fig. 2
Figure 2 is the same as figure 1 but it is in finer prints. Here you will notice that there are small wiggles in between the bigger troughs/crests and identifying which one should be grouped together in real life is an impossible intellectual challenge, leave alone being able to see and isolate them.
It is because of these challenges that we made the assumption that the movement of stock market price, which is a vibrations of waves that are repetitive in time and amplitude, is linear (even though we know very well it is not linear).
Moving Averages
The real forces that move the markets are the moving averages. They are a measure of accumulation of strength and weakness over time due to news, economic growth reports, manipulation, fear and greed. There are many moving averages just as there are different types of traders. It is through the dynamics of the moving averages that there are crests and troughs. Every day the bulls and the bears are continuously in a see-saw of moving averages trying to take advantage of the next motion of the see-saw so created. The day traders are in it losing sight that at distance there are weekly, monthly, quarterly and yearly traders on the same see-saw, the swing traders are at it losing sight of all the others, and so on and so forth.
At any one time there is a moving average that form the equilibrium line between winning bulls and winning bears. For example: a stock can exhibit the characteristic that anytime the price is above say the moving averages of less than 40 days the bulls win, and when the price is below, the bears win. Unfortunately this does not last forever because the properties of the stock changes. These properties is the standard deviation which the market call volatility. The other major drawback with the moving averages is the time lag. This explain why many traders make very little profit because they are unknowingly buying to open at the tops of crest and selling to close at the bottom of troughs.
Multiple Timeframe
Moving averages are a measure of waves (crests and troughs). If two crests of different degree moves in the same direction up with one another the resultant net effect is of enhanced crest. This interference is known as constructive interference. If a crest and a trough of different degree move in one direction with one another the two pulses will try to cancel each other's effect and the resultant net effect will tend toward zero or the equilibrium position. This therefore means that markets move against the trend of one greater degree only with a seeming struggle. Resistance from the larger trend will prevent the shorter trend that carry your money from developing full strength or weakness resulting in loses to your money. This struggle between the two oppositely trending degrees generally makes visualizing well defined troughs and crest impossible. This really is like trying to saw the wood up against the grains - it's tedious and the bundles are not sliced clearly leaving a rough surface with lots of defects.
One of the most successful trading tool since time immemorial is multiple moving averages crossover, and the change in all averages are either positive in all averages or negative in all averages that you are using. If the change in averages is positive, you go long, and if the change is negative, you go short. This really is multiple time frame where you trade using the shorter trend but only if the longer trend supports it.
Stop Losses
Since you place the stop loss order when you open your stock position, your stop loss will take the emotion out of a decision to close your stock position. This control of your emotions is the single most important thing about stop loss order. Set that automatic stop loss today and not tomorrow. If you do not place a stop order to get you out of your trades, it is human nature to try and impose your will in favour of your open trades. You do not have to listen to anybody, news, think in favour of your open trades or try to impose your will on the market. Your stop loss based on the charts and only charts will always tell you what the market is doing. The secret is to wait for the market to talk before trading and continue to listen in case it changes its mind.
And then the question is usually asked: do traders follow the charts because the charts work or the charts work because traders follow them? Whatever the case, price action on the charts is the way to go rather than try to imagine you can see certain geometrical shapes in the price - if truly you want to see geometrical shapes in the price line, then you will see many that will support what you want to see.
Following Market Direction with Precision
In view of the above we have considered only proven mathematical logics. We now shall intermarry all these logics and follow profitable market directions that will beat everyone else hands down. We look at the table from the link below which shows trades on QQQQ as a stock from April 05, 2007 to the current date. If you look at the net realized, to many people, these are small percentages perhaps not worth the effort.
Click Here to Expand The Table Above on Power Shares Exchange-Traded Fund Trust, QQQQ (from April 05, 2007 to the current date, updated July 27th, 2009)
But that 5% gain in stock may translate to 100% gain in its options. The opposite is also true. Next, we look at trading these small gains to generate better gains from options. Bear in mind that even where there is a loss in QQQQ stock, in-between there may be several profitable crests and troughs.
Should you be interested in trading QQQQ for these small gains, then you have to keep on checking here for update on "Final Exit and Initial Entry Conditions" as this is the key that determine where to initiate and exit your trades.
And because losing a trade can be painful to some people, the contents of this site are meant for entertainment purposes only. But you can try with a Free stocks trading Practice account that you can find. It will not cost you any cent. Use the stop loss I use here and update the stop loss accordingly. With time you will be an expert in trading the stock market. All that will be free.
