Options Trading Beginner

Behaviour of THETA in relation to TIME REMAINING TO EXPIRATION – With Past DATA and CHARTS

2011-11-07T11:47:00.006+08:00

The following is the behavior of Theta in relation to Time to Expiration:

For ATM option, Theta increases as an option gets closer to the expiration date.
On the other hand, for ITM & OTM options, Theta decreases as an option is approaching expiration.
The above effects are particularly observed in the last few weeks (about 30 days) before expiration.

Using the same past actual data as shown in the previous post on the behavior of Delta, namely:
Options Chain for Call options of RIMM as at 3 Sep 2010, when the closing price is $44.78 and Implied Volatility (IV) is 54.05, for expiration month of Sep 2010 (10 days to expiration), October 2010 (38 days to expiration) and Dec 2010 (101 days to expiration).

The following is the summary of Theta values for different Time to Expiration:

For easier analysis, we can plot the Theta values of different Degree of Moneyness across various Time to Expiration, as follows:

As can be seen from the table and the chart above:
For (near) ATM options (i.e. strike price $45.00, because the stock price is $44.78), Theta (in absolute value) is the higher for the options with expiration month “Sep-10” (nearer to expiration), as compared to “Oct-10” and “Dec-10”.
In other words, Theta (in absolute value) increases as time to expiration gets nearer.

Whereas for both deep ITM (strike price $35.00 & $37.50) and deep OTM options (strike price $52.50 & $55.00), Theta (in absolute value) is the lower for the options with expiration month “Sep-10” (nearer to expiration), as compared to “Oct-10” and “Dec-10”.
In other words, Theta (in absolute value) decreases as time to expiration gets nearer.

Note:
For Theta, we’re always comparing Theta here (whether it’s high or low) in terms of the absolute value, because the negative sign only represents the decaying effect.

Likewise, we’ll also compare Theta of different time to expiration at various strike prices, as shown in the chart below.

As can be seen in the chart:
For all the three options with different time to expiration, Theta always behaves the same way, i.e. given the same time to expiration, Theta of ATM options is higher, and it gets lower as it moves towards deep ITM and deep OTM options.

That means:
Given the same time to expiration, ATM options will always decay faster as time goes by, as compared to deeper ITM and OTM options would.

However, the blue line (i.e. options with expiration month “Sep-10”) is much steeper than the red line (i.e. options with expiration month “Oct-10”) and green line (i.e. options with expiration month “Dec-10”).
This means:

Theta values for options with nearer time to expiration differ more significantly along various strike prices, as compared to those with further time to expiration.
The further the time to expiration is, the smaller the difference in the Theta values across different strike prices will be.

Conclusion:
Given the same time to expiration, ATM options will always decay faster as time goes by (i.e. have higher Theta) than the deeper ITM and OTM options would.

Given an ATM option, the option with nearer time to expiration will have the highest Theta (will decay the fastest), as compared to that with longer time to expiration.

Given a deeper ITM / OTM option, the option with nearer time to expiration will have the lowest Theta (will decay the slowest), as compared to that with longer time to expiration.

To view the list of all the series on the this topic, please refer to:
“Behaviour of OPTION GREEKS in relation to TIME REMAINING TO EXPIRATION and IMPLIED VOLATILITY (IV) – With Past DATA and CHARTS.”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Behaviour of GAMMA in relation to TIME REMAINING TO EXPIRATION – With Past DATA and CHARTS

2011-10-22T17:55:00.005+08:00

As discussed previously in the earlier post, here is the behavior of Gamma in relation to
Time to Expiration:

Assume all other factors unchanged:
For ATM options, Gamma increases (is higher) as time to expiration is nearing.
In contrast, for both deep ITM and deep OTM options, Gamma normally decreases (is lower) as time to expiration is nearing.

We will use the same past actual data as shown in the previous post on the behavior of Delta, namely:
Options Chain for Call options of RIMM as at 3 Sep 2010, when the closing price is $44.78 and Implied Volatility (IV) is 54.05, for expiration month of Sep 2010 (10 days to expiration), October 2010 (38 days to expiration) and Dec 2010 (101 days to expiration).

Similarly, here is the summary of Gamma values for different Time to Expiration:

As can be seen from the table, for both deep ITM (strike price $35.00 & $37.50) and deep OTM options (strike price $52.50 & $55.00), the Gamma values are the lowest for the options with expiration month “Sep-10” (nearer to expiration), followed by “Oct-10”, and then “Dec-10” (further to expiration).

On the other hand, for near ATM options (i.e. strike price $45.00, because the stock price is $44.78), the Gammas are the highest for the options with expiration month “Sep-10” (nearer to expiration), followed by “Oct-10”, and then “Dec-10” (further to expiration).

These prove the statement above.

Now, let’s compare Gamma of different time to expiration at various strike prices, as shown in the chart below.

As can be seen in the chart:

For all the three options with different time to expiration, Gamma always behaves the same way, i.e. Gamma of ATM options is always higher, and it gets lower as it moves towards deep ITM and deep OTM options.

That means:
Given the same time to expiration, the Delta of ATM options changes the most when the stock price moves up or down, as compared to deeper ITM and OTM options.

However, the blue line (i.e. options with expiration month “Sep-10”) is much steeper than the red line (i.e. options with expiration month “Oct-10”) and green line (i.e. options with expiration month “Dec-10”).
This shows that:

Gamma values for options with nearer time to expiration differ more significantly along various strike prices, as compared to those with further time to expiration.
The further the time to expiration is, the smaller the difference in the Gamma values across different strike prices will be.

Conclusion:
Given the same time to expiration, Gamma of ATM option will always be higher than Gamma of deeper ITM and OTM options.

Given an ATM option, the option with nearer time to expiration will have the highest Gamma, as compared to the option with longer time to expiration.

Given a deeper ITM or OTM option, the option with nearer time to expiration will have the lowest Gamma, as compared to the option with longer time to expiration.

To view the list of all the series on the this topic, please refer to:
“Behaviour of OPTION GREEKS in relation to TIME REMAINING TO EXPIRATION and IMPLIED VOLATILITY (IV) – With Past DATA and CHARTS.”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Behaviour of DELTA in relation to TIME REMAINING TO EXPIRATION – With Past DATA and CHARTS

2011-09-24T12:11:00.006+08:00

The following is the behavior of Delta in relation to Time to Expiration:

Assume all other factors unchanged:
As the time to expiration is nearing, the Delta of ITM options increases (i.e. ITM option’s Delta gets closer to 1 for Calls or to -1 for Puts) and the Delta of OTM options decreases (i.e. OTM option’s Delta gets closer to 0).

Now, let’s observe using the past real data.
The following is the Options Chain for Call options of RIMM as at 3 Sep 2010, when the closing price is $44.78 and Implied Volatility (IV) is 54.05, for expiration month of Sep 2010 (10 days to expiration), October 2010 (38 days to expiration) and Dec 2010 (101 days to expiration).
(The rows highlighted in yellow are ITM options, while those in white are OTM).

For easier reading and comparison, I summarize the Delta for different time to expiration as follow:

As can be seen from the table, for ITM options (highlighted in yellow), the Deltas are the highest for the expiration month “Sep-10” (nearer to expiration), followed by “Oct-10”, and then “Dec-10” (further to expiration).

On the other hand, for OTM options, the Deltas are the lowest for the expiration month “Sep-10” (nearer to expiration), followed by “Oct-10”, and then “Dec-10” (further to expiration).

For near ATM options (i.e. the option’s strike price $45.00, because the stock price is $44.78), the Delta is about the same, i.e. close to 0.5.

These observations are in line with the statement above.

In addition, we can also look from different point of view, i.e. by comparing Delta at various strike prices at different time to expiration, as shown in the chart below.

From the chart, we can see that:

The effect of stock price changes on the option price (i.e. Delta) are more “extreme“ for ITM and OTM options with nearer time to expiration, as compared to those with further time to expiration.
Nearer time to expiration will push the Deltas of ITM Calls closer to 1 (-1 for Puts) and the OTM option’s Delta closer to 0.

In contrast, for ATM options, the Delta is relatively unaffected to changes in time to expiration, i.e. all will have Deltas close to 0.5.

Implication
So, what’s the implication?
We can use this knowledge to help us consider and choose which options to use for trading, given the trading opportunities, expectation of whether the price movement is big or small, expected time frame, and options strategies.

For instance:
If you’re playing a swing trading and expect a stock’s price will change moderately within a short period, and you want to buy a straight Long Call to take advantage of this opportunity. In this case, you could consider using ITM options from a nearer time to expiration, as this option has higher Delta. Hence, when the stock price indeed increases as expected, you can gain more (in terms of dollar) from the increase in the option’s price.

However, given the scenario, suppose due to capital constraint, you would like to use OTM options, then choosing OTM options from a longer time to expiration should be better to take advantage from the stock price movement (in terms of dollar), as this option has higher Delta.
(Note: This is just a simple example about how to make use of the knowledge on Delta behavior in your trading. Actually, using OTM options in such case would have lower chance to be profitable, as an OTM option would require a very big increase in the stock price for the option to be profitable.)

The bottom line:
Whatever strategy you use, do consider the behaviors of the Option Greeks to help you choose which options to use (ITM, ATM, or OTM) to enhance the probability to make money.

Next, we’ll discuss about the behavior of the rest of the Options Greek.

To view the list of all the series on the this topic, please refer to:
“Behaviour of OPTION GREEKS in relation to TIME REMAINING TO EXPIRATION and IMPLIED VOLATILITY (IV) – With Past DATA and CHARTS.”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Behaviour of OPTION GREEKS in relation to TIME REMAINING TO EXPIRATION and IMPLIED VOLATILITY (IV) – With Past DATA and CHARTS

2011-09-23T13:36:00.005+08:00

The past articles in this blog have discussed many times about the effect of time remaining to expiration and IV on Options Greeks.
In fact, not only this blog, many other websites have done the same too.
Nevertheless, generally these topics are only discussed qualitatively, as it is quite tedious and time consuming to show these using real data.

While there is an adage “A picture speaks a thousand words”, I am trying to show how Options Greeks behave in relation to the changes in time remaining to expiration or Implied Volatility (IV) by using the past real data and showing the relevant charts.

The following is the list of articles in this series:

Behaviour of Option Greeks in relation to TIME REMAINING TO EXPIRATION:
1. Delta
2. Gamma
3. Theta
4. Vega

Behaviour of Option Greeks in relation to IMPLIED VOLATILITY:
1. Delta
2. Gamma
3. Theta
4. Vega

By knowing better how Options Greeks behave in relation to the change in time remaining to expiration or Implied Volatility (IV), I hope this info can help you in your trading to enhance the probability to make money using whatever strategies that suit you.

We'll start with the first article soon.

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Historical Volatility – Part 7: Comparing HV

2011-09-11T16:53:00.003+08:00

Go back to Part 6: Interpretation.

One other way to use the HV data is by comparing the values among different stocks, as well as for a particular stock.
Here are some of the possible ways and its purpose/use:

1) Comparing the HVs among different stocks.
Although the volatility always fluctuates, it tends to oscillate around some “normal” value over long period of time, which can be deemed as its “average” value. When the volatility is relatively high or low, it would then move back or reverse towards its average value.
Therefore, we can use the average value of HV to compare between the volatility of one stock with the other, in order to estimate whether the stock is relatively “more volatile” or “riskier” than the other.
A stock with higher HV is considered to be a “more volatile” or “riskier” stock than that with lower HV.

2) Comparing the HV of a particular stock a particular point of time with its own average HV value.
As mentioned earlier, the volatility of a stock will always keep fluctuating.
Comparing the HV of a particular stock a certain point of time with its own average HV value will allow us to what has happened to the stock price.
When the HV is high, that means the stock has been showing extreme fluctuations in price during the period.
When the HV is low, that means the stock has been in quiet or sideways trading during the period.

3) Comparing the HV of a particular stock in different period used for calculation.
Comparing the HV of a particular stock in different period can help to determine whether the volatility is rising or falling.
For example:
If the 30-day HV of a stock is 50% and 10-day HV of a stock is 15%, it suggests that the stock has recently experienced a sharp decline in volatility.

To view the list of all the series on “Historical Volatility”, please refer to: “More Understanding about HISTORICAL VOLATILITY”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Historical Volatility – Part 6: Interpretation

2011-08-23T19:08:00.013+08:00

Go back to Part 5: How To Annualise Standard Deviation.

After we know the definition and how to calculate HV, we’ll move on to its interpretation.

