expansion move, threatening you for giving up 75% or more of the already reached profit.

Now, you might no more wonder, where the pattern of small profits, small profits comes from and if you knew, where those critical levels are, you would sure take bigger instead of smaller profits.

High Probability Trade Setups
Most trading systems focus on trade setups, with positive expectations. The question is why they still do not produce long-term profits for you?
By our studies, the wide variety of trade pattern- and standard indicator based trading systems have a probability of 54% to 57% to conclude a price move in the assumed direction. This manifests the positive expectation, however, we want to give you a short cut to making money trading: As a retail trader, you pay commissions, you experience slippage (bid/ask-spread differences) and you are prone to gaps or rapid price moves, hence, only if you find a trading system, which gives you an above 65% likelihood to conclude in the desired direction, without infringing the set risk level, then and then only will you be profitable as a retail trader.

Odds in Your Favor
Give yourself the ability to trade with the Odds in Your Favor, considering:

  • Risk
  • Reward
  • Probability for Success

See all this with the blink of the eye on your trading screen. NeverLossTrading and TradeColors.com provide such systems. They are based on algorithmic trading with human interaction. Check out their performance and take the opportunity for a personal demonstration.

August 18, 2013 at 3:37 pm Leave a comment

1 Key Note on the Odds of Stock Trading

How Do You Know When the Odds of Trading are in Your Favor

At any trade situation, successful traders make an approximation for the risk involved in the trade.

What is the Risk of a Trade and can a trader control the risk?

If you are a day trader, you are in best control of the risk involved in any trade. As long as you are trading a liquid asset, your stop identifies the maximum risk. To stay in control of the risk:

  • Use a hard stop.
  • Stay out of a trade, when key economic news are released.

For a swing trader, the overnight risk of a news related gap-up or gap-down is a key element, which can increase the risk for a trade above the original approximated base. To control this risk:

  • Use a trade adjustment price level and method, which will keep you in the trade but buffers the risk of it.
  • Stay out of a trade, at earnings announcements or at other key news events.

The actual amount of risk is calculated in relation to the expected wiggle room, you need to leave the price, when it is going in your desired direction. Past data, price gravitation lines which identify support and resistance help you to define the actual dollar-amount.

Next, we need to approximate the potential reward of a trade and do this by:

  • Measuring the distance from the actual price to the next potential support or resistance zone.
  • By calculating an expected price move, where NeverLossTrading is using the SPU (Speed Unit = algorithm based expected futures price move in the time unit observed).

As a final step, our trading system shall give us an approximation of the probability for success for specific trade setups and when we correlate those with the approximated reward and risk, it calculates an odds ratio, which will tell if the odds are in favor of a trader.

Taking trading serious, we also need to consider commissions, which are increasing the potential risk and decreasing the potential reward. Many new traders have the sentence plugged in their mind: “Never care about commissions; they are just part of the game, like you need a car for going to work”. However, by commissions being part of the professional trading business, we run, we surely consider them.

You might think, this is all a given, however, let me tell you a little story about a man, I met who had worked out a trading plan, which he assumed, will make him rich quick:

Once, I was invited at “trading symposium” in New Jersey and a new trader-coach showed his trading. He had just mastered all the classes of his education firm. He explained the trade; he wanted to get rich with. The trade is called QQQ (or 10/20 cents financial freedom) and sells for about $4,000 on DVD’s. His setup was as follows: If the market ticks up or down 5-minutes after the open, he buys a delta 70 QQQ option (put or call) and then trades for a 10 cent move. If the 10 cent move is concluded he takes profits. If the trade goes against him, he takes a loss. When I asked him a couple of questions he got annoyed and had answers like this:

  • “I do not care about commissions, I trade (he paid about 1.5 Cents per side for the trade)”.
  • “I know others tested the system and it works”. OK, but when I ran the tests on 500 days it only gave a probability for success of about 50% that the trade concluded in the direction of the first five minutes. However, when you worked with a stop on the option, then you had another 50% chance to get stopped, which gives you only a probability 25% to make a profit – and we do not even need to calculate the odds, the trade is setup for failure from the get go.
  • His answer in respect of using a stop was: “I take a mental stop and a maximum risk of $0.20, and then I am out”.

He did not understand, nor accept an odds ratio.

Here are the calculated odds in his best case, NOT considering, that at times he had to bite the bullet and take a $0.23 loss.

Reward Risk 1

When I politely asked the organizer of the symposium what he was thinking of this presentation, he said, that he does not understand all the trading talk, he is not trading; he organizes the education process (great prerequisite for success).

The trade, this instructor propagated that it will make him rich, had a 2:1 chance for losing and should be considered by nobody.

Turning the odds around, what would allow you to have them approximated at 2:1 in your favor?

When you trade an asset it should give you a minimum 1-SPU price move of $0.17 (in the observed time unit):

o If you buy 300 shares and your 1-SPU is only $0.08 and bid/ask is 1-cent and you are entering 1-cent above the price threshold, it just leaves you with a 6 –cent profit expectation at target. Paying another 2-cents commission for a trade round-trip, reduces your reward expectation to $0.04. When trading with a 1-SPU risk, the odds are no more in your favor: The trade has double the risk than the reward.

o If you trade for at least for $0.17, at the same assumed risk (1-SPU), with a high probability trading system the approximations made, turn the odds 2:1 in your favor. This is how it is calculated:

Reward Risk 2

These are the instruments, NeverLossTraders use for putting the odds in their favor:

· Entry at high probability signals, with NLT Double Decker Stop. Exception: Stop at a box line below the cyan dot of an NLT Light Tower Candle.

· Watch the candle color; if it is the same color of your trade direction, you have a high probability for a positive, rather than for a negative exit and no need to take profits early.

· You have all the other indicators (Purple Zone, Box Lines, Channels, Price Gravitation Lines, Buy/Sell…..), which help you to know where prices will accumulate. If none of such lines are in your way to target, let the trade make its move for 1-SPU or 2-SPU’s or to the next price gravitation line.

If you want to learn how to trade like this: Call +1 866 455 4520 or contact@NeverLossTrading. Com

July 23, 2013 at 4:35 am Leave a comment

Day Trading Euro Futures

Day Trading NeverLossTrading Style

No overnight risk. Day trade for success!

Read off the chart what is going on and take advantage of it: Trade What You see !

Find high probable trade proposals right on the chart.

  • Close your position at the end of the day.
  • Take no overnight risk.
  • Find clearly defined entries, exits and stop levels on our chart.
  • Make money when the markets move up or down.

Step up your trading by seeing on the chart what is going on and how you can benefit from this knowledge.

–          You will no more be dependent on “expert” recommendations, personal or fundamental assumptions.

–          In no way will your trading depend on European developments, the election, or the economic outlooks.

–          Our reports, studies and Indicators spell out highly probable trade proposals right on the chart.

We are happy to give you a private, personal, interactive introduction to the “Never Loss Trading High Frequency Stock Trading Mentorship”: contact@NeverLossTrading.com, which will reveal everything from…

Why some of the most successful investors in our community are so eager to use “Never Loss Trading”… to how you can beat the best hedge fund managers of the world — no matter what the market does… to how to protect a position if the trade runs against us, turning potential losers into winners.

Check out our home page: http://NeverLossTrading.com

Never Loss Trading

To learn trading what you see: contact@NeverLossTrading.com

October 31, 2012 at 3:02 pm Leave a comment

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