Trading Software and Books Reviews

Stock Trading Software Programs That Make Money

Jumping into the stock market to create wealth and a revenue stream is something that many people aspire to yet very few actually achieve. The stock market can be a difficult and confusing place, however, with the help of stock trading software programs that basically do everything, more and more people have been getting into the stock market than ever before. Instead of relying on local stock trading brokers and other experts to make money, stock trading software programs are usually simple to use for the end user and allow anyone to be able to understand how to make money and profit from stock trading.

MarketClub Software

One of the very popular stock trading software programs on the market today is the MarketClub investing software that has really made it pretty simple for anyone to profit while stock trading. The MarketClub software is an investing tool that demonstrates how to make money by using such techniques as technical analysis and charting. It uses predictions about the stock market to determine which stocks should be invested in, and spots those big moves before they actually happen so investors have a chance to make money.

With the MarketClub software program, it’s been demonstrated that a 50% return in gold is possible just by using their investing software. In addition, it has been reliable in crude oil market trading and has proven itself in the foreign exchange market as well.

OmniTrader 2009

This is another program that’s similar to MarketClub. However, many people have actually reported that OmniTrader 2009 is more profitable because of their proprietary trading simulators, easy-to-use investing charts that are configurable to each end user, and because it’s fully automatic.

The fully automatic feature of the OmniTrader 2009 stock trading software is actually what many investors rely on to have their money managed right. Since the program is automatic and is able to help investors trade the moves immediately, the program also comes equipped with a money management system that takes the risk of investing out of the equation. This is a major advantage to most people as it is very easy to lose in the stock market if you don’t know what you’re doing.

Wizetrade Software

A third stock trading software that is really great for the beginning stock market investor is Wizetrade. This is a program that helps stock market traders make money through a system of red and green lights that indicate when the individual should start and stop the trade. It breaks down all the complicated information about each part of the stock market and visually shows it to the trader. In addition, many people love this stock trading software because they have a chance to interact and speak with a Wizetrade orientation trader who can help them understand how to use the software to their advantage.

All of these stock trading software programs are popular for both the beginning investor and the seasoned one. They help investors understand how the stock market works by showing which trades to make and when, and all of them are capable of generating a steady, long-term income over time.

Trading Systems Performance Updates

Results through September 30, 2009.

3-Month Performance Ranking

BEST					WORST
1.	Gina (ES)	70.42%			1.	Guru Gene (ES)	(127.75%)
2.	CoreDuo (S)	58.63%			2.	Impetus (ER)	(41.92%)
3.	Axiom Swing (NQ)	37.34%			3.	Early Bird II (ER)	(41.74%)
4.	STCStemwinder2 (ES)	27.37%			4.	1 Day Russell (ER)	(38.60%)
5.	Black Gold (CL)	23.71%			5.	AdvantageDT(ES)	(32.97%)

6-Month Performance Ranking

BEST					WORST
1.	Delphi II EM Swing	109.92%			1.	Impetus (ER)	(145.33%)
2.	Gina (ES)	90.62%			2.	Delphi II (ER)	(109.81%)
3.	Black Gold (CL)	74.00%			3.	Early Bird II (ES)	(95.75.%)
4.	Axiom Swing (NQ)	69.26%			4.	1 Day Russell (ER)	(95.30.%)
5.	Maxim (ER)	32.63%			5.	SITA (ES)	(86.93%)

12-Month Performance Ranking

BEST					WORST
1.	Charge WS (ER)	168.64%			1.	Crossbow (ES)	(179.74%)
2.	Charge Indices (ER)	89.09%			2.	SITA (ES)	(159.53%)
3.	Brigade (ES)	74.80%			3.	Meteor (ES)	(74.98%)
4.	Saturn (ES)	73.99%			4.	Turbo Ultimate (ER)	(71.19%)
5.	Axiom Swing (NQ)	63.11%			5.	1 Day Russell (ER)	(62.20%)

Life Performance Ranking

BEST

1.	Compass (SP)	401.68%	$30,000 Acct Size	Since 01/10/2000
2.	Charge WS (ER)	222.64%	$10,000 Acct Size	Since 07/21/2008
3.	Brigade (ES)	201.57%	$7,500 Acct Size	Since 06/21/2008
4.	Crescendo (ER)	177.03%	$8,000 Acct Size	Since 05/02/2007
5.	Compass (ES)	170.98%	$5,000 Acct Size	Since 01/03/2005

WORST

1.	Katana (ES)	(151.38%)	$5,000 Acct Size	Since 10/07/2005
2.	Meteor (ES)	(136.82%)	$5,000 Acct Size	Since 07/09/2007
3.	Guru Gene (ES)	(127.75%)	$3,000 Acct Size	Since 07/27/2009
4.	Axiom Swing (ER)	(122.96%)	$8,000 Acct Size	Since 06/15/2004
5.	SITA (ES)	(91.53%)	$5,000 Acct Size	Since 02/20/2000

The trading performance cited in the table above represents actual trading history of day-trading and swing trading systems at Striker, commissions included. For all trades listed, Striker holds the actual trading tickets. Reporting actual results of trading activity is a long tradition at Striker, and one that sets us apart in the industry. Our clients know they can view actual performance of trading systems, commissions included, in the client section of our web site. In the case of “split fills”, we always report the worst fill. The percentage returns reflect the inclusion of commissions. Please note that past performance is not necessarily indicative of future results.

Copyright © Striker Securities, Inc. All rights reserved.

Trader's Story

Phillip McGregor lives with his wife Susan in North West Sydney. They have five children and grandchildren, who are a very important part of their lives. Most of Phillip’s working life has been spent in senior management in industrial distribution and manufacturing. Susan often worked with Phillip, allowing them to travel and spend a lot of time together. For the past seven years Phillip has worked as a consultant/accountant. They mainly trade Australian equities with a medium-term time frame.