Example:
If it is known that the value of HV is 35%. Remember that this HV value is annualised, i.e. for one year.
As mentioned in the earlier post, assuming that price returns are normally distributed, about two-third of the time, an individual return would fall within one standard deviation of the mean, and about 95% of the time, an individual return would fall within two standard deviation of the mean.

That means, we can interpret that in one year, approximately two-thirds of the time, the stock returns would be between minus 35% and plus 35%. Or about 95% of the time, the stock return would be between minus 70% (= 2*35%) and plus 70%.

If the stock price is $100, in one year, the price would probably be between $65 and $135 about two-thirds of the time. Or about 95% of the time, the stock price would be within $30 to $170 range.

How about for one month?
Since the annualised HV is 35%, the estimated value of standard deviation for one month will be:

That means, in one month, approximately two-thirds of the time, the stock returns would be between minus 10% and plus 10%. Or about 95% of the time, the stock return would be between minus 20% (= 2*10%) and plus 20%.

If the stock price is $100, in one month, the price would probably be between $90 and $110 about two-thirds of the time. Or about 95% of the time, the stock price would be within $80 to $120 range.

How about for 10 days?
With the annualised HV of35%, the estimated value of standard deviation for 10 days will be:

That means, in 10 days time, approximately two-thirds of the time, the stock returns would be between minus 7% and plus 7%. Or about 95% of the time, the stock return would be between minus 14% (= 2*7%) and plus 14%.

If the stock price is $100, in 10 days, the price is expected to be between $93 and $107 about two-thirds of the time. Or about 95% of the time, the stock price would be within $86 to $114 range.

Note:
Some people use the following formula to convert:

This formula is actually the same as the above formula.
This formula is based on the one mentioned in Wikipedia, as discussed in the earlier post (Part 5).

Continue to Part 7: Comparing HV.

To view the list of all the series on “Historical Volatility”, please refer to: “More Understanding about HISTORICAL VOLATILITY”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Historical Volatility – Part 5: How To Annualise Standard Deviation

2011-05-26T15:03:00.014+08:00

Go back to Part 4: Understanding Standard Deviation

As mentioned earlier, Historical Volatility is actually a standard deviation. The standard deviation can be calculated using historical price data in terms of daily, weekly, monthly, quarterly or yearly.
Historical Volatility is then expressed in terms of annualised standard deviation of % price returns, so that it can be compared across different stocks, regardless of the stock price and period used for HV calculation.

The formula to annualise the Standard Deviation (that may be calculated using either daily, weekly, monthly, quarterly or yearly) is as follow:

Where:
HV = Historical Volatility (annualised)
Sigma = Standard Deviation for a particular time period
T = Number of times (count) of such time periods in a year

So, the value of T in the above formula will depend on the time period of the data used.

In the example used in Part 3, we use daily price returns to calculate standard deviation. Assuming there are 252 trading days in a year, the value of T = 252 / 1 day = 252, because there are 252 times of 1-day period in a year. Hence, we can annualise it by using the following formula:

Just for the sake of giving more examples for better understanding of the value of T.
Suppose that 3-day price return data (i.e. the closing prices for every 3 days) is used to calculate the standard deviation. In this case, the value of T = 252 / 3 days = 84, because there are 84 times of 3-day period in a year. Hence, the formula will be:

In the case of monthly data is used (i.e. using month-end closing prices), the value of T will be 12 because there are 12 months in a year. Hence, the formula to annualise the monthly data is as follow:

For example:
If it is known that the “monthly” standard deviation of Stock ABC’s price returns is 15%, its Historical Volatility will be:

Note:
In Wikipedia, the formula to annualise the standard deviation is as follow:
http://en.wikipedia.org/wiki/Volatility_(finance)

Where:
Sigma = Annualised Volatility
Sigma SD = Standard Deviation for a particular time period
P = Time period of returns (expressed in terms of year)

To annualise a daily (i.e. 1 day) standard deviation, the value of P will be 1/252 (i.e. 1 day expressed in terms of year). So, the formula will be:

This Formula (6) is actually the same as Formula (2), because:

I found some people had commented that the formula in Wikipedia is not right. Actually, the formula is right. But we should understand what the logic is and understand the “definition” for the variables. Do compare the definition for T and P, and notice when we should multiply or divide when we want to annualise from daily standard deviation or to convert the annualised standard deviation into daily standard deviation. Just choose one that can make more sense to you.

Continue to Part 6: Interpretation

To view the list of all the series on “Historical Volatility”, please refer to: “More Understanding about HISTORICAL VOLATILITY”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Historical Volatility – Part 4: Understanding Standard Deviation

2011-03-31T12:12:00.004+08:00

Go back to Part 3: Steps to Calculate HV using MS Excel (with Example)

As Historical Volatility (HV) is calculated using standard deviation, it might be good to understand better about the concept of standard deviation, so that we can interpret the meaning of HV better.

Standard deviation is a measure of data variability or dispersion (i.e. how spread out the data points from its mean).
When the standard deviation is low, that means the data points tend to be very close to its mean (i.e. the data is spread out over a small range of values).
When the standard deviation is high, that means the data points tend to be far away from its mean (i.e. the data is spread out over a large range of values).

This can be understood from the formula below as well:

The numerator in the formula is the summation of the difference between individual data point and the mean of the data set.

If the data points tend to be very close to its mean (less spread out from the mean value), the difference between each individual data point and the mean would be relatively small, and hence the summation of all differences and, in turn, the standard deviation will be small too.

On the other hand, if the data points tend to be far away from its mean (more spread out from the mean value), the difference between each individual data point and the mean would be bigger, and hence the summation of all differences and, in turn, the standard deviation will be big too.

In denominator, “n – 1” is used instead of “n” to get an unbiased estimator, because this standard deviation is derived based on sample, not population. (If the population is used, then the dominator will be “n”).
Since the standard deviation is estimated based on sample, using “n – 1” as the denominator will “inflate” the standard deviation value to “capture more risks” due to estimating the standard deviation based on sample only instead of population. (Remember that to estimate HV, we’ll never be able to use “population”).
This adjustment is particularly essential when we estimate the standard deviation based on a small number of observations (i.e. when n is relatively small). However, when n is big, the difference between using “n – 1” or “n” is not very significant.

Standard Deviation of Normal Distribution
One important attribute of the standard deviation is that in a Normal Distribution, about 66.8% (two third) of the data are within one standard deviation of the mean, and about 95% of the data are within two standard deviations of the mean.

In Historical Volatility, price returns are assumed to be normally distributed, like shown in the picture below.

Source of picture: http://www.russell.com/us/glossary/analytics/standard_deviation.htm

Therefore, about two-third of the time, an individual return would fall within one standard deviation of the mean, and about 95% of the time, an individual return would fall within two standard deviation of the mean.

Continue to Part 5: How To Annualise Standard Deviation

To view the list of all the series on “Historical Volatility”, please refer to: “More Understanding about HISTORICAL VOLATILITY”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Historical Volatility – Part 3: Steps to Calculate HV using MS Excel (with Example)

2011-02-06T18:01:00.007+08:00

Go back to Part 2: Formula to Calculate HV

Example for HV Calculation:
Suppose we have the daily stock price data and would want to calculate HV for 10-day period (10-day HV).
The daily stock price data is in the first two column of the table below:

Note:
Step 1, 2 and 3 in the table will be described below.

Steps to calculate Historical Volatility (using MS Excel):

Step 1: Calculate the Price Returns.
In this case for the above example, we use formula (4) mentioned in the earlier part (Part 2).
However, when the price change is quite small, the price returns calculated using formula (3) or (4) is quite similar.

Step 2: Calculate the Standard Deviation of the Price Returns, which will result in “Daily” Standard Deviation.
In MS Excel, formula “=STDDEV” can be used to calculate Standard Deviation as in formula (1) mentioned in Part 2.

If the period used for calculation is 10 days (like in the example), we’ll use the formula “=STDDEV” for a “rolling 10 days”.
Hence, the Standard Deviation for Day 11 will use Price Return data from Day 2 to Day 11; for Day 12 will be from Day 3 to Day 12; for Day 13 will be from Day 4 to Day 13, and so on.

Step 3: Annualise the “Daily” Standard Deviation in order to obtain the HV.
Since standard deviation is in daily and assuming there are 252 trading days in a year, we can annualise the “Daily” Standard Deviation by using the following formula:

Note:
Different number of days in a year may be used by different site, such as 254 days or 256 days.
252 days is the number of days used in ivolatility.com.

Here is the screen capture of the MS Excel formula used for the calculation in the table above.

Since HV is actually a standard deviation, in order to be able to interpret and use HV data better, it is good if we could have a better understanding on the concept of standard deviation, which will be discussed in the next part.

Continue to: Part 4: Understanding Standard Deviation

To view the list of all the series on “Historical Volatility”, please refer to:
“More Understanding about HISTORICAL VOLATILITY”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Historical Volatility – Part 2: Formula to Calculate HV

2010-11-17T18:37:00.018+08:00

Go back to Part 1: Definition of Historical Volatility

As mentioned in Part 1, to obtain Historical Volatility, we need to calculate the standard deviation of the price returns using historical data (which can be in terms of daily, weekly, monthly, quarterly or yearly) over a certain period.
Commonly, the daily price data for the period of 10 days, 20 days, or 30 days are used.

Theoretically, the formula to calculate Historical Volatility (i.e. standard deviation of % stock’s returns) is as follow:

After the standard deviation is calculated, we then need to annualize it.
To annualise the Standard Deviation resulted from formula (1) in order to get Historical Volatility (HV):

The formula above may look complicated. However, they are actually quite simple with the help of MS Excel to calculate it.
We’ll discuss it further along with the example in the next part.

Continue to Part 3: Steps to Calculate HV using MS Excel (with Example).

To view the list of all the series on “Historical Volatility”, please refer to:
“More Understanding about HISTORICAL VOLATILITY”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Historical Volatility – Part 1: Definition

2010-10-31T18:42:00.007+08:00

Historical Volatility (HV) is a measure of the fluctuations of the stock price (i.e. how volatile the prices had fluctuated) over a certain period of time in the past.

Suppose the daily closing prices of Stock X and Y for the past 10 days are shown as follows:

As can be seen from the data above, regardless of the direction (up or down), the closing prices of Stock X in the past 10 days have fluctuated / changed by $2 to $5, whereas Stock Y by $1 to $3.
Since given the same initial stock price of $100, Stock X has shown bigger fluctuation in terms of dollar, Stock X is said to be more volatile than Stock Y.

Now, suppose Stock Z has an initial stock price of $50 and has also fluctuated by $2 to $5 like Stock X. In this case, given the same fluctuation in terms of dollar but lower stock price than Stock X, Stock Z will be considered to be more volatile than Stock X.
Hence, to get relative measurement of volatility and to compare volatilities among stocks with different prices, it is more accurate to reflect the price change in terms of percentage of the stock price, which is known as “Price Returns”.

Historical Volatility (HV) is therefore obtained by calculating the standard deviation of historical price changes (i.e. price returns) over a specified period in the past.

In Statistics, Standard Deviation measures the dispersion (spread) of a set of data points from its mean (average).
The more disperse (spread out) the data points from its mean, the higher the standard deviation. This deviation is referred by traders as “volatility”.
(Note: Further understanding about standard deviation will be discussed in the future article).

The higher the historical volatility, the bigger fluctuation the stock has experienced. As such, theoretically, the more likely the stock may make big movement in the future too, although this does not give any insight about the trend / which direction it will move to.

Depending of its uses/purposes or data availability, for calculation of HV, we can use historical price data in terms of daily, weekly, monthly, quarterly or yearly.
The common period used to calculate HV is 10 days, 20 days, or 30 days (using daily data).
To allow comparison between volatilities that are calculated using different period, the HV would be annualized.

By expressing HV using annualised standard deviation of % price returns, the figures can be used to compare the volatility across different stocks, regardless of the stock price and the period used for HV calculation.

In conclusion, Historical Volatility can be defined as follow:

Historical Volatility (HV) is the annualised standard deviation of historical price changes (i.e. returns) over a specified period in the past.

In the next posts, we will discuss:
* Formula to calculate HV
* Steps to calculate HV using MS Excel (with example)
* Further understanding about Standard Deviation

Continue to Part 2: Formula to Calculate Historical Volatility.