Stop Loss Order
Always make sure that every position that you open has a corresponding stop loss order, repeat, every position that you open has a corresponding stop loss order. We can repeat this until breakfast tomorrow. Trading without stop loss orders is like driving an automobile with faulty breaking system. Every now and then check to see if your stop loss orders are still active. If your broker's system fails, when it come back it may come without your stop loss orders and that is why you should keep checking on your open positions and your stops. And these stops are not free. There is a small fee to pay your broker and it only fair that he should get it.
The secret to trading is to wait for the market to talk before trading and continue to listen in case it changes its mind. You cannot impose your will on the market. The market will always tell you what it is doing. So what happened next? We got out with a profit at between 26.2656 and 26.2460.
Your Stock Broker
Get yourself a good stock broker who has low commission fees because you will be making many trades per month. A broker who charges more than $1.0 per 100 shares of stock is expensive. Likewise, A broker who charges more than $1.0 per contact (options) is expensive. A good broker should at this age have modern technology and may even include the capability for you to trade anywhere on this planet. Search and you will find that there are many brokers who meet these criteria.
Low Cost High Yielding Stock Options
You may have wondered why some people seem to know the secret of making money in the stock market. Their secret relies on low cost high yielding stock options that are readily available and can be bought with pennies. And yes, I mean those stock options that will fluctuate at lightening speeds like propane and naked flame. Everybody seems to fear options, and with a good reason. The Mathematics involved in the dynamics of options is advanced Mathematics and that coupled with the Market Timing of the underlying stock makes it a mystery for everyone to tell you to keep off options. And yes, if you try to play a game you do not understand, then it will not take you long before you become the hunted and you will lose very fast.
Getting an accurate Market Timing is a very difficulty thing regardless of what you may have been made to believe. To neutralize the effects of inaccurate Market Timing is the so called neutral options trades biased in favour of what you think is the trend of the underlying stock. Contrary to the belief that determining the security's trend is easy, in real time this is very difficulty. That being the case, it would be fair if I mention a few things you need to know about options for you to trade neutral trades. There is a way to go about trading options that will eliminate all those fears. I am going to start by assuming that you have the basics of options and that you know what stock options are, and the details of puts and calls, strike-prices and expiration dates, in-the-money, at-the-money, out-of-the-money, short and long positions. If you do not have the basics, read a book on options as a Strategic Investment.
To beat inaccurate Stock Market Timing, the secret to this neutral options game plan is to use other people's money in that the options you sell pays for the better part of what you buy, with your money paying just for the difference or the gap. If you do this, it will not take long before you realize that you are ahead of the game. Unfortunately many of us place a lot of weight on trying to predict the difficulty Stock Market Timing and hardly use this strategy.
This style of options trading is a sedative strategy and you should not expect your money to multiply rampantly overnight but rather slow and consistence profits throughout the year – its waiting is like watching water in a cup dry. A 35% profit within a period of two to three weeks is normal but bigger gains in less time are not unusual. So, what Happens? The sold options and the bought options are confined in a channel such that the sold options decays or lose value faster than the bought options and the spread between their prices widen with time. When the situations warrant the appropriate adjustments and or rollovers are made to ensure all options are within the profit-yielding channel without reversing their roles. 90 percent of all options expire worthless. Time for logic: Does this mean that 90 percent of all those buying options lose their monies and that 90 percent of those who sell options make money from those options? Do not try any of these because either way you will most likely lose your money. But combine both and you see the difference. It's no wonder covered call writing is so popular. If you think the market is going up you can do the following: (a) buy long stock and sell a call, (b) buy deep in-the-money call/leap and sell at-the-money call, or (c) buy long stock. If you think the market is going down you can do the following: (a) short the stock and sell a put, (b) buy deep in-the-money put/leap and sell at-the-money put, or (c) short the stock. You will have to consider the issue of margin or collateral where applicable. These really are neutral positions but still the issue of combined delta, wear, volatility, price direction and so forth and so on has to be well understood.Facts about Neutral Positions.
Why is it then that Neutral Positions have high chances of making a profit? Two factors come into play here. (a) The short options nearer the expiration month wear or decay faster in time value in favor of the options writer and against the options buyer. (b) The stocks spend a lot of time fluctuating in neutral sideway ranges and during which options issued against them are losing time value. By twisting call and put options in certain ways, we can reduce the money we put at risk and still stand good chances of making nice profits. Options are highly affected by implied volatility. The implied volatility is the monster that has to be contained at all cost. This implied volatility measures the cheapness and expensiveness of options premiums. Its impact to an option price is indeed very significant and cannot be ignored. Fortunately, the mere fact that you are buying an option and simultaneously selling another one tends to cancel this effect.
Stocks Trading Tips - Trade Options on Profitable Crests and Troughs