How and when did you first become interested in the markets?

Around 1991 my wife and I realised we needed to start planning for our financial future and we began considering our options. In May 1992 we decided on direct investment – mainly because we could have greater control over the investments and use negative gearing (a lot of negative gearing, since savings, if any, were earmarked for the mortgage).

And then what happened?

Our initial strategy was long-term buy and hold based on companies that we knew and whose products and services we used. Our exit criteria were when we no longer used the products or services – we didn’t ‘like’ the business. Our original investments were made in Commonwealth Bank, Woolworths Limited and Westfield Trust. All performed exceedingly well, which gave us confidence that direct investment was a workable strategy. After several years we realised there was more to stock selection than ‘liking the company’. Several other shares on our shopping list had not performed so well – although they continued to be well regarded by analysts and had very sound fundamentals.

How have you been able to learn and to educate yourself about the markets?

I started with fundamental analysis, a logical choice given my business background. However, we had already determined that too many of the well run, fundamentally sound companies, which were almost always a ‘buy’ recommendation, did not show consistent growth in share price.

In 1998 I tried to apply technical analysis to fundamentally sound shares. I say “tried” because it all seemed obvious only after the pattern had completed. I felt much more comfortable with indicators than with chart patterns and trend lines.

Did you make mistakes when first starting out?

One of the first books I read was by Daryl Guppy. Daryl thoughtfully provided a list of common errors that new traders make. I was forewarned – so could avoid such obvious errors. I soon discovered it was more a checklist of things that I ended up doing! Thankfully Daryl did not update and extend the list in his later books.

Would you define yourself as a discretionary trader, a mechanical trader or a combination of both?

I use a combination of both methods of trading. There is always an element of discretion. When you first enter the markets is discretionary (and many people start closer to a market top when it all seems exciting). Second, you always have to choose between various potential trades. It’s rare that you have only one entry signal when you are looking to fill a position. And third, the elements of your trading system are discretionary. You have to select the elements and parameters you are going to apply. So even if someone claims to be a purely mechanical trader, they are really a combination of the two.

However, the execution of your system needs to be mechanical – especially the exits.

Who have been some of your mentors and role models? What impact have these people made on you personally as well as on your trading style?

The pivotal point in my learning came when I read Alan Hull’s ‘Active Investing’ and attended several different weekend workshops run by Alan. During 2002 and 2003 I quickly saw how Alan looked at fundamentally sound companies and identified those with a high probability of gaining value. I also learned I was managing a portfolio, not just buying and selling shares. The individual trade was less important than the portfolio value over time.

This was quickly followed by a rediscovery of Daryl Guppy through his excellent newsletter, Tutorials in Applied Technical Analysis, which exposed me to a wide range of trading styles and trade-management techniques. It helped me discover what appealed to me and where I ‘fit’ in the spectrum of available trading styles.

This introduced me to Jim Berg’s methods. By the time I had finished reading a short article Jim had included in one of Daryl’s newsletters I knew this was where I wanted to be in trading style. I ordered Jim’s book (pre-release) that afternoon. Jim’s original Metastock Training Course taught me as much about how to get the most out of Metastock as it did about his trading strategy.

In 2005 I read ‘Adaptive Analysis’ by Nick Radge, which has an excellent chapter on having making money from trading as your objective, as opposed to being ‘right’. If you’re interested in charting or Elliott Wave, then you should check his site at www.thechartist.com.au. I have found it a useful learning tool.

The final pieces fell into place when I came across Jim Berg’s and John Atkinson’s newsletter at www.sharetradingeducation.com. Aside from the various articles there is a section showing examples of trades. For me, the newsletter is an ongoing mentoring program. Week after week the same trading processes are applied to various lists of stocks – some trades produce small losses, some produce gains. A worthwhile rate of return is generated on the portfolio.

When you do it right, trading is boring. Many newer traders, or those that do not trade at all, think it is exciting. If you are not doing it right it can be exciting, because you are trading on emotion. The flip side is depression. I have been through the excited and depressed phase. It is not the way to trade.

Once you reach the ‘mechanical execution’ phase you tend to want to find ways to keep it interesting. This promotes the urge to ‘fiddle’, especially during the extremes – when the market is ‘hot’, or when the number of consecutive losing trades is climbing – and your plan starts to unravel. I have been known to fiddle in my time.

Using www.sharetradingeducation.com helps keep me focused on what really matters – sticking to my plan. Great strategies or plans should be simple: the simpler, the better. It takes someone with a keen intellect to understand that simple strategies have a much greater chance of still remaining valid as the market changes over time. Jim Berg uses sound logic and applies ‘been-around-for-a-long-time’ indicators to capture a visual representation of that logic.

After finally getting around to reading Van Tharp’s ‘Trade Your Way to Financial Freedom’, I understood the importance of John Atkinson to the Berg-Atkinson partnership. John is all about risk. I started using the Atkinson Portfolio Planner to monitor my portfolio’s performance, especially portfolio valuation. I realised that a portfolio valued at today’s close is incorrect. I am not a seller at today’s price unless today’s price is below my stop loss. Valuing my portfolio using my stop loss (actually five per cent below the stop loss) produces a more realistic equity curve without the volatility generated using current closing prices. Those awful equity curve drawdowns are bringing the price closer to the ‘real’ exit value.

My learning is continually supplemented by reading YTE magazine.

Can you give us a brief overview of your trading style?

I aim to be a minimalist. I have been through the “you are not really a trader unless you do lots of analysis” phase. With the help of Jim Berg, John Atkinson and Alan Hull, I now understand that more analysis is not necessarily better analysis. Keep it simple and keep it focused. Execute as per your plan. Then take your wife out for lunch. I have a much better time taking my wife to lunch, or visiting our family and friends, than trying to second-guess what the market might or might not do.