To view the list of all the series on “Historical Volatility”, please refer to:
“More Understanding about HISTORICAL VOLATILITY”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

More Understanding of HISTORICAL VOLATILITY

2010-10-16T08:47:00.012+08:00

In the previous article, we had explained what Historical Volatility is very briefly. In these series, in order to gain better understanding and hence be able to interpret its meaning better, we’ll discuss more in-depth about Historical Volatility. As usual, I’ll try to share my understanding about this topic as simple as possible, so that it’ll be easier to understand for everyone.

The following are the series of topics on HV, which we’re going to discuss in the near future:

1) Definition of Historical Volatility
2) Formula to calculate HV
3) Steps to calculate HV using MS Excel (with example)
4) Understanding Standard Deviation
5) How to annualise Standard Deviation
6) Interpretation of Historical Volatility
7) Comparing HV

So, stay tune... =)

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Market Analysis Video: This Reliable S&P Formation Could Make You Money

2010-10-10T19:06:00.002+08:00

This short video on the S&P 500 is worth watching. It shows a detailed analysis on a particular chart formation that has proven to be very reliable in the past. If the analysis is right, we couldsee a further move and run in the S&P500 to the upside.
Check it out!

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos: Learn Technical Analysis from Award Winning Author John Murphy

Related Topics:
* Understanding HEAD & SHOULDERS BOTTOM Pattern
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value
* Learning Charts Patterns
* Learning Candlestick Charts
* Getting Started Trading

THREE BLACK CROWS - Bearish Candlestick Pattern

2010-09-23T15:20:00.007+08:00

Three Black Crows (Bearish)

Three Black Crows is a top reversal / bearish reversal formation.
It could occur at the end of an uptrend, or during a bounce within a downtrend, or at the resistance.

This pattern consists of 3 consecutive long black candlesticks that appear in an upward price trend.
The opening price of Candles 2 and 3 of the pattern should be higher than the previous day's closing price (i.e. The prices open within the previous day’s body).
And all the 3 candles should close near or at their lows, and make new lows in each day.

Since all the 3 candles should close near or at their lows, the lower shadows of the Three Black Crows formation are normally short, or even no shadow in some cases.

This pattern is formed when the prices are in overbought condition, and indicate a sign that the bulls might have lack of conviction in the current uptrend. This uptrend has now reached levels where the bears have started to short the market.
On 1st day, due to increasing selling pressure, the price closes below its opening price.
On 2nd and 3rd days, it seems that as if the price wants to regain its former strength, as the price opens higher than the previous day’s close. However, by the end of each day, the sellers would regain control, causing the price to fall to a new closing low (i.e. the price closes at lower levels than previous day’s closing price).

The Three Black Crows pattern does not occur very frequently. However, when it does occur, traders / investors should be very alert, because their appearance indicates a period of strong selling pressure, and hence the reliability of this pattern is likely to be very high. If on the 4th day the stock is not able to show strength, then lower prices may potentially continue.

The reliability of this pattern tends to increase in the following conditions:
1) Longer black candlesticks’ body.
However, it should not be too long as well because if the black candlesticks are too long (over-extended), traders / investors would worry that the market could be oversold by now and hence may pause accordingly.
2) Shorter lower shadow of the candles.
3) The opening prices of the 2nd and 3rd days can be anywhere within the previous day's body. However, it is better to see the opening prices to be below the middle of the previous day's body.
4) Increase in trading volume.

Although the reliability of this pattern is likely to be very high, but it is always better to substantiate this signal with other technical indicators to confirm that the momentum is actually changing.

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Posts:
* Learning Candlestick Charts
* Learning Charts Patterns
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

One-Cancels-Other (OCO) & One-Cancels-All (OCA) Orders

2010-09-08T17:57:00.003+08:00

One-Cancels-Other (OCO) Order is a group of orders that consists of two individual orders; if one of the orders is executed, then the other order will be automatically canceled.

One-Cancels-All (OCA) Order is a group of orders that consists of 2 or 3 individual orders. When any one of the orders in the group fulfils a trigger condition, the triggered order will be sent to the market for execution, whereas the other order(s) will be automatically canceled.
Basically, One-Cancels-Other (OCO) Order and One-Cancels-All (OCA) Order are similar. The difference may be that OCO Order consists of two individual orders in a group, while OCA Order can be made up of 2 or more individual orders in a group.

Generally, the following are some characteristics of One-Cancels-All (OCA) Order:
* Individual orders in one OCA group order can be either stocks or options, and the security type does not need to be consistent across all individual orders in the group. That means you can mix the orders for stocks or options in one OCA group order.
* Once one of order is triggered, the other remaining order(s) in the group will be canceled. The triggered order does not need to be executed for other remaining order(s) to be canceled.
* All orders in an OCA group order will be are held at the brokerage until triggered. Once triggered, the triggered order will be sent to the market as either Market Order or Limit Order as set by the trader/investor.
* If one order is partially filled, the remaining order(s) will be reduced proportionately to the remaining quantity of the unfilled order.
* If one order is canceled by the trader/investor before it gets triggered & executed, all the remaining order(s) will automatically be canceled as well.
* However, if one of the orders is rejected or canceled by the system, the remaining order(s) will NOT be canceled automatically.

Some examples of how you can make use of OCA order:

Example 1:
You want to enter into a long position in either a particular stock or an option in that stock.
You can place a One-Cancels-All (OCA) order that consists of the following orders:
a) Order 1 – Buy stock DEF with Limit Price of $30.00.
At the time you’re placing the order, stock DEF is trading at $32 / share.
b) Order 2 – Buy option DEFJKL of stock DEF with Limit Price of $1.60.
At the time you’re placing the order, Option DEFJKL is trading at $1.80 / contract.

If the price of stock DEF drops to $30.00 before option DEFJKL hits $1.60, Order 1 will be triggered and sent to the market as Buy Limit Order to buy stock DEF at $30.00 or lower. At the same time, Order 2 will be canceled automatically.
On the other hand, if the price of option DEFJKL drops to $1.60 before stock DEF hits $30, Order 2 will be triggered and sent to the market as Buy Limit Order to buy option DEFJKL at $1.60 or lower. At the same time, Order 1 will be canceled automatically.

Example 2:
You’ve own stock OPQ that is currently trading at $25.00. In order to manage the position without having to constantly monitor the market, you want to place Sell Limit Order at $32.00 to lock in profit when the price has reached your Profit Target Price, and Sell Stop Order at $20.00 to limit your losses in case the price moves against your expected direction. When one of the orders is triggered & executed and your position is closed as a result, the other order will be automatically canceled.
Note:
The purpose of the order in this example is actually similar to that of Bracketed Order, which is to allow you lock in profit and limit your losses.
The difference is that in this case, you place the above two opposite orders when you’ve already own the stock; whereas for a Bracketed Order, the above two opposite orders are submitted together with the buy order for opening the position.

Disclaimer:
This order is a more complicated order, not all brokerages can accept this order.
Even the procedures, rules, terms and/or how to place this order may vary from one to another brokerage. Hence, you need to check with your own brokers specifically for the details before placing such order.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns

FALLING WEDGE PATTERN – Part 2: Important Characteristics

2010-08-27T14:29:00.002+08:00

Go back to Part 1: Falling Wedge Formation

Important Characteristics of Falling Wedge Pattern

Existing Trend:
There should be an established existing trend (either uptrend or downtrend). As mentioned before, Falling Wedge, which has a bullish bias, can be categorised as a reversal or continuation pattern.
As a reversal pattern, Falling Wedge normally occurs after an established downtrend. The slope of Falling Wedge will be downward, which is in the same direction as the prevailing trend.
As a continuation pattern, Falling Wedge occurs after following an uptrend. The slope of Falling Wedge will still be downward, but this slope will be against the prevailing uptrend.

Shape of Falling Wedge:
* There should be at least 4 reversal points to draw two converging lines, i.e. two successively lower peaks (highs) forming a downward sloping upper line and two successively lower troughs (lows) forming a downward sloping lower line. The descending upper line acts as resistance, while the descending lower line as support.
The more times the price tests each level, particularly on the upper side (resistance), the higher quality the wedge pattern is thought to be.
* The upper line (resistance) should have a sharper slope (more negative slope) than the lower line (support). If the lines were extended to the right, both lines would converge and slanted in a downward direction.
* There should be some distance between the two peaks as well as the two troughs.
In other words, prices should increase and hit the descending upper line then decline for at least twice (forming at least two peaks). Prices should drop and hit the descending lower line then bounce up for at least twice (forming at least two troughs).

Volume:
Volume should be diminishing; heavy at the beginning and contracts as the pattern develops.
However, when breakout occurs, there should be a significant increase in volume.
Monitoring the existence of significantly higher volume to confirm a valid breakout for Falling Wedge is more crucial than for Rising Wedge.
Without a significant surge in volume, the upward breakout above the resistance of Falling Wedge would lack conviction and be more vulnerable to failure.

Duration:
This pattern is generally a longer term pattern. It takes from about 3 to 6 months to form.
If the pattern duration is less than 3 weeks, it can be considered as a pennant.

Breakout Direction:
For Falling Wedge, the breakout usually happens to the upside, hence it is considered as a bullish pattern. However, the breakout might also occur to the downside.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches above the upper (resistance), but then it moves back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes ABOVE the upper (resistance) line, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the upper (resistance) line depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Potential Price Target:
For Wedge pattern, there is no price target, as it is difficult to project specific potential price target in this pattern.

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to the breakout level for an immediate test of this new resistance before continuing their moves in the direction of the breakout. (Remember that the support now has turned into new resistance level).
However, the prices should not re-enter the wedge and move outside the opposite line of the breakout line. When this happens, it means the pattern has failed or considered in invalid.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
Free Trading Videos:
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

FALLING WEDGE – Part 1: Formation

2010-08-20T14:29:00.006+08:00

Falling Wedge is generally regarded as a bullish pattern. The breakout usually occurs upwards through the wedge and then move on into upward trend.
Falling Wedge can be categorised as a reversal or continuation pattern.

As a reversal pattern, Falling Wedge normally occurs after an established downtrend. The slope of Falling Wedge will be downward, which is in the same direction as the prevailing trend.

As a continuation pattern, Falling Wedge occurs after following an uptrend. The slope of Falling Wedge will still be downward, but this slope will be against the prevailing uptrend.

Regardless of whether it occurs as reversal or continuation pattern, Falling Wedge is regarded as bullish pattern.

However, Falling Wedge is not seen as a popular pattern, as the failure rate of this pattern is quite high and more difficult to trade.

The Formation of Falling Wedge

Falling Wedge Pattern contains at least two lower highs (peaks) and two lower lows (troughs). When the peak as well as trough points are connected by separate lines and then extended to the right, they would respectively form a descending upper line and a descending lower line, whereby the upper line should have a sharper slope than the lower line. As such, both lines would converge and look slanted in a downward direction, creating a pattern that looks like a Falling Wedge.
In this case, the descending upper line acts as resistance, whereas the descending lower line as support.
When the lower line (support) is noticeably flatter as the pattern develops, it indicates that selling pressure is weakening, as sellers are not really able to push the price down further each time the price is under pressure.

The completion of the pattern occurs when prices break out through the upper line (i.e. breakout to the upside) with a high volume.

Continue to Part 2: Important Characteristics of Falling Wedge pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Market Analysis Video: Updates on Dow and Nasdaq Markets

2010-08-13T14:50:00.003+08:00

Watch the following videos to see what’s happening in both of the markets:
* Updates on Dow market
If nothing else, watch this video as this could be one of the most important weeks for the DOW and its future. This 3-minute video will share both interesting and educational analysis from both a Fibonacci and Japanese candlestick point of view.
The weekly chart on the DOW is flashing the same Japanese candlestick signal that it had earlier in April of this year. Back then the DOW dropped from 11,200 to 9,700 in the space of just 10 weeks!

* Updates on Nasdaq market
This video shows an eerily similar pattern in the NASDAQ. If the pattern repeats, then it certainly is going to be a rough 3rd and 4th quarter for most investors.
The video would also give you exact points and the formation that could make a huge difference to most people's portfolios.

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos: Learn Technical Analysis from Award Winning Author John Murphy

Related Topics:
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value
* Learning Charts Patterns
* Learning Candlestick Charts

Market Analysis Video: Make or Break in the S&P Market

2010-08-12T13:42:00.003+08:00

This new short video shows you one key element that could make or break the S&P 500 market.
See how to interpret the trendline, Fibonacci, Moving Average Crossover, and Divergence analyses together.

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos: Learn Technical Analysis from Award Winning Author John Murphy

Related Topics:
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value
* Learning Charts Patterns
* Learning Candlestick Charts

Bracketed Order

2010-08-01T12:05:00.002+08:00

Bracketed Order allows traders/investors to manage the trade/position by “bracketing" an order for opening a position (i.e. the “main order”) with two opposite “side orders” for closing the position in order to limit losses and lock in profits, without having to constantly follow the position.
The order quantity for the “side orders” matches the original order quantity of the “main order”.

When the Bracketed Order is placed, the trader/investor must determine the corresponding prices for all the 3 component of the Bracketed Order (One “main order” for opening position and two opposite “side orders” that bracketed the “main order” for closing the position).
When one of the side orders is being executed, the other side of the order will automatically be cancelled.

Depending on the “main order” for opening a position, there are 2 types of Bracketed Orders:

1) BUY ORDER
The Buy Order will open the position by buying a security.
The price for the Buy Order can be set as a Market Order (to buy at the market price) or Limit Order (to buy at the Limit Price or lower).
The Buy Order will then be bracketed by:
a) Sell Limit Order: The Limit Price to sell should be above the Buy Order’s Price.
This Sell Limit Price serves as Profit Target in order to lock in profits.
b) Sell Stop Order: The Stop Price should be below the Buy Order’s Price.
This order serves to limit losses.
Other than Sell Stop Order, you can also use Sell Stop Limit Order or Sell Trailing Stop Order for this purpose.

2) SELL ORDER
The Sell Order will open the position by selling a security.
The price for the Sell Order can be set as a Market Order (to sell at the market price) or Limit Order (to sell at the Limit Price or higher).
The Sell Order will then be bracketed by:
a) Buy Limit Order: The Limit Price to buy should be lower the Sell Order’s Price.
This Buy Limit Price serves as Profit Target in order to lock in profits.
b) Buy Stop Order: The Stop Price should be above the Sell Order’s Price.
This order serves to limit losses.
Other than Buy Stop Order, you can also use Buy Stop Limit Order or Buy Trailing Stop Order for this purpose.

Example 1:
You place a Sell Order for Stock STU at the price of $20, along with a Buy Limit Order with Limit Price of $15 and a Buy Stop Order with Stop Price of $25.

If the price falls to $15 or lower (and never go up touching the Stop Price at $25), the Buy Limit Order will be triggered and sent to market to buy back the shares at $15 or lower. You will then realize at least $5 profit. In this case, the Buy Stop Order at $25 will automatically be cancelled.

If the price increases to $25 or higher (and never go down touching the Sell Limit Price at $15), the Buy Stop Order will be triggered and sent to market to buy back the shares at the market price. You will then realize at least $5 losses. In this case, the Buy Limit Order at $15 will automatically be cancelled.

Example 2:
You place a Buy Order Call Options of DEF at the price of $3.00, along with a Sell Limit Order with Limit Price of $4.00, and a Sell Trailing Stop Order with Trailing Amount of $0.50.
Since the current option premium is $3.00, the Initial Stop Price will be $2.50 (= $3.00 - $0.50).

If the option premium increases to $4.00 or higher, the Sell Limit Order will be triggered and sent to market to sell the options at $4.00 or higher. You will then realize at least $1.00 profit. In this case, the Trailing Stop Order will automatically be cancelled.

If the option premium increases to $3.20 first, that it starts to fall. In this case, the Stop Price would reset to $2.70 (= $3.20 - $0.50). It the premium continues to drop and pass $2.70 (the new Stop Price), the Sell Stop Order will be triggered and sent to market to sell the shares at the market price. You will then realize at least $0.30 losses. In this case, the Sell Limit Order at $4.00 will automatically be cancelled.

Advantage & Disadvantage of Bracketed Order:
The advantage of Bracketed Order is that it allows the trader/investor to manage the trade without having to constantly follow the position. They also can control how much they’re willing to lose and determine what the Profit Target Price is, based on their planned risk/reward ratio. Hence, this can help take some emotions out of your trading decision.

However, the disadvantage of Bracketed Order is that since you place a limit on how much profit you want to make, you might potentially “lose money” should the price continues to move to your expected direction. In order words, you could not let the profits run using this kind of order.

Disclaimer:
This order is a more complicated order, not all brokerages can accept this order.
Even the procedures, rules, terms and/or how to place this order may vary from one to another brokerage. Hence, you need to check with your own brokers specifically for the details before placing such order.

For the list of other types of order, go to: Types of Orders in Trading.

Market Analysis Video: Intense Bull vs Bear Battle in the Current S&P Market

2010-07-26T15:40:00.001+08:00

The battle between the bulls and the bears continues in the S&P 500 with neither side able to gain the upper hand. This choppy trading action will eventually lead to a large move one way or the other. The bulls are betting that we are headed higher and the bears are betting that the economy is going to tank.

This new video shares some of the key technical points that are still in play and where the market needs to go in order to break out of the current logjam that it's in.

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos: Learn Technical Analysis from Award Winning Author John Murphy

Related Topics:

* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value
* Learning Charts Patterns
* Learning Candlestick Charts
* Getting Started Trading

THREE WHITE SOLDIERS - Bullish Candlestick Pattern

2010-07-12T15:10:00.008+08:00

Three White Soldiers is a 3-day bottom reversal / bullish reversal formation.
It could occur at the end of a downtrend, or during a pullback within an uptrend, or at the support.

The appearance of Three White Soldiers pattern signals that higher prices are likely ahead.
This pattern is more powerful particularly when it appears after an extended decline followed by sideways movement.

Three White Soldiers pattern consists of 3 consecutive long white candlesticks that occur during a downward price trend.
The opening price of Candles 2 and 3 of the pattern should be lower than the previous day's closing price (i.e. The prices open within the previous day’s body).
And all the 3 candles should close near or at their highs, and make new highs in each day.

Since all the 3 candles should close near or at their highs, the upper shadows of the Three White Soldiers formation are normally short, or even no shadow in some cases.

This pattern is formed when the prices are in oversold condition, and indicate a sign that the bears might have lack of conviction in the current downtrend.
On 1st day, due to increasing buying pressure, the price closes above its opening price.
On 2nd and 3rd days, it seems that as if the bears want to regain controls, as the price opens lower than the previous day’s close. However, by the end of each day, the buyers’ strength overcomes the earlier bears, causing the price to move up to a new closing high (i.e. the price closes at higher levels than the previous day’s closing price).

The Three White Soldiers pattern does not occur very frequently. However, when it does occur, traders / investors should be very alert, because their appearance indicates a period of strong buying pressure, and hence the reliability of this pattern is likely to be very high.

The reliability of this pattern tends to increase in the following conditions:
1) Longer white candlesticks’ body.
However, it should not be too long as well because if the white candlesticks are too long (over-extended), traders / investors would worry that the market could be overbought by now and hence may pause accordingly.
2) Shorter upper shadow of the candles.
3) The opening prices of the 2nd and 3rd days can be anywhere within the previous day's body. However, it is better to see the opening prices to be above the middle of the previous day's body. The higher a candle opens compared to the prior candle, the stronger the chance of a continued reversal.
4) Increase in trading volume.

Although the reliability of this pattern is likely to be very high, but it is always better to substantiate this signal with other technical indicators to confirm that the momentum is actually changing.

To learn about other major candlestick patterns, please refer to the following:
Learning Candlestick Charts

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos: Learn Technical Analysis from Award Winning Author John Murphy

Related Topics:
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value
* Learning Charts Patterns
* Getting Started Trading

Market Analysis Video: Determining Potential Downside Target for S&P Market

2010-07-06T15:11:00.002+08:00

This new video shows how to use the combined analysis of Moving Average Crossover, Fibonacci Retracement, RSI (Overbought/Oversold), and Chart Pattern (i.e. Head and Shoulder pattern) in trying to predict where the market is moving to and the potential target price.

Other Learning Resources:
* FREE Trading Educational Videos: Learn Technical Analysis from Award Winning Author John Murphy
* FREE Trading Educational Videos with Special Feature

Related Topics:
* Learning Charts Patterns
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Option Greeks
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Trading Educational Video: BEARISH ENGULFING Candlestick Pattern

2010-07-02T14:40:00.002+08:00

Japanese Candlestick patterns have been popular and widely used by traders. There are several major Candlestick Patterns which most technical traders should be familiar with, such as: Bullish vs. Bearish Engulfing, Harami Bullish vs. Bearish, Piercing Line vs. Dark Cloud Cover, Hammer vs. Hanging Man, Inverted Hammer vs. Shooting Star, etc.

This video shows the real current example for BEARISH ENGULFING Candlestick Pattern in the Nasdaq market. Do watch it to see the more detail analysis and why you should pay attention to this pattern when it appears in the chart.

You may want to read this previous article to find out more about Bullish & Bearish Engulfing Candlestick Pattern.

To learn about other Japanese Candlestick pattern, please refer to the following:
Learning Candlestick Charts

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos: Learn Technical Analysis from Award Winning Author John Murphy

Related Topics:
* Learning Charts Patterns
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Option Greeks
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Trading Educational Video: How To Use FIBONACCI RETRACEMENT and MARKET DIVERGENCE in Your Trading

2010-06-28T13:47:00.002+08:00

Some of the powerful tools in the technical analysis which many traders use to help them in their trading are Fibonacci Retracement and Market Divergences.

How to make use of these two powerful tools in your trading?
The following are two videos that discuss and explain in very detail about how to use Fibonacci Retracement and Market Divergence to help in your trading analysis.

* Fibonacci Retracements Explained
* Market divergences Explained

I believe the explanation in the videos will be very useful & educational, along with the real examples from the current markets.
Happy learning!

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos: Learn Technical Analysis from Award Winning Author John Murphy

Related Topics:
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns
* Getting Started Trading

The Battle of the Bull and Bears in S&P 500 market

2010-06-12T22:55:00.001+08:00

The battle between the Bulls and Bears continues with very choppy trading action. The rally from a potential double bottom is a cause for concern for the Bears. However, the Bulls are in a similar situation as they have to prove their case with sustained market action.

This video shares some of important key levels in the S&P 500 market. Volume continues to be light and that is why the markets are moving around and are so volatile at the moment.

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos: Learn Technical Analysis from Award Winning Author John Murphy

HEAD AND SHOULDERS BOTTOM PATTERN – Part 2: Important Characteristics

2010-06-06T22:40:00.002+08:00

Go back to Part 1: Head & Shoulders Bottom Formation

Important Characteristics of Head & Shoulders Bottom Pattern

Existing Trend:
There should be an established existing DOWNWARD trend prior to the pattern.

Shape of Head & Shoulders Bottom Pattern:
1) Head & Shoulders:
Ideally, the shape Head & Shoulders should be symmetry. The Left & Right Shoulders should bottom at about the same price level. The Left & Right Shoulders should also about the same distance from the Head, which means the time duration to develop the formation between the bottom of Left Shoulder & the Head should be about the same as that between the Head & the bottom of Right Shoulder.

However, in the real world, the Shoulders are rarely perfectly symmetrical. Sometimes, one shoulder is lower than the other, or takes longer time to develop.
In any case, the Left or Right Shoulder should not reach the level of the Head. If it does, the formation is actually not Head & Shoulders Bottom pattern.

When the bottom of the Right Shoulder is higher than the bottom of the Left Shoulder, it may carry a higher chance of larger price increase after the breakout, as it implies more strength & bullish sentiments.

In addition, ideally, the shape Head & Shoulders should also be made up of three downward sharp bottoms. But in real world, the Shoulders can be a bit more rounded / flat.
Also, sometimes in a more complex formation, the pattern could have more than one head and/or more than two shoulders (e.g. 2 Left Shoulders with about the same size and 2 Right Shoulders that are more or less equivalent to the Left Shoulders). This more complex formation is more often seen in the Head & Shoulders Bottom than in the Head & Shoulders Top.

2) Neckline:
The Neckline that connects the two high points in between the Left Shoulder-Head and the Head-Right Shoulder can be horizontal, sloping upwards or downwards, but should not be too steep.
The slope of the Neckline could predict degree of bullishness of the pattern and hence affect the chance of stronger price increase.

A downwards sloping Neckline has a weaker tendency that the price would increase further, as the lower high of the 2nd low point of the Neckline still indicates the strength of bearishness & market weakness, and thus it carries lower chance of stronger price increase.

An upwards sloping Neckline, which rarely happens, is more reliable as a bullish reversal signal, as it may imply stronger bullish sentiments & more rapidly increasing market strength, and hence have a higher chance of stronger price increase.