Is there any one trade (win or loss ) that sticks in your mind that had a profound effect on your development as a trader ? If so, what did you learn from this trade?

It was shortly after modifying my trading plan to incorporate management of on-going position risk (individual shares, sector risk and total portfolio risk).

I was holding a position in FMG, which had performed well – around 100 per cent gain. Around May and June it began to become exceedingly volatile, with closing prices exhibiting movements of 20 per cent or more over a few weeks. Several times during these fluctuations the risk profile exceeded my maximum for any one position, requiring a partial sale. After three weeks I had sold off 50 per cent of my position. At a time of high market volatility with a downside risk increasing, I found I had to hold more cash. It now seems the logical thing to do, but before then I would not have recognised the potential for loss and that one of the star performers had now become the single largest potential risk to the portfolio. Until this change I was not one to hold much in cash. I always reasoned you could not make money unless you were close to fully invested. Of course, the market goes down as well as up, so sometimes holding more in cash is better.

FMG may well continue its spectacular growth – or it may have a deeper retracement. However, my portfolio’s risk profile is kept within my parameters and is still showing acceptable growth. And I am far more relaxed, and sleep much better.

Can you tell us about your best and worst trades?

The ‘worst trades’’ list goes on for so long it would double the size of this magazine! What would probably seem unusual is that many of these trades were profitable. Some were very profitable. What puts them in my worst trades’ list is that I did not exit according to my trading plan. Had I stuck to my plan, some may have been more profitable, some less. More importantly though, had I followed my plan, I would have ended up in much the same position – but with much less stress! And considerably fewer trades.

Being able to stand up and admit: “My name is Phillip McGregor – and I do not always follow my trading plan,” was a major turning point. I could seek help. In my case it was Jim Berg and John Atkinson. There are many excellent educators – the list of contributors to YTE is a great start. For example, Tom Scollon’s book ‘Fair Share’ not only offers some sound advice, it’s also a good read. However, the real change has to come from within.

Would you classify yourself as a short-term or a long-term trader? What advice would you offer to people getting started as traders on the relative merits or otherwise of each?

I trade several portfolios. In my superannuation fund I take a medium- to long-term view, using a combination of Alan Hull’s and Jim Berg’s trading strategies.

The shorter-term portfolios use strategies modelled on Jim Berg’s short-term methods plus one using a strategy modelled on Nick Radge’s methods.

These are all long strategies – although with different time horizons and entry/exit criteria. I plan on adding additional strategies that offer a much lower correlation in outcomes, such as short selling.

Medium- and long-term investing suits me because it takes very little time. Usually a few hours a week, and that’s a busy week. Short-term trading at least gives me something to do – even though most days this seems to be mainly downloading data and seeing everything is going to plan. The important task is selecting the watch list. That takes the real time – at least one hour a month. Actually, it’s more like one every three or four months.

What markets do you trade and which do you prefer? Do you have a favourite, and why?

I trade ASX equities, both direct shares and CFDs. I have considered other markets, for example US and UK markets, but this adds complexity – currency movement – into the trading result. The ASX may only be two per cent of the world market, but it’s still relatively enormous against my portfolio valuation.

What makes your trading style different from others? What sets you apart from other traders?

It is how my experiences and training cause me to react. We all see the same key pieces of data – price (open, high, low, close) and volume. We add indicators and time frames; we put in trend and resistance lines. Then we draw our conclusions, and take action based on our expectations of what those conclusions mean. The difference between all traders is how we interpret the data and how disciplined we are in our execution.

Do you have a favourite trading rule?

Stick to your trading plan. There is no other trading rule.

Ed Seykota says, “Everybody gets what they want from the markets.” What does Phillip McGregor ‘get’ from the markets?

I have learned a lot about myself. How I react when things go well, and when things do not go so well. To be successful you have to learn ways to focus and to manage what you can control – your reaction, and your exposure to risk. If you treat the process as one of self-development, you can become a better person in the process. Learning to trade is not just about learning indicators, chart patterns and fundamental criteria. The answer lies within us. We are the key to our own trading success, and our life success.

How has trading affected your lifestyle?

It has greatly improved our financial security, and we have certainly been able to achieve a better lifestyle, including travel, spending more time with our children and grandchildren, and so on, than we could have expected otherwise.

What books, seminars and courses have you read or attended and which would you recommend?

• Alan Hull: ‘Active Investing’ and ‘Active Retirement’. If ‘active investment’ appeals to you, then definitely attend the workshop.

• Nick Radge: ‘Adaptive Analysis’. The Chartist (www.thechartist.com.au) newsletter is also a great learning tool if you are interested in understanding chart patterns and Elliott Wave.

• Stan Weinstein: ‘Secrets for Profiting in Bull and Bear Markets’. Written in 1988, but only the dates on the examples show its age. Still a great book.

• Jim Berg: ‘The Stock Trading Handbook – Fundamental & Technical Analysis Combined’ (available only as an E-Book from www.sharetradingeducation.com). Jim also runs a weekend seminar/workshop (Boot Camp Seminar) that is very worthwhile. ShareTradingEducation.com newsletter provides ongoing support.

• Van Tharp: ‘Trade Your Way to Financial Freedom’. If you do not understand that the real key to trading success does not lie with your entry and exit criteria after reading Van Tharp, then you should probably stop trading and seek help.

• Daryl Guppy: Take your pick, they’re all good. ‘Trend Trading’ is one I re-read periodically. The Tutorials in Technical Analysis newsletter (www.guppytraders.com) provides a good cross section of trading styles and management techniques. I have also attended Daryl’s ‘Trend Trading’ seminar.

What does the future hold for Phillip McGregor?

Probably more of the same – travel, spending time with my family and friends, taking my wife to lunch (very high on the agenda). And ensuring I do not slip into old bad trading habits. Just like any other ‘abuse’ issue, it takes only one panic attack deviation from your trading plan to send you back to ‘no plan’ trading.

Kel Butcher is a full-time futures, equities and derivatives trader. He also acts as a mentor and coach to other traders. He can be contacted by email at kel@tradingwisdom.com.au

This article was originally published in the Sep/Oct 07 issue of YourTradingEdge magazine (www.YTEmagazine.com). All rights reserved. © Copyright 2009, MarketSource International Pty Ltd.

Are You Really a Risk Taker?

Very early on, in the first day of any class I teach, I write on the white board these two words in big bold print: EMBRACE RISK. It would seem that everyone looking to get involved in trading, whether on a full-time or part-time basis, understands that trading is a risky business, so embracing risk would be a given. When asked, most of the students will acknowledge that they are indeed willing to assume some degree of risk – some more than others – and that’s typical.

However, when we begin discussing technical analysis and trading set-ups, those same students that assured me that they didn’t have a problem taking losses begin asking questions such as, “How do I know if it will hold that support or resistance level?”, or “What if it doesn’t hold?”. Another one of my favorites is “What do you use for confirmation?”, to which I reply, “I put on the trade, and let it work or fail. Confirmation is the trade working”. This answer always seems to elicit a puzzled look.

Now this last statement flies in the face of what many traders have been conditioned to look for. A large number of new traders seek out multiple technical indicators, in essence, searching for multiple layers of assurances for their trades. The problem I see with this set of criteria is that by the time all the stars line up (so to speak), these traders are usually entering the trade too late, thereby increasing their risk or missing the trade entirely. This inability to pull the trigger when an opportunity presents itself is a direct result of the self-doubt generated when one does not TRULY ACCEPT THE RISK on the trade (I’ll expound on this later).

What I also find interesting is when we start the first trading segment of the class, I begin to hear the sighs of vexation every time a student has a stop triggered (takes a loss). It’s as though they’ve just received a body blow. Some students begin to take every loss personally. While with others, I have to suggest they step back and take a deep breath before they continue their trading, as they’ve become overwrought, and are no longer thinking logically. It’s at this juncture when students really find out how they emotionally react to losses. Changing their attitudes about losing and being right is truly where the work begins.

Let’s delve into this notion of unconditionally accepting losses as part of trading, which in my humble opinion, is one of the biggest obstacles for most traders to overcome. It goes without saying, we never put on a trade expecting to lose, and most traders do place a stop loss just in case the trade doesn’t work. Yet, when price approaches the stop level, the natural tendency for the NON-PROFESSIONAL trader is to move the stop away from the market, in hopes that the market will recover. The next adjustment in his avoidance of losing is to pull the stop altogether, or worse, double-down on the position.

Moreover, when a trade initially goes against the non-professional, and then recovers to a breakeven level, this trader will close out the trade, relieved he didn’t lose money. Invariably though, as soon as he exits at breakeven, the trade goes on to do exactly as his analysis suggested – causing him to be immensely irritated. Regrettably, this begins a vicious cycle that can only be broken by gaining confidence in a methodology and coming to terms with risk acceptance. So you see, placing a hard stop does not necessarily endow a trader with the “risk taker” attribute.

In class, I encourage students to think in terms of risk versus reward, as well as probabilities. I’ve covered the risk/reward topic in previous newsletters so I won’t go into it now. However, I will discuss the odds game.

Much like a professional poker player, a trader must find an edge. A poker player works at memorizing what card pairings offer the highest chances for him to win. He understands that aside from the initial ante, he only presses his bet when the odds are in his favor. What’s more, he understands that he may not win for a series of hands, but if he plays enough hands, his edge will win out over time. Similarly, the professional trader will put on his trades in a systematic fashion without FEAR of losing or being wrong. He sees every trade as only one in a series of hundreds or possibly thousands in his trading career.

I understand this is much easier said than done, and it will probably take some work to modify your thinking. On the other hand, those traders who can’t get over their fear of losing or being wrong will always operate in an environment full of stress and anxiety. Sure, they’ll have their ups and downs, but at some point, trading will become drudgery and not much fun. Then again, for those of you that truly want to take your trading to the next level, and experience the satisfaction of seeing a rising equity curve over months and years, next time you spot an opportunity, predefine your risk, put on the trade without hesitation or doubt, and let the chips fall where they may. After all, what’s the worst that can happen? You might lose a few bucks or perhaps the trade works and your profit target is attained. If your profits exceed your losses by a margin of better than three-to-one and you have an edge (higher than 50/50 probability), your chances of being consistently profitable will vastly improve. That is, provided you accept the outcome on every trade. In other words, you must truly EMBRACE RISK in order to become a PROFESSIONAL TRADER.

Until next time, I hope everyone has a profitable week.

Gabe Velazquez, Online Trading Academy E-Minis Instructor

Triple 3-Dimensional Options Are

Often I am asked: “What is the advantage of trading options versus trading equities?” In Yoda’s (the Star Wars character) speech pattern, I frequently reply: “Triple three-dimensional options are.” The following article will describe in detail each of the three areas that make the options 3-D when compared to equities.

First of all, it is repeatedly mentioned that options are complicated. I personally dislike the use of the word “complicated” in the same sentence with the word options. The word “complicated” carries within itself assumptions that options are impossible to be learned. In my humble opinion, options are indeed complex but they are NOT complicated. They are mathematically accurate and manageable as long as one has the knowledge of the six grade level of math. I would assume that any reader of this article has completed elementary education; therefore, I could further argue that everyone is capable of grasping how the options work. However, whether a trader embarks on the journey using options as his or her trading instrument is just a matter of perspective. A majority of novice traders find the stock market to be challenging enough and they do not want to embark on more challenges by turning their attention to learning about options. For those rare individuals who do wish to gain knowledge of options, I salute you; it is for you that I am writing this article.