Duration:
The duration of the formation of the pattern from the start of the development of Left Shoulder to the break of the Neckline can take several months, normally range from 3 to 6 months.
Normally, Head & Shoulders Bottom takes longer time to develop and less volatile in price swing than Head & Shoulders Top.
Hence, bottoms tend to be wider (due to longer duration to develop) and flatter (as a result of less volatile price swing) than tops.

Breakout:
Even when the price has increased from bottom of the Right Shoulder, the pattern is not completed yet. The chances that the existing downtrend will continue are still higher than the chances of reversal to take place, as it is normal during a downtrend for the price to test a support level a few times, and then bounce up, and then resume the downtrend again.

Head & Shoulders Bottom pattern is only completed and confirmed when the price increases and closes above the Neckline, which serves as the key resistance level in this pattern.

Remember that we should always assume the existing trend (i.e. in this case is downtrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing above the Neckline resistance, accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Head & Shoulders Bottom pattern.

Nevertheless, since this pattern is considered as one of the most reliable pattern and has a relatively high success rate, some aggressive & experienced traders like to enter the market when the price is increasing from the bottom of the Right Shoulder, provided they are sure that a valid Head & Shoulders Bottom is forming. But of course, this trade is much riskier and not recommended for novice traders.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches above the Neckline, but then it moves back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.

A minimum penetration criteria for a breakout should be the price closes ABOVE the Neckline resistance, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Neckline depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Traders / investors should be more cautious if the price keeps hovering around the Neckline without making a decisive break. When this happens, the reversal might never happen and the downtrend is likely to resume.

Volume:
Volume should be diminishing as the pattern is forming.
Volume is the highest during the formation of the Left Shoulder, and then gets lighter as the pattern develops the Head, and should be the lightest during the formation of Right Shoulder, showing an indication that the selling sentiments are getting weaker.
During & after the breakout of the Neckline support, the volume should significantly increase again.

Monitoring volume for Head & Shoulders Bottom is more crucial than in Head & Shoulders Top, as a breakout from the key resistance (i.e. Neckline) accompanied by an expansion in volume may indicate increased buying pressures and a potential change in sentiment from selling to buying. Hence, it may provide higher chances that the pattern is a reversal pattern.

When during the increase from bottom of the Right Shoulder, the price experiences an accelerated increase, perhaps with a gap up or two, accompanied by an expansion in volume, this might give a good sign, as the price increase tends to increase further, and hence it may provide higher chances that the pattern is a bullish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The vertical distance between the bottom of the Head (which serves as the support) and the Neckline (which serves as the key resistance).
2) To compute the potential price target: Add the result to the point where the price finally breaks Neckline.

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Example:
Suppose a Head & Shoulders Bottom pattern is forming with the Neckline is sloping upward.
The bottom of the Head is at $50 and the Neckline vertically above it is at $65.
The height of the pattern is therefore 15 (= 65 - 50).
Suppose the Neckline was finally broken at $70.
Hence, the price target would be $85 (= 70 + 15).

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to the Neckline for an immediate test of this new support level before continuing their moves in the direction of the breakout. (Remember that the resistance now has turned into new support level). It is also normally only a minor & short-lived retracement.
If this price return move happens, it could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.
However, when the breakout occurs with a heavy volume, the chance of the price to return to the breakout level before continuing its upward movement will be smaller.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos: Learn Technical Analysis from Award Winning Author John Murphy

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

HEAD AND SHOULDERS BOTTOM PATTERN – Part 1: Formation

2010-05-22T09:20:00.004+08:00

Head & Shoulders Bottom Pattern is a bullish reversal pattern that normally forms after an extended downtrend, which marks a shift in trend from bearish to bullish. This pattern is very popular because it is regarded as one of the most reliable of all patterns.
Head and Shoulders Bottom pattern is sometimes referred to as Inverse Head and Shoulders pattern.

The Formation of Head and Shoulders Bottom Pattern

Head and Shoulders Bottom Pattern contains three consecutive, sharp bottoms, whereby the middle bottom is the lowest (Head) and the other two bottoms (left & right bottoms) are higher & roughly equal in size (Left & Right Shoulders).

This pattern forms when the price is in an existing downtrend. The price falls and hits a low then bounce up (forming the Left Shoulder). Afterwards, the price falls to an even lower low and then bounces up again (forming the Head). The Right Shoulder is formed when the price drops again but it does not reach the low of the Head. Instead, the price bounces back up after it has hit about the same price level as the Left Shoulder.
Although the Left & Right Shoulders do not necessarily need to be exactly the same, but it should appear roughly equal to one another.

The important part of this pattern is the Neckline. The Neckline is formed by drawing a line that connects two high points: (1) the high point in between the Left Shoulder & Head, and (2) the high point in between the Head & Right Shoulder.
This Neckline can be horizontal, sloping upwards or downwards.

The pattern is only completed and confirmed when the price increases and closes above the Neckline, which serves as the key resistance level in this pattern.

Although Head & Shoulders Bottom is viewed as a common pattern and quite easy to identify, it’s actually not the case. Therefore, one should pay close attention & take proper steps to analyze the characteristics of Head & Shoulders Bottom in order to minimize / avoid making mistakes in spotting the pattern.
The characteristics of the pattern will be discussed in more detail in the next post.

To be continued to Part 2: Important Characteristics of Head & Shoulders Bottom pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Market Analysis Video: Bearish View on Dow and S&P markets

2010-05-09T22:05:00.002+08:00

Watch the following videos for an update on Dow and S&P markets:
* Dow market analysis
* S&P market analysis

In the videos, you’ll again see the “power” of Fibonacci tools, along with MACD Divergence analysis. Happy watching! :)

Other Free Trading Videos for Learning Resources:
FREE Trading Educational Videos with Special Feature

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Binary Options

2010-05-07T22:37:00.003+08:00

What is Binary Options?
According to Wikipedia, Binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all.
There are two main types of binary options:
* Cash-or-nothing binary option: Pays some fixed amount of cash if the option expires in-the-money.
* Asset-or-nothing binary option: Pays the value of the underlying security if the option expires in-the-money.

Hence, the options are “binary” in nature, because there are only two possible outcomes.
They are also called all-or-nothing options, digital options (more common in forex / interest rate markets), and Fixed Return Options / FROs (on the American Stock Exchange).

For example:
A trader speculates on a binary cash-or-nothing Call Option on Company ABC that its stock price will be at $50 at the expiry date with the investment amount of $100.
If at the future expiry date, the stock is trading at or above $50, the trader will receive $100, in addition to $100 invested.
If the stock is trading below $50, nothing is received. That means he lost all the $100 invested.

One broker that provides Binary Options Trading is StartOptions.
StartOptions offers a FREE Demo Account that will allow newbie’s traders to become familiar with their product and user-friendly platform, as well as testing and improving trading strategies. The demo account operates exactly the same as a real account, enabling you to have the full binary options trading experience without risking real money.

StartOptions’s "Above Below" game lets you trade real-time binary options across various financial instruments; from US stocks and Indices to commodities and Forex Pairs.

On a virtual account you can buy CALL (Above), or buy PUT (Below) and trade the same way you would in the real account. You will also have access to your trading history, as well as all the tools and features of the trading platform.
Every new player begins his trading journey with a virtual wallet of $500 to speculate with and to show the world his trading skills.

What is the payout for the options traded in "Above Below" game?
StartOptions's "Above Below" game offers up to a 75% payout for successful trades (options that expired In-the-money), and a 10% return for unsuccessful trades (options that expired Out-of-the-money).
You can take trading positions for as little as $30.

Example:
You can speculate $100 that the price of Google stocks will be higher than the current stocks in one hour from now. If correct, you will receive 72% payout on your initial investment i.e. your account will be credited with $72 in addition to your $100 investment.
On the other hand, if by the end of the hour Google's stock is lower, you'll keep 10% of your investment, i.e. your account will be credited with $10. That means you lose $60 in this case.

What is a Call Option in "Above Below" game?
An option that yields a profit when the option closes higher than the level it was purchased at. If it closes at exactly the same price, the original investment amount will be returned to the player.

What is a Put Option in "Above Below" game?
An option that yields a profit when the option closes lower than the level it was purchased at. If it closes at exactly at the same price, the original investment amount will be returned to the player.

What is 'In-The-Money' expiry in "Above Below" game?
A professional term to describe a successful option trade in "Above Below" game, i.e. a CALL option that expired above the option price during purchase, or a PUT option that expired below the option price during purchase.

What is 'Out-of-the-money' expiry in "Above Below" game?
A professional term to describe a failed option trade in "Above Below" game, i.e. a CALL option that expired below that expired above the option price during purchase, or a PUT option that expired above, or at the same option price during purchase.

What kinds of instruments are traded on StartOptions?
US Stocks:
Apple (Symbol: AAPL), Cicso (Symbol: CSCO), Citybank (Symbol: C), Google (Symbol: GOOG), Microsoft (Symbol: MSFT), Yahoo! (Symbol: YHOO).

Forex Currency Pairs:
EUR/USD, GBP/USD, USD/CHF, USD/JPY, USD/CAD, GBP/JPY.

Commodities:
Gold, Platinum, Silver.

How to start trading the markets?
You can register via this link, then click “Register”.
After the registration procedure you will receive a confirmation e-mail to the e-mail address you entered during registration, after confirming the e-mail log in to: StartOptions.com and start trading.

When you’re ready for trading of binary options using real money, you can open an account with them.
The initial minimum deposit amount is either USD100, EUR100 or GBP100.
Deposits can be made with Visa, MasterCard and Diners cards. Also by wire transfer, moneybookers and several debit cards.

HEAD AND SHOULDERS TOP PATTERN – Part 2: Important Characteristics

2010-04-17T10:00:00.003+08:00

Go back to Part 1: Head & Shoulders Top Formation

Important Characteristics of Head & Shoulders Top Pattern:

Existing Trend:
There should be an established existing UPWARD trend prior to the pattern.

Shape of Head & Shoulders Top Pattern:
1) Head & Shoulders:
Ideally, the shape Head & Shoulders should be symmetry. The Left & Right Shoulders should peak at about the same price level. The Left & Right Shoulders should also about the same distance from the Head, which means the time duration to develop the formation between the top of Left Shoulder & the Head should be about the same as that between the Head & the top of Right Shoulder.

However, in the real world, the Shoulders are rarely perfectly symmetrical. Sometimes, one shoulder is higher than the other, or takes longer time to develop.
In any case, the Left or Right Shoulder should not reach the level of the Head. If it does, the formation is actually not Head & Shoulders Top pattern.

When the peak of the Right Shoulder is lower than the peak of the Left Shoulder, it may carry a higher chance of larger price decline after the breakout, as it implies more weakness & bearish sentiments.

In addition, ideally, the shape Head & Shoulders should also be made up of three upward sharp peaks. But in real world, the Shoulders can be a bit more rounded / flat.
Also, sometimes in a more complex formation, the pattern could have more than one head and/or more than two shoulders (e.g. 2 Left Shoulders with about the same size and 2 Right Shoulders that are more or less equivalent to the Left Shoulders). Nevertheless, a more complex formation is more often seen in the Head & Shoulders Bottom than in the Head & Shoulders Top.

2) Neckline:
The Neckline that connects the two low points in between the Left Shoulder-Head and the Head-Right Shoulder can be horizontal, sloping upwards or downwards.
The slope of the Neckline could predict degree of bearishness of the pattern and hence affect the chance of severe price decline.

An upwards sloping Neckline has a weaker tendency that the price will decline further, as the higher low of the 2nd low point of the Neckline still indicates the strength of bullishness, and thus it carries lower chance of severe price decline.

A downwards sloping Neckline, which rarely happens, is more reliable as a bearish reversal signal, as it may imply stronger bearish sentiments & more rapidly increasing weakness, and hence have a higher chance of severe price decline.

Duration:
The duration of the formation of the pattern from the start of the development of Left Shoulder to the break of the Neckline can take several months, normally range from 3 to 6 months.

Breakout:
Even when the price has declined from peak of the Right Shoulder, the pattern is not completed yet. The chances that the existing uptrend will continue are still higher than the chances of reversal to take place, as it is normal during an uptrend for the price to test a resistance level a few times, then retreat, and then resume the uptrend again.

Head & Shoulders Top pattern is only completed and confirmed when the price declines and closes below the Neckline, which serves as the key support level in this pattern.