Options aren’t complicated, they are simply complex. Options are all about choices. Choices aren’t complicated they are just numerous and that is the beauty of it.

The first main difference between trading the equities versus options is in the direction. When trading equities there are only two choices possible when opening a position: to buy or to sell short. In either way, one has to be correct about the direction in order to receive money from the market. Nonetheless, the market can move in more than two directions – it can go sideways, too. The table below illustrates the point of having two choices versus three possible outcomes.

In other words, the probabilities of being profitable with equities are only 33.3% which is worse than flipping a coin. In short, an equity trader could not become profitable when the market goes sideways. If the possibility of the market going sideways gets removed from the equation, then the equity trader has a 50-50 chance.

Options, on the other hand, could produce income no matter which direction the market goes: up, down, or sideways. The equities trading could make some profits only if the open position moves either up or down. There is no in-between scenarios for the equities being profitable if the market goes sideways. Unlike the equities, there are options strategies which are specifically designed to be profitable if the stock market goes sideways. One of those neutral strategies is Iron Condor, a combination of two vertical credit spreads. It is the range of the underlying that needs to be selected accurately for a specific amount of time and as long the price action stays within the boundaries of that predetermined range, the time constrained Iron Condor would be profitable.

Having described a single dimension, the direction, I shall revisit my argument that options are 3-dimensional instruments. Once again, an equity trader is always a directional trader; whereas an option trader could be more than just a directional trader. In the example above with the Iron Condor strategy, an option trader was a non-directional trader.

In this second segment, I shall use an example of an option trader who is a directional trader, and he or she wants the market to go either up or down. In other words, I am comparing oranges with oranges, directional equity traders with directional option traders.

Unlike an equity trader who needs to be correct only in the direction, an option trader must be correct in three dimensions: (1) direction, (2) time in which the move will take place, and (3) volatility of the underlying product which is being traded. An equity trader does care about the timing of entry and exit, yet (implied) volatility does not concern the equity trader. Volatility of the overall market does. Just a brief detour without any intent of getting too technical, implied volatility is, according to Investopedia.com, the estimated volatility of a security’s price. My question to the readers is: “Estimated by whom?” The answer is – by the market makers. IV or implied volatility reflects the expectation of the market makers.

Going back to the issue of time, any option trade either bought or sold has a time element built into it. Options have time decay built into their price which equities do not have. The chart below illustrates this point by showing the outcome on four different call scenarios.

In the first example, the option profits could go down on the directional option trade, if the underlying does not move but goes sideways. The similar situation was with the equity trader who could not be profitable if there was no move in the underlying, yet there was no loss taken for the equity trader. With the directional option trader who is a long a call, with price going sideways, there is already loss in the premium paid due to the time passage. The time left for holding the option decreases regardless of the price move. The time variable always decreases.

Scenario two shows the situation that the stock has gone up in value but the IV has gone down. The fact that the profits box is filled with the word “depends” means that more specifics are need to determine the exact situation of the premium. In the next example, the stock has gone down, the IV has gone up, and there is a loss in the premium. Again, there could be some exceptions to the rules in this kind of environment as well, but generally speaking, the option profits would decrease. The fourth example, shows a situation very similar to the second one, where the stock moves up, while the IV stay unchanged yet there is uncertainty whether the magnitude of the move was great enough to make the call into a profitable play. The overall point of these four scenarios is that option traders must be correct on three things (dimensions). They are: timing, volatility, and also the extent of the move (direction).

Lastly, let us turn our attention to the third reason why I consider options to be three-dimensional. An equity trader has it simple; he or she trades only the stock, whereas an option trader could trade the stock by buying or selling it, as well as trading put and calls on it, or even the combination of all three. Some of the choices are listed below:

Buy the stock and sell a call = covered call.

Buy a call.

Buy a call and simultaneous sell a call = vertical, horizontal, or diagonal spread.

Buy a put.

Buy a put and simultaneous sell a put = vertical, horizontal, or diagonal spread.

Combination of buying calls and selling puts or buying puts and selling calls = synthetics.

The list here is limited because the combinations are truly limitless when the share size of calls and puts changes.

In conclusion, options are 3-D because (a) they trade in all three directions, (b) they also have the component of time and volatility built in them, and lastly, (3) they can involve the trading of the stock, calls, and puts all simultaneously, as well as the combination of them. It is for these reasons that options are call options. The choices are limitless.

Josip Causic, Online Trading Academy Options Instructor

Trading Systems, Fibonacci and Other Forex-Related Q & A

Greetings from New York City! I have some great email questions this week about a variety of topics – please keep those questions coming! Let’s get started with a question about trading during the U.K. session…

Q) Hello Ed! I’ve been following you for the past year or so; I like your articles! I have a full time job, and I’m almost sure that I will not be able to wake up around 2 or 3 AM to trade when the London markets open. Is there any pair that I could trade after 5 PM ET? That’s when I get home from work … I think I heard that Australian markets open at 5 PM ET…so AUD/USD would be a good pair to trade (I’m also wondering about volume at this time of day).

Ed Ponsi) Thank you for your question. There was a time when I used to get up around 3:00 am (New York time) to place trades at the beginning of the London session. Since London is 5 hours ahead of New York, 3 am New York time translates to 8 am London time – a time of day when breakouts are common. Breakouts are common at the beginning of the London session because London is the world’s capital of Forex trading. There is a tremendous rush of volume that enters the market at this time because so many big institutional traders are based in the U.K. and Europe. It is also the time of day when economic news out of the U.K. hits the newswires. Here’s an example; on December 1, 2008, the GBP/USD broke out of a sideways consolidation at around 8 am London time (3 am New York time). The pair fell nearly 400 pips over the next eight hours (see figure 1).

If you are looking for particular pairs to trade at around 5 pm New York time, you are correct to be concerned about volume. 5 pm Eastern is a “dead zone”, and any moves that occur at that time are likely to retrace. If you are working regular hours and do not wish to get up early, why not wait until the Asian markets really get rolling, around 7 pm New York time? The Japanese Yen tends to be very active from about 7 pm to midnight, so you might find great trades in EUR/JPY, GBP/JPY, and of course USD/JPY. Good luck!

Q) Great article and agree with your conclusions. On the subject of Fib fans and arcs, I believe the reason why they work is because of business cycles, reporting periods and accounting periods. There could a coincidental reason why an FX pair has a major turn about the same time each year or it could be that the flow of money may have something to do with it. Small turns are not as obvious but the major ones are. Time, price and astronomical observations are what Gann theory is based on and I postulate the time factor is what makes arcs and fans tend to work.

There are so many unanswered occurrences in life and we are never going to be able to explain them so your simplistic approach works fine. I tried for almost a decade to get Gann theory to work and now believe that simple is best. Our psychological side I believe is more important than all of this complexity.

Ed Ponsi) Very well put. I also made that journey from simple support and resistance to gradually more and more complicated systems, culminating in Elliot Wave and Gann techniques, and guess where I wound up? I ended up right back where I started, with simple but robust trading techniques that are based on market tendencies. I think it is intuitive for intelligent traders to believe that highly complicated systems might be more effective than simple techniques, but my experience has been the opposite – it was the simple things that wound up being the most effective, at least for me. To me, this is just another example of the counter-intuitive nature of trading. For the uninitiated, here is a Gann wheel (see figure 2).

Q) Dear Ed, thanks a lot for your informative articles on Forex trading. I’ve been a Forex trader for over one year. I have tried Forex signals, trading systems, trade analysis from pros. But still it ain’t easy. My main question is, what is your comment on the trading systems out there? Is there anyone that you have ever tried and what were the results? I subscribed to XXX (signal provider company name removed by E.P.) but it made me lose a lot of money (demo of course). I also subscribed to another signal provider who was also so inaccurate. Please start a debate about the trading systems.

Ed Ponsi) Thank you for your email, I’m very thankful that you decided to try out this trading system in a demo account. I wish there were more room for debate on this topic, but I feel strongly that there is little of anything of value to new traders in the form of signal services, trading systems, etc. – in fact, there are many shady operators working in this area. I would like to refer you to an earlier article that I wrote on this topic titled, “Scamming the Scammers”, that might be helpful in understanding this part of the trading world.

Most of these scammers measure their “performance” in terms of how many pips they made. What they don’t tell you is how many pips they lost. By the way, no real trader measures his or her performance in this manner. Real traders measure performance in terms of percentage gains/losses over the course of a month, quarter, year, or since inception.

Here’s the bottom line – you have to learn how to trust your own analysis. This can only be done by doing the work and learning to trade correctly. Once you can analyze currencies yourself, you’ll stop looking to outside sources such as the ones mentioned above. Signal services and trading systems may seem like nice shortcuts to the novice trader, but they only serve to delay the real work that needs to be done. Good luck!

Ed Ponsi, Online Trading Academy Forex Instructor

Human Action is a Direct Result of Your Belief System

At the core of any significant economic, political, scientific, social, medical, psychological or cultural theory lies a quest to understand and quantify the forces of change, action, or energy. The theories that attempt to quantify “force” that have stood the test of time, date back centuries and are extremely simple. In 1686, noted physicist Isaac Newton suggested in his laws of motion that an object will remain in motion until it is met with an equal or greater force. Noted economist Adam Smith suggested hundreds of years ago that when supply exceeds demand at a price level in a given market, price will decline. Smith and Newton didn’t create or invent the laws and principles for which they are famous. Supply, demand, motion, and the relationships therein existed long before Smith and Newton, long before humans walked the earth for that matter. What these two individuals did, however, is look mass conventional perception in the face and challenge it with a reality that had been there all along. They were able to discover what no one else had because of a belief system that allowed them to open doors others never knew existed. If you notice, Newton and Smith didn’t figure out one specific issue. They had a belief system that allowed them to rather easily apply the core principles of their knowledge to a host of issues, producing answers the rest of the world still considers “ingenious”, centuries later.

Throughout history, there are countless examples of individuals who looked mass conventional perception in the face and challenged it. Long ago, challenging conventional thought often meant a death sentence. Galileo was almost burned at the stake for suggesting that the earth was not the center of the universe. Certain minds throughout history such as Einstein, Newton, Galileo, Smith and others were made famous because of their discoveries. What I have always focused on is not the results of their work but the belief system that allowed them to realize what most other people have never even considered.

Are Newton’s three laws of motion really any different than Adam Smith’s laws of supply and demand? In my quest for truth, I have realized that whether you are talking about Newton’s laws of motion, Smith’s theories of supply and demand, or Maxwell’s laws of electromagnetic force, the basic governing dynamic of these laws and principles are different manifestations of the exact same governing dynamic. What I did many years ago is apply this simple and straight forward truth to financial markets. The result was a profound reality that opened up a door of extraordinary low risk / high reward opportunity in any and all markets.

At any university across the country, Chemistry is taught in one building, History is taught at another location, and Mathematics is taught somewhere else. While these are three different subjects, at their core, there is one common governing dynamic that is responsible for answers. For example, the equation that allows us to understand how to split a cell is the same equation that allows us to figure out how and when an earthquake will occur. The cell will split and the earthquake will occur when a specific threshold of force is reached. Why bring all this up in a piece dedicated to speculating in markets? When you realize that this one governing dynamic is solely responsible for the movement of price in any and all markets, you are able to discover the simplicities of market speculation.