Remember that we should always assume the existing trend (i.e. in this case is uptrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing below the Neckline support, preferably accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Head & Shoulders Top pattern.

Nevertheless, since this pattern is considered as one of the most reliable pattern and has a relatively high success rate, some aggressive & experienced traders like to enter the market when the price is declining from the peak of the Right Shoulder, provided they are sure that a valid Head & Shoulders Top is forming. But of course, this trade is much riskier and not recommended for novice traders.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches below the Neckline, but then it moves back up again & resumes uptrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.

A minimum penetration criteria for a breakout should be the price closes BELOW the Neckline support, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Neckline depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Traders / investors should be more cautious if the price keeps hovering around the Neckline without making a decisive break. When this happens, the reversal might never happen and the uptrend is likely to resume.

Volume:
Volume should be diminishing as the pattern is forming.
Volume is the highest during the formation of the Left Shoulder, and then gets lighter as the pattern develops the Head, and should be the lightest during the formation of Right Shoulder, showing an indication that the buying pressures are getting weaker.
Ideally, during & after the breakout of the Neckline support, the volume should significantly increase again.
When during the decline from peak of the Right Shoulder, the price experiences an accelerated drop, perhaps with a gap down or two, accompanied by an expansion in volume, this might give a good sign, as the price decline tends to drop further, and hence it may provide higher chances that the pattern is a bearish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The vertical distance between the top / peak of the Head (which serves as the resistance) and the Neckline (which serves as the key support).
2) To compute the potential price target: Subtract the result from the point where the price finally breaks Neckline.

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Example:
Suppose a Head & Shoulders Top pattern is forming with the Neckline is sloping downward.
The peak of the Head is at $80 and the Neckline vertically under it is at $60.
The height of the pattern is therefore 20 (80 - 60 = 20).
Suppose the Neckline was finally broken at $50.
Hence, the price target would be $30 (50 - 20 = 30).

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to the Neckline for an immediate test of this new resistance level before continuing their moves in the direction of the breakout. (Remember that the support now has turned into new resistance level). It is also normally only a minor & short-lived bounce.
If this price return move happens, it could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.
However, when the breakout occurs with a heavy volume, the chance of the price to return to the breakout level before continuing its downward movement will be smaller.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Important: Rare Opportunity Offered by Market Club

2010-04-07T10:00:00.002+08:00

If you often watch many of trading videos here, you should have known about Adam Hewison from Market Club and the powerful tools he uses. Now, the Market Club is opening up a rare opportunity.... a 2 week free trial where you can have access to try all the powerful tools at no costs at all.

There are 4 powerful tools available to Market Club members that you, as a free trial member, will have access to: Smart Scan, Trade School, Chart Analysis, and Data Central. They all will be opened up just for you.
On top of that, you can get unlimited support via emails and phones, and also from Adam Hewison himself.

However, you must be quick to grab this rare opportunity, as it is only available until 9 April 2010 (inclusive).
So, don’t miss this chance to give it a try! Register yourself here now.

HAPPY EASTER 2010!

2010-04-04T21:57:00.005+08:00

Wishing you a Blessed and Happy Easter 2010!

Source of the picture: http://www.flickr.com/photos/52334279@N00/2327100884/

Hope you enjoy and be blessed by the song below here....
GOD bless!
http://www.youtube.com/watch?v=qrPAZbD6fG0&feature=related

HEAD AND SHOULDERS TOP PATTERN – Part 1: Formation

2010-03-27T10:57:00.006+08:00

Head and Shoulders Top is a bearish reversal pattern that normally forms after an extended uptrend, which marks a shift in trend from bullish to bearish. This pattern is very popular because it is regarded as one of the most reliable of all patterns.

The Formation of Head & Shoulders Top Pattern

Head and Shoulders Top Pattern contains three consecutive, sharp peaks / tops, whereby the middle peak is the highest (Head) and the other two peaks (left & right peaks) are lower & roughly equal in size (Left & Right Shoulders).

This pattern forms when the price is in an existing uptrend. The price increases and hits a high then declines (forming the Left Shoulder). Afterwards, the price increases to an even higher high and then declines again (forming the Head). The Right Shoulder is formed when the price rises again but it does not hit the high of the Head. Instead, the price falls back after it has reached about the same price level as the Left Shoulder.
Although the Left & Right Shoulders do not necessarily need to be exactly the same, but it should appear roughly equal to one another.

The important part of this pattern is the Neckline. The Neckline is formed by drawing a line that connects two low points: (1) the low point in between the Left Shoulder & Head, and (2) the low point in between the Head & Right Shoulder.
This Neckline can be horizontal, sloping upwards or downwards.

The pattern is only completed and confirmed when the price decreases and closes below the Neckline, which serves as the key support level in this pattern.

Although Head & Shoulders Top is viewed as a common pattern and quite easy to identify, it’s actually not the case. Therefore, one should pay close attention & take proper steps to analyze the characteristics of Head & Shoulders Top in order to minimize / avoid making mistakes in spotting the pattern.
The characteristics of the pattern will be discussed in more detail in the next post.

Continue to Part 2: Important Characteristics of Head & Shoulders Top pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Related Topics:
* 10 Important Trading Lessons
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Trading Educational Video: “Day Trading Made Simple”

2010-03-13T10:27:00.001+08:00

If you’re keen to learn some knowledge about Day Trading, here is the chance to learn from a renowned trading expert William Greenspan for FREE.

Watch this video, and grab this chance while it’s still free.

A Technical Video Analysis of the Equity Market

2010-03-05T18:28:00.000+08:00

Although all the indices are undergoing some correction recently, the major trend for all the indices still remains positive. However, the trend may potentially reverse to negative in these markets should the key reversal price levels are broken.

This new short video will show you an analysis of where the key reversal area is in the S&P 500, the NASDAQ, and the Dow, if in fact the markets are ever going to reverse to the downside.

Conditional / Contingent Order – Part 2: Examples

2010-02-21T23:00:00.003+08:00

Go back to Part 1: How It Works.

Examples of Conditional / Contingent Orders:

Example 1:
Stock XYZ has been trading in a range between $30.00 and $35.00. You want to place a buy order to buy the shares of XYZ when the stock has broken out the range and show upward price movement. You can place a contingent order and set a condition that when the price is trading at $35.20 or above (Trigger Price >= $35.20), place an order to buy XYZ at $35.30 (i.e. Limit Order with Limit Price $35.30).
Suppose when the market opens the next day, XYZ opens at $35.25, the order will be triggered and sent to the market as a Limit order. The order should be executed at a price around $35.25. Basically, the order will only be filled with the price $35.30 or lower.
However, suppose stock XYZ opens at $40.00, the order will be triggered, but it won’t be executed as the price is higher than the Limit Price. Hence, this can prevent you from buying more than the price that you’re willing to pay.

Example 2:
Adding to Example 1, suppose that in order to ensure that there is also sufficient momentum leading to the price breakout of the trading range, you also want to specify a minimum volume target of 300,000 units traded.
In this case, if the price increase to $35.20 or above, but only 200,000 units are traded that day, then your order will not be triggered.
Only when both the price is $35.20 or above AND the volume traded on that day (i.e. all units traded on the day the price is traded at $35.20 or above, including units traded at both above and below $35.20) is 300,000 units or more, the Limit order to buy stock XYZ at the price $35.30 or below will then be triggered and submitted to the market.

Example 3:
You own Call option contracts of stock ABC and would like to sell the options if a certain market index falls below 10,000. You can place a contingent order and specify a condition that if the market index drops to below 10,000, your order to sell will be triggered and sent to the market.
In this case, you can choose to have Market Order, Limit Order, Stop Order, or Stop Limit Order to be sent to the market when the condition is met.
Remember that since the security you will be selling is options, when you place Limit Order, Stop Order, or Stop Limit Order, the Limit Price or Stop price you specify must be the options premium, not the stock price.

Example 4:
You’ve observed that normally when stock price of ABC drops, stock XYZ would also drop shortly after. Currently, stock ABC is trading in the range of $15 to $18. You expect that the stock ABC will fall and break down the trading range. When that happens, you wish to buy Put options of stock XYZ.
You can place a contingent order and set a condition that if the stock price of ABC falls to or below $14.80, your order to buy Put options of XYZ will be triggered.
Likewise, you can choose to have Market Order, Limit Order, or even Buy Market-If-Touched (Buy MIT) or Buy Limit-If-Touched (Buy LIT) Order (if available) to be sent to the market when the condition is met.

Example 5:
You have short sell stock PQR at $20.00 and wish to buy it back to take profit when the price has fallen to $18.00 (your profit target). In addition to the price condition, you also want to set a minimum traded volume before the order can be triggered.
For this purpose, you can place a contingent order and set a condition that if the stock price of PQR has fallen to 18.00 or below and at least 100,000 units of PQR are traded, your order to buy (back) the stock will be triggered. You can choose to have Market Order, Limit Order, Stop Order, or Stop Limit Order to be sent to the market when the condition is met.
In this case, if the price falls to $18.00 or below but only 90,000 units are traded that day, then your order will not be triggered.
Only when both the price is $18.00 or below AND the volume traded on that day (i.e. all units traded on the day the price is traded at $18.00 or below, including units traded at both above and below $18.00) is at least 100,000 units, the order will be triggered and submitted to the market.

For the list of other types of order, go to: Types of Orders in Trading.

10 Important Trading Lessons

2010-01-30T23:57:00.000+08:00

I got to know that there is a series of free trading lessons, which consists of 10 topics that traders, both beginners and experienced traders should find them very useful.
While for more experienced traders, they could serve as a refresher, I think these trading lessons are particularly even more important for beginners.

The 10 Free Trading Lessons will cover the following topics:

(1) The importance of psychology in price movement.

(2) How to spot mega trends.

(3) Understanding of technical price objectives.

(4) How to picture price objectives.

(5) How to trade with moving averages.

(6) How to use point and figure trading techniques.

(7) How to use the RSI indicator.

(8) How to correctly use stochastics in your trading.

(9) How to use the ADX indicator to capture trends.

(10) How to capitalize on natural market cycles.

On top of the above, you will learn all about Fibonacci retracements, MACD, Bollinger Bands, and much more.

These 10 free trading lessons will be sent via email.
In order to get this, just fill out the form here. Then you should be able to get it started very soon.
Hope this info can be useful to you. :)

Conditional / Contingent Order – Part 1: How It Works

2010-01-25T23:11:00.003+08:00

Conditional / Contingent Order is an order with sets of criteria attached (specified by the trader / investor placing the order), which will automatically be submitted to the market if the predetermined sets of criteria are met.

How Conditional / Contingent Order Works
Conditional / Contingent Order can be specified as a Market Order or Limit Order.
You can then set one or more conditions attached to the order, and normally the condition is set in terms of price and/or volume.
You can also specify those conditions for stock, option or combination orders, and use many different triggers (e.g. the price and/or volume of the security being traded and/or another security, including security index).

When you are setting condition in terms of Price & Volume, for the order to be sent to the market, not only the price must pass the preset trigger price, but also the trading volume must also exceed certain target.
Hence, volume condition serves as additional safeguard in order to avoid an order being sent to market without sufficient momentum (e.g. when the price is trading at just slightly outside your trigger price but only in small volume, which does not really indicate a significant market sentiment change).

For Volume condition, the Volume Target (i.e. the units traded limit) will consider all units traded on the day the price condition is met, including units traded at both above and below the condition price / Trigger Price.

Therefore, if you enter a Volume condition, your Conditional Order would only be triggered and submitted once the Price Trigger has been passed and your Volume Target has been reached both on the same day.

Note:
As Conditional / Contingent Order is a more complicated order, not all brokerages can accept this order.
Even the procedure or rules of how to place a Conditional / Contingent Order may vary from one to another brokerage. Some brokerages may also only allow setting conditions for prices, but not volume.
Hence, you need to check with your own brokers specifically how to do it.

Normally, you are allowed to amend or cancel a conditional / contingent order any time before the conditions you have set are met. However, once the conditions have been met and the order has been triggered, it is not possible to cancel the conditional / contingent order.

Continue to Part 2: Examples

For the list of other types of order, go to: Types of Orders in Trading.