I began my trading career on the floor of the Chicago Mercantile Exchange (CME), clerking for a firm in the currency futures. I will never forget my first day on the floor, it was very intimidating. Numbers flashing non-stop all around, people screaming words not appropriate for this piece, and huge money changing hands at lightning speed. My first thought was to spend the day and never come back but my friend got me the job so I stuck it out for the first week. That first weekend off, I evaluated this crazy job choice and thought that I had better get educated on all these markets and the basic world of trading if I was going to stay at the CME. I spent a little time in the education department after work and looked over bits and pieces of material but none of it made sense to me so I stopped seeking this education. Instead, I focused on what was happening around me each day. That choice is the most important choice I have ever made in my career and I only made it because I was not smart enough to understand the text book version of what was happening in front of me each day. As a phone clerk, I took orders from large funds, money managers, and big individual traders. I would take many buy and sell orders before the market opened. As the opening of trading would approach, I would organize the orders based on price and then I would split them into buys and sells. Obviously, the larger the stack of buy or sell orders at a specific price, the greater the supply and demand imbalance at that price level. The movement of price in any and all free markets is a function of the laws of pure supply and demand. Buying and selling opportunity emerges when this simple and straight-forward relationship is out of balance.

If the answers to the most basic questions in life are so simple and right in front of us, why is it that most people never see them, or consider them for that matter? Before we explore that question, let’s take a basic look at how people think. Instead of focusing on changing our actions, let’s look at where those actions come from. Moving backward one step at a time, actions stem from behavioral patterns, and behavioral patterns stem from beliefs. So, it’s at the level of beliefs that decisions are made, and moreover, where your ability to differentiate reality from illusion lies. It’s time to start considering where your beliefs about what works and what doesn’t come from. In life, which includes trading and investing, most of us tend to repeat the same processes over and over, expecting a different result.

The common thread in any quest for irrefutable answers is the search for truth. To obtain irrefutable answers, one must look truth straight in the face, void of any illusion. The presence of even the smallest amount of illusion in the quest for truth ensures truth will never be found. Our quest for truth is in financial markets, specifically addressing proper trading and investing. The question for market speculators needs to begin with this: How do we derive consistent low risk, high reward, and high probability profits buying and selling anything?

Recently, I instructed a Global Futures course in London and on day one of the class, the word “futures” was maybe mentioned once. It was only mentioned on day one to let people know that this was a futures course and that we would NOT be discussing futures specifically on day one. We spent day one learning how a market works, exactly how and why do prices move in any and all markets, and so on. New traders always skip or ignore this most important lesson in trading. Make sure you begin your trading education with the basic thought of how you make money buying and selling anything. This will not only empower you to see and act on what is real and not what you feel, but it will also have the same effect as getting a flu shot, making you immune to all the poisonous, complicated, and useless information that has nothing to do with trading. I tend to call this the “illusion creators.”

It is well known that around 90% of people who attempt to speculate in markets lose money. If you take the same path as this group, don’t expect different results. As Albert Einstein pointed out, it is not possible to solve a problem with the same level of awareness with which the problem was created. Ironically, the natural human tendency is to dive deeper into issues and work harder at them when attempting to come to a conclusion. Keep it simple…

Let me revisit the question I never answered before. If the answers to the most basic questions in life are so simple and right in front of us, why is it that most people never see them, or even consider them for that matter? All the answers we need are incredibly simple yet, the vast majority miss the whole game being played out because of the illusions presented to them by those who have more to gain by obscuring reality.

In the Extended Learning Track (XLT) Futures and Forex classes, my goal for the traders under my guidance is to first instill awareness that ensures they don’t fall prey to the many illusion traps. Lastly, to make sure they are a part of the 10% of profitable traders/investors who know exactly how to set the trap.

As a final thought, never put too much of your hard earned money at risk until you have results that suggest you are part of the 10% of market speculators that know exactly how to get paid from the 90% who don’t.

Sam Seiden, Online Trading Academy Instructor

Large Pullbacks

Using Limit Orders

We also would like to take the above combination, and if possible, buy the stock on an intra-day limit order below yesterday’s close. As we have discussed in the previous lessons of this course, these intra-day drops have increased the average gains per trade going all the way back to 1995.

Short Term PowerRatings

Another way to identify large pullback candidates is to use our Short Term PowerRatings. Look for stocks which have had large 2-3 day increases in their ratings, up to the 9 and 10 levels. A big jump in a PowerRating means the stock has had a significant drop and is entering levels which it has historically risen from. Here’s a good example…

Chart of IRBT

On 9/13/07 IRBT closed at 24.23 and had a PowerRating of 3 signaling that it was oversold. A few days later the stock had a powerful pullback taking it to 17.49 and bringing its PowerRating all the way up to a strong 9. This type of move (from 3 to 9) has historically produced very good short-term trading results. And as we can see here, we can exit either a few days later on a close above the 5-day MA, or exit when the stock rating goes from green (8-10) to blue (4-7). Both types of exits have produced positive returns since 1995, in simulated trading.

PowerRatings Charts

Large pullbacks don’t occur as often as the other pullbacks, but when they do occur, they’ve been the best pullbacks to trade. The simplest way to find these pullbacks is by using the PowerRatings 9’s and 10’s list, and then looking at our new PowerRatings Charts. That way, you can see how far they have pulled back over the past few days and how much the PowerRatings have risen.

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Mid-Level Pullbacks

Combine Price and Time

Ideally we want to combine price and time with our pullbacks. What does this mean? It means we want to see the pullback occur over a period of time (not one day), and we want to see the pullback be at least 3-5% from its highs.

The further the pullback, the greater the returns have been in testing going back to 1995.