New Free Trading Videos with Special Feature: TREND TV

2010-01-23T13:37:00.002+08:00

Are keen to learn about the following:

* Short Term Trading Strategies
* Predictive Trading Indicators
* Specific Market Entry Points
* Tomorrow’s Forecasted Trading Range
* Applications of Candlestick Charting

Trend TV provides you with the following educational videos to share all the above topics:

Video 1: Basic Indicators to Analyze Markets

Video 2: Advanced Trading Applications of Candlestick Trading

Video 3: Day Trading Made Simple

Video 4: Using “Differences” to Spot Shifts in Momentum

Here is what one of the above videos is all about:

Advanced Applications of Candlestick Charting:
Many investors attempt to incorporate candlestick charting into their trading plans. However, few know why this tool has become so popular.

In this complimentary video, “Advanced Applications of Candlestick Charting,” authors, software programmers, and co-founders of the International Pacific Trading Company, Gary Wagner & Brad Matheny will walk you through:

* History of candlestick charting
* How to interpret candlesticks
* How to merge techniques of Eastern & Western technical analysis together
* How to merge candlestick techniques with your current trading plan
* And more…

You’ll watch and listen as Wagner explains the importance of using this strategy.
He says, in part, “Candlestick patterns are a mathematical formula which illustrates the psychological market sentiment. In other words, as a market reverses, or a market is moving in an up-trend, there are certain traits that can be distilled in terms of mathematical formulas that will reveal some very important information.”

This 100 minute complimentary video can be found in Trend TV.

What is special / different about Trend TV?
You don’t have to worry about watching the whole video at once. After you have a password, you can revisit anytime to watch the rest of a video, review a video, or watch other videos on Trend TV.

More importantly, there is no cost to watch all the above videos, as this is part of an educational program that we thought you would find beneficial.

So, wait no more so that you won't miss it!
Watch Trend TV now via this link.

Trading Educational Videos: Option Greeks, Learn Technical Analysis from John Murphy, and Market Wizard

2010-01-16T23:02:00.003+08:00

The video to learn some technical tips from Dan Gramza for free is no longer available.
Nevertheless, there are other new free trading educational videos, which are even more interesting. Don’t miss this chance anymore! Summaries on what the videos are all about are below.
To watch all the videos mentioned below, just click the “Sign Up” button in that page and fill up the registration form in order to watch the videos for FREE.

How much do you know about the “Greeks”?
No matter what the investment, an investor needs to know and fully understand the potential risks of the investment prior to committing capital to that investment. In the options market, the Greeks define and quantify the risks of your position before you commit to the investment. Understanding the Greeks is a must for proper risk management. Further, the Greeks can also help you identify and select not only the proper strategy to fit the opportunity you selected, but also which specific options to use to create that specific strategy.

Without a full understanding of the risks of an investment, an investor should never commit hard earned money. If you do not know your Greeks, you have no business being in the options market! So, option traders or those who are keen to learn options, don't miss this video.
Learn more about Greeks from the option expert in this video. Grab it now before it's no longer available for free.

Learn Technical Analysis from Award Winning Author
John Murphy has written 8 highly touted technical analysis books and today you’ll be sitting in on one of his seminars for no expense. His expertise is known the world over, his teaching style is impeccable, and he’s agreed to give access to a limited number of people for one of his most sought after seminars!

John’s seminars are usually reserved for an elite few, so please take advantage of the chance to learn from a man with over 30 years successfully trading using technical analysis, by watching this video.

What makes a Market Wizard?
How much do you think you could learn if you had a chance to sit down with over 15 of the most successful day, value, and long term investors of all time? Do you think you’d finally get that one piece of advice that takes your trading from OK to extraordinary? Today you have the chance to pick the brain of one man who has sat down with experts and got your top questions answered.

The key ingredient with ‘super-traders’ isn’t as complicated as you think, as most of them share the same traits and behavioral patterns, but it’s how they put them to work in the markets that sets them apart.
So, find out what sets ‘super-traders’ apart in this video.

Relationship between OPTION GREEK with DEGREE of MONEYNESS, IMPLIED VOLATILITY and TIME TO EXPIRATION: Summary – Part 2

2010-01-13T15:51:00.002+08:00

Go back to Part 1.

THETA
Theta is an options greeks that measures of the rate of decline of option’s time-value resulting from the passage of time (time decay).
Theta provides an estimate of the dollar amount that an option price would lose due to 1 day decrease in the time remaining to expiration, assuming other factors remain constant.

Theta of ATM, ITM & OTM Option
Theta is typically highest for ATM option, and is progressively declining as an option moves to ITM or OTM.
This makes sense because ATM options have the highest time value component, so they have more time value to lose over time compared to ITM or OTM options.

Effect of Time Remaining to Expiration on Theta
For ATM option, Theta will be higher as an option is approaching the expiration date.
In contrast, for ITM & OTM options, Theta will be lower as an option gets closer to expiration. The above effects are particularly observed in the last few weeks (about 30 days) before the expiration.

Impact of Implied Volatility (IV) on Theta
When Implied Volatility (IV) decreases, Theta will decrease, especially when it is approaching expiration.
On the other hand, when IV increases, Theta would also increase.

VEGA
Vega measures how sensitive an option’s price to the changes in Implied Volatility (IV). Vega estimates how much an option price will change as a result of 1% change in volatility.

A change in IV will have the same effect on both Calls and Puts options:
An increase in IV would increase an option’s price, whereas a decrease in IV will decrease an option’s price.
This is because higher volatility implies greater expected fluctuations in the stock price, which means a greater possibility for an option to move into your favor by the expiration date.

Vega of ATM, ITM & OTM Option
Vega will be the highest for ATM options, and would gradually get lower as options become more ITM and OTM.
That means, when there is a change in volatility, the value of ATM option would change the most. This makes sense because ATM option has the highest time value component, and that the changes in IV will only affect the time value portion of an option’s price.

Comparing between ITM & OTM options, the impact of volatility changes will be greater for OTM options than it is for ITM options.

Effect of Time Remaining to Expiration on Vega
Assuming all other things constant, Vega decreases when as time passes (as the option gets closer to the expiration).
Vega is relatively higher when there is more time remaining to expiration. This is because options with more time remaining to expiration have larger portion of time value, and it is the time value component that will affected by the changes in volatility.

Effect of Implied Volatility on Vega
Vega will be lower when IV decreases, especially for ITM and OTM options.
However, Vega is relatively stable / unchanged for ATM option.

Related Posts:
* Option Greeks
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning / Understanding Candlestick Charts
* Learning Charts Patterns

Market Analysis Video: Is S&P 500 Getting Ready to Skyrocket or Collapse?

2009-12-12T08:27:00.002+08:00

The market has been moving sideways recently, developing a Rectangle pattern.
Is S&P 500 market getting ready to skyrocket or collapse?
What are the key price levels to watch this week?
Find out more detail in this video for the S&P 500 market updates.

Sorry, it’s been some time since I posted an update on the market analysis.
I was quite held up with things lately. However, when I saw this video, I can’t wait to share it with you. Not only is it informative, but also educational for both experienced & beginner traders. Happy watching! :)

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns
* Understanding Implied Volatility (IV)
* Understanding Option Greeks
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Relationship between OPTIONS GREEK with DEGREE of MONEYNESS, IMPLIED VOLATILITY and TIME TO EXPIRATION: Summary – Part 1

2009-11-20T21:50:00.001+08:00

Option Greeks have been one of the main topics that I have previously shared in details in this blog.
I’ve tried to explain each of option greek in a simple way for easy but yet deep understanding. It’s really not easy doing this, but I was very encouraged by many compliments and positive feedback from my readers. I'm happy that many people in fact have benefited from these Option Greeks articles. I'd really like to thank my readers for their continuous support. :)
Here I tried to summarize the main understanding of Options Greeks:

DELTA
Delta is an option greek that measures of the change in the option price due to a change in the underlying stock price.

Delta of ATM, ITM & OTM Options
The delta values for long position will be positive for Calls (0 to 1) & negative for Puts (0 to -1).
At-the-money (ATM) options have deltas around 0.5 (Calls: +0.5, Puts: -0.5).
Out-of-the-money (OTM) options have deltas between 0 to 0.5 (Calls: 0 to +0.5, Puts: 0 to -0.5).
In-the-money (OTM) options have deltas between 0.5 to 1 (Calls: +0.5 to +1, Puts: -0.5 to -1).

Effect of Time To Expiration on Delta:
As the time to expiration is nearing, the delta of ITM options increases (i.e. ITM option’s delta gets closer to 1 for Calls or to -1 for Puts) and the delta of OTM options decreases (i.e. OTM option’s delta gets closer to 0).

Impact of Implied Volatility on Delta:
When Implied Volatility (IV) increases, delta of OTM option will increase, whereas the delta of ITM option will decrease.
However, the delta of ATM option will always remain at around 0.5.

GAMMA
Gamma is an options greek that measures the rate of change of delta due to a one-point change in the price of the underlying stock.
In other words, Gamma estimates how much delta would change if the price of the underlying stock changes by $1.
So, gamma indicates how “stable” its corresponding delta is.
A high gamma means that the delta can change considerably for even a small move in the stock price.
Unlike delta, gamma for long position is always positive for both Calls and Puts. That means delta will increase as the underlying price increases, and delta will decrease as the underlying price decreases.

Gamma of ATM, ITM & OTM Options
Gamma is the largest for ATM options, and gradually decreases as it moves furthers towards ITM and OTM.
This means that the delta of ATM options changes the most when the stock price moves up or down, as compared to ITM & OTM options.

Effect of Time To Expiration on Gamma
As the time to expiration gets nearer, the gamma of ATM options increases (is relatively higher), whereas the gamma of deep ITM and deep OTM options normally decreases (is relatively lower).

Impact of Implied Volatility (IV) on Gamma
When the Implied Volatility decreases, the gamma of ATM options increases, whereas the gamma for deep ITM or OTM options decreases.
When the Implied Volatility is very low, the gamma of ATM options is relatively high, while the gamma for deep ITM / OTM options is relatively low (close to 0).
This is because when the volatility is low, the time value portion of an option is low. However, time value of ATM option is still higher relative to ITM & OTM options, hence the gamma of ATM option is higher as compared to ITM & OTM options.

On the other hand, when IV is high, gamma tends to be stable for ATM option as well as ITM and OTM options. This is because when volatility is high, the time value of deep ITM / OTM options are already quite substantial. As a result, the increase in the time value of deep ITM / OTM options as they go nearer the money will be less dramatic. Therefore, gamma tends to be stable across all strike prices in this case.

Continue to Part 2.

Related Posts:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning / Understanding Candlestick Charts
* Learning Charts Patterns

TRIPLE BOTTOM PATTERN – Part 2: Important Characteristics

2009-11-14T10:40:00.002+08:00

Re-visit Part 1: Triple Bottom Formation

Important Characteristics of Triple Bottom Pattern

Existing Trend:
There should be an established existing DOWNWARD trend prior to the pattern.

Shape of Triple Bottom Pattern:
1) The Three Bottoms:
The bottoms should be sharp and distinct / well separated. The price bottoms do not have to be exactly the same, but it should appear reasonably equivalent to each other.
If the last bottom (3rd bottom) is higher than the middle bottom (2nd bottom), there is a relatively higher chance of stronger price increase. A higher bottom in the last bottom might indicate weaker selling pressures, as the sellers attempt to push the price down to the previous low or make a new low but fail, suggesting that the selling pressures might have started to subside.

2) The Two Peaks:
The highs of the peaks can appear more rounded.

Duration:
Triple Bottoms pattern can be considered a long term pattern.
The duration of the formation of the pattern can take several months, normally range from 3 to 6 months, with an average of about 4 months. Normally, the formation of Triple Bottoms should take longer time and less volatile in price swing than Triple Tops. Hence, bottoms tend to be wider (due to longer duration to develop) and flatter (as a result of less volatile price swing) than tops.
Basically, the longer the time duration the pattern takes to develop, the more likely the pattern could work out as a reversal pattern or the stronger the price might move once the breakout occurs.

Breakout:
Even when the price has risen from the 3rd bottom, the pattern is not completed yet. The chances that the existing downtrend will continue are still higher than the chances of reversal to take place, as it is normal during a downtrend for the price to test a support level a few times, and then bounce up, and then resume the downtrend again.

Triple Bottom pattern is only completed and confirmed when the price increases and closes above the highest highs of the peaks in between the 3 bottoms, which serves as the key resistance level in this pattern. This highest high is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is downtrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing above the Confirmation Point, accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Triple Bottoms pattern.