Finding Mid-Level Pullbacks

1. Look for stocks which dropped at least 5% from their highs over the past 3-5 days. These stocks will potentially be setting themselves up for a rally. In fact, approximately 66% of these stocks have closed higher when you use a 10-day moving average exit, when they were above their 200-day MA.

2. Now, let’s look to increase the edges even further. How do we do this? By waiting for these stocks to pull back even further intra-day. For example last week we looked at stocks which were above their 200-day MA, when they had certain liquidity requirements and were at 10-days lows. As we saw the results were as follows:

Limit Order Entries

Now let’s look what happens if we wait for these stocks to pull back even further intra-day and we buy them on a limit 5% below yesterdays close. As you can see, the results improve, and we’re now trading higher quality pullbacks.

Here are the results of a 10-day low, buying on a limit order 5% lower the next day. Exit on a close above the 10-day MA.

Higher Quality Trades

By waiting for the pullback to become deeper, you see that there are fewer trades. But the quality of these trades improves by a healthy amount. The % correct stays the same, but the average gain per trade nearly doubles.

Here is an example of a mid-level pullback which was able to capture a healthy gain over a few trading days:

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Shallow Pullbacks

Identifying Good Pullbacks

First, we want a stock to be above its 200-day moving average before we buy it. Why? Because stocks tend to trade higher more consistently in pullbacks above their 200-day moving average than below it.

We tested a stock’s behavior above and below its 200-day MA looking at over 8.25 million trades from 1995-2006. What we found, is that the average gain for all stocks above their 200-day MA five days later was comfortably ahead of the average gain for all stocks below their 200-day MA when looking ahead five days.

Simply stated, it’s better to be buying stocks above their 200-day MA than below. When stocks break down under their 200-day MA, they often have a tendency to continue dropping.

Catch a Falling Knife?

A good example is Freddie Mac (FRE | charts | news | PowerRating):

As you can see, the stock reached above $60 per share, and after closing under its 200-day MA, it proceeded to collapse into the $20’s. Within a 30 day period of time, the stock lost more than 50% of its value. By staying away from the stock once it broke under its 200-day MA, you would have avoided a great deal of pain and losses that fund managers and investors felt when they bought it much higher, believing it was a cheap stock. In reality, it was a falling knife, and the 200-day MA rule often helps us avoid stocks like these.

Citigroup (C | charts | news | PowerRating) is another example:

10-Day Highs versus Lows

Before looking at the various levels of pullbacks you’ll want to focus on, we’d like to share a research study of ours. The study looked at the average gain per trade for all stocks above their 200-day MA making 10-day highs (breakouts) versus those making 10-day lows (pullbacks). The exit was a close on the opposite side of the 10-day moving average.

The average gain for the stocks making 10-day lows was more than three times greater than the stocks making 10-day highs. This test is one of the strongest pieces of evidence that the short-term edges have been greater when buying a pullback versus buying a breakout.

Three Types of Pullbacks

There are three types of pullbacks we want to focus on. They are shallow pullbacks, mid-level pullbacks and deep pullbacks. Each has its pluses and minuses, and when you blend them together, you have a combination of pullbacks which potentially gives you a healthy trading edge. In this lesson, we’ll look at shallow pullbacks.

Shallow Pullbacks

What is a shallow (or small) pullback? It’s exactly as it sounds. It’s an up-trending stock which pulls back for a few days, before resuming its longer-term up-trend. These types of stocks are usually momentum stocks giving fund investors little opportunity to accumulate the stock at lower levels.

This chart of Freeport-McMoRan Copper & Gold (FCX) is a good example of shallow pullbacks:

10-Day Lows

Now that we have these filters, let’s first look at stocks that closed at a 10-day low. We’ll also need to exit these stocks (there is no more guessing when to exit!), so we’ll exit once the stock closes above its 10-day simple moving average.

A 10-day low is exactly as it sounds. It’s a stock which closes at its lowest price over the past ten trading days (today inclusive). As you can see from these results (Jan 1, 1995 through Sep 30, 2007), these stocks have had an edge.

Stocks which have made 10-day lows using these filters and exits have outperformed the average of all stocks. And they have outperformed 10-day highs by a very healthy margin.

Here are two examples of stocks which made 10-day lows and then rallied to close above their 10-day MA:

As you can see, the stocks pull back to levels which attract buyers, and then resume their moves higher.

Since 1995, if you bought each stock using this criteria, each day at a 10-day low, and exited when it closed that day above it’s 10-day MA, you would have been profitable (before slippage and commission) 69% of the time, and your returns would be more than double versus randomly selecting any stock during this period of time. This is the beginning of you finding trades which have had historical edges.

2-Period RSI

Now, let’s look at stocks which have a 2-period RSI below 5. Before we do that, we want to make sure you understand what a 2-period RSI is.

What is RSI? It’s an oscillator which measures the strength of a stock on a 0 to 100 basis. The stronger the stock has been, the higher the RSI is likely to be. Most charting packages and books look at the 14-period RSI. This is too long for traders (and we can find no statistical evidence that a 14-period RSI has any edge). We use a 2-period RSI, as that is one of the best ways to identify how overbought or oversold a stock is. Ideally we want to focus on stocks whose 2-period RSI is below 5.

When we use our filters and then look at all stocks that have had an RSI below 5, we see edges. For example, from Jan 1995-Sept 30, 2007, buying a stock with an RSI below 5 and exiting on the close when the 2-period RSI closed above 70, you would have been correct 70% of the time (before slippage and commission). And the average gain was 1.69%, approximately three times greater than the average gain for all stocks during that 12 ¾ year period of time. These are healthy edges and it shows you that edges trading edges can be found when using the proper entry and exits.

Here’s an example of a stock with a 2-period RSI below 5 that then traded up and closed with a 2-period RSI above 70:

Trading Markets