In addition, as Triple Bottoms is forming, the formation may also resemble few other patterns. Before the 3rd bottom is formed, the pattern may look like Double Bottoms (reversal pattern). The three equal lows may also be seen in Rectangle pattern (neutral pattern) or Descending Triangle pattern (bearish continuation pattern).
Nevertheless, all these patterns have similar principle to follow, which could help differentiate between the above patterns or avoid jumping the gun: Always wait for the decisive breakout to occur before entering into any trade.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches above the Confirmation Point, but then it moves back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes ABOVE the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Volume should be higher during the formation of the 1st bottom and then get lighter as the pattern develops the subsequent two bottoms, showing an indication that the selling pressures are getting weaker.
The volume may sometimes pick up when the price hits each of the bottoms, but overall, volume tends to be diminishing as the pattern is forming.
During & after the breakout of the Confirmation Point, the volume should significantly increase again.
When during the increase from the 3rd bottom, the price experiences an accelerated rise, perhaps with a gap up or two, accompanied by an expansion in volume, this might give a good sign, as the price increase tends to rise further, and hence it may provide higher chances that the pattern is bullish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The distance between the lowest low of bottoms (which serves as the support) and the highest high of the peaks (i.e. the Confirmation Point, which serves as the key resistance).
2) To compute the potential price target: Add the result to the Confirmation Point (i.e. the highest high of the peaks).

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new support level before continuing their moves in the direction of the breakout. (Remember that the resistance now has become a new support level).
This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Market Analysis Video: Has the S&P Index Broken Final Support?

2009-11-04T21:39:00.002+08:00

In the previous video on the S&P 500 last week, it was indicated that this market may have topped out for the year.
As a follow up, this latest video shares some ideas that could potentially come into play for this market, such as potential downside targets and pattern that may evolve in the next several weeks.
Hope you can benefit from this. :)

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns
* Understanding Implied Volatility (IV)
* Understanding Option Greeks
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Market Analysis Video: Has the S&P Index Topped Out for the Year?

2009-10-31T11:38:00.002+08:00

Have we seen a top in the S&P index? This short video shows some analysis that indicates we may potentially be going to see a correction in this index.
Watch this video and see if you will agree with the arguments in regards to this market.

By watching the video, you’ll also learn more about the following:
* Trend line
* Fibonacci Retracement
* MACD Divergences

Although I posted this video a bit late, I’m sure you can still learn something from this due to its rich educational values in technical analysis. Happy watching! =)

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns
* Understanding Implied Volatility (IV)
* Understanding Option Greeks
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Market Analysis Video: Is the NASDAQ Now in Thin Air?

2009-10-22T20:59:00.001+08:00

The major indexes have made some interesting moves lately, but the NASDAQ is currently at an interesting spot, as pointed out in this new video.

The video would give you some examples about Bearish Engulfing candlestick, Fibonacci Retracement and MACD Divergences. See how it can help you sharpen your technical analysis skills.
Happy watching. :)

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

TRIPLE BOTTOM PATTERN – Part 1: Formation

2009-10-16T21:35:00.006+08:00

Triple Bottom Pattern is a bullish reversal pattern that normally forms after an extended downtrend, which marks a shift in trend from bearish to bullish.

The Formation of Triple Bottom Pattern

Triple Bottom Pattern contains three consecutive, distinct & sharp bottoms at about the same price level, with two moderate peaks in between the bottoms, followed by a breakout through a resistance.
This pattern forms when the price is in an existing downtrend. It occurs when the price drops to a support level (forming the 1st bottom), then increases (forming the 1st trough), and then return to the support level (forming the 2nd bottom), then increase again (forming the 2nd trough), and then drop back to the resistance level again (forming the 3rd bottom), before subsequently increase further.

Although the price bottoms do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price increases and closes above the highest high of the two peaks, which serves as the key resistance level in this pattern. This highest high point is called the “Confirmation Point”.

This pattern occurs because the sellers attempt to push the price lower, but are not able to do so as they are facing support, which prevents the continuation of the downtrend. After three failed attempts, the sellers in the market exhausted and gave up, and the buyers begin to be more aggressive to take control of the market and drive the price higher, pushing it up into a new uptrend.

To be continued to Part 2: Important Characteristics of Triple Bottom pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Trading Quotes from “Way of Turtle” by Curtis Faith – Part 2

2009-10-09T22:11:00.003+08:00

Go back to Part 1.

Some more good trading quotes from "Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders" by Curtis Faith.

Don’t spent all your time admiring the fancy tools in the magazine.
First learn how to use the basic ones well. It’s not the size of your tools that counts but how you use them.

Keep it simple. Simple time-tested methods that are well executed will beat fancy complicated method every time.

Trading with poor methods is like learning to juggle while standing in a rowboat during the storm. Sure, it can be done, but it is much easier to juggle when one is standing on a solid ground.

Trading is not a sprint; it is boxing. The market will beat you up, screw with your head, and do anything it can to defeat you. But when the bell sounds at the end of the twelfth round, you must be standing in the ring in order to win.

The market does not care how you feel. It will not prop up your ego or console you when you are down.
Therefore, trading is not for everyone. If you are unwilling to face the truth about the markets and the truth about your own limitations, fears and failures, you will not succeed.

I always say that you could publish my trading rules in the newspaper and no one will follow them.
The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick with those rules even when things are going bad.
(By Richard Dennis, quoted in 'Market Wizard' by Jack D. Schwager)

Trading Tips Video: Is DIVERGENCES Developing in Apple (AAPL)?

2009-10-03T15:33:00.003+08:00

Following up the educational video on understanding Divergences a few days ago, here is another example about Divergences in Apple (NASDAQ_AAPL), one of the biggest tech stocks in the world.

This four-minute video about APPL explains some potential negative divergences that are developing for this stock. The negative divergences do not mean that Apple is going to collapse, as the major positive trend in the stock still looks strong. However, it could indicate that Apple may be at a high point, at least for the time being.

Hope the video can give you more understanding about the use of Divergences in analysing the market. Enjoy! :)

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Trading Tips Video: Understanding DIVERGENCES Using the S&P 500 Market

2009-10-01T22:45:00.002+08:00

Divergences have been widely used by the traders / investors using technical analysis to find the clue of a potential market turning.
Do you understand how Divergences work in the market?

This video has done a very good job in explaining how Divergences (in MACD indicator) work using the recent S&P 500 market analysis. Short and sweet …. straight to the point and clear.
Don’t miss this short video to gain better understanding of Divergences and how to make use of it to help in your trading.

Also, if you’d like to enhance your trading / technical analysis knowledge even more, you may want to learn from these 10 Trading Lessons as well. They are informative and educational. More importantly... it's FREE.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Trading Quotes from “Way of the Turtle” by Curtis Faith – Part 1

2009-09-27T21:55:00.008+08:00

About 25 years ago, trading guru Richard Dennis reportedly said to his long-time friend William Eckhardt, a friend and fellow trader. Dennis believed that successful trading could be taught. This started a bet between them about whether great traders were born or made. To settle this debate, Dennis recruited and trained 21 men and 2 women, and this became a legendary trading experiment.
Dennis trained his Turtles, as he called them, for only two weeks. Then he gave each of them a million dollars of his own money to manage, and turned each one loose on the markets. When his experiment ended five years later, his Turtles reportedly had earned an aggregate profit of $175 million.

Curtis Faith is one of the Turtles. One of his book is Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders.

Found good trading quotes from this book… with deep meaning.
Here they are:

Human emotion is both the source of opportunity in trading and the greatest challenge.
Master it and you will succeed.
Ignore it at your peril.

Trade with an edge, manage risk, be consistent, and keep it simple.
The entire Turtle training, and indeed the basis of all successful trading, can be summed up in these four core principles.

Good trading is not about being right, it’s about trading right.
If you want to be successful, you need to think of the long run and ignore the outcomes of individual trades.

Trading with an edge is what separates the professionals from amateurs.
Ignore this and you will be eaten by those who don’t.

Edges are found in the places between the battleground between buyers and sellers.
Your task as a trader is to find those places and wait to see who wins and who loses.

Mature understanding of and respect of risk is the hallmark of the best traders.
They know if you don’t keep an eye of risk, it will set its eye on you.

Ruin is the risk you should be concerned with the most.
It can come like a thief in the night and steal everything if you’re not watching carefully.

Continue to Part 2.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns

Market Analysis Video: What’s Going to Happen in the S&P 500 Market?

2009-09-22T23:07:00.004+08:00

The S&P 500 has made remarkable recovery from the lows that were seen earlier this year.
However, is the recent upward price move going to continue?
There are two major technical indicators that are colliding at a crucial point and time.
The upward moves might potentially come to an end as the market approaches this strategic level.
Unless you’re aware of these indicators, it could be very expensive.

So, watch this video to find the analysis on this market.
I believe you’ll benefit from this interesting video, and also learn something from it.

In addition, if you want to improve your trading knowledge even more, do learn from these 10 Trading Lessons as well. It’s FREE, informative and educational.

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Trading Video: FIBONACCI RETRACEMENT RULES
* Trading Tips Video: Using TREND LINES in Analyzing the Market
* Trading Tips Video: Fibonacci Retracement, Support/Resistance, Stop Loss, Price Target
* Learning Candlestick Charts
* Learning Charts Patterns

Trailing Stop Limit Order

2009-09-14T22:35:00.003+08:00

Trailing Stop Limit Order is similar to Trailing Stop Order, whereby the Trailing Stop Price will be “trailing” below or above the movement of the security’s market price, depending on whether it is on a long or short position, to maintain the set distance, which is either stipulated as an absolute dollar or as a percentage of the market price.

The main difference is that for Trailing Stop Limit Order, when the Stop Price is passed, the order will be converted into a Limit Order, whereas for Trailing Stop Order, it’ll convert into a Market Order.

Hence, for Trailing Stop Limit Order, when the market price hits or passes the Stop Price, the order would convert into a Limit Order to buy / sell the security at the specified Limit Price or better.

As a result, Trailing Stop Limit Order carries a big risk, as the order may never get filled if the market price is worse than the Limit Price. As a result, the position can continue falling with no more protection for the position. This makes Trailing Stop Limit Order a very insecure stop loss method, particularly for the extremely volatile stocks that often experience a gap up or gap down in prices.
Due to this risk, using Trailing Stop Limit Order to protect a position is not advisable.

Depending on the position on the market you have (long or short), there are 2 types of Trailing Stop Limit Order:
a) Sell Trailing Stop Limit Order (Trailing Stop Limit to Sell)
This is the trailing stop order when you have a long position on a security.
In this case, the Trailing Stop Price is placed at a set distance (e.g. Trailing Amount) below current market price of the security.
In addition, the Trailing Limit Price will also need to be specified as a certain distance (e.g. Limit Offset) from the Stop Price, whereby the Limit Price should be at a least the same or lower than the Stop Price.

The Stop Price will then rise as the market price increases (i.e. The Stop Price will be trailing the increasing market price from below: Stop Price = Increasing Market Price – Trailing Amount).
However, the Stop Price will remain the same (will not go lower) when the market price decreases.
Once the market price hits or passes Stop Price, the order would convert into a Limit Order to sell the security at the Limit Price (Limit Price = Stop Price – Limit Offset) or better (i.e. at Limit Price or higher, because for selling, the higher the price, the better).

b) Buy Trailing Stop Limit Order (Trailing Stop Limit to Buy)
This is the trailing stop order when you have a short position on a security.
In this case, the Trailing Stop Price is placed at a set distance (e.g. Trailing Amount) above current market price of the security.
In addition, the Trailing Limit Price will also need to be specified as a certain distance (e.g. Limit Offset) from the Stop Price, whereby the Limit Price should be at a least the same or higher than the Stop Price.

The Stop Price will then move lower as the market price decreases (i.e. The Stop Price will be trailing the decreasing market price from above: Stop Price = Decreasing Market Price + Trailing Amount).
However, the Stop Price will remain the same (will not go higher) when the market price increases.
Once the market price hits or passes Stop Price, the order would convert into a Limit Order to buy the security at the Limit Price (Limit Price = Stop Price + Limit Offset) or better (i.e. at Limit Price or lower, because for buying, the lower the price, the better)

Note:
When placing Trailing Stop Limit Order for an Option, the order will be triggered based on the market price of the option, NOT the market price of the underlying stock. Therefore, the Stop Price should be set based on the option’s price as well.

Therefore, just remember how the price of Call and Put options are related to the underlying stock price:
For a Call option, the option’s price increases when the underlying stock’s price increases, and decreases when the underlying stock’s price decreases (positive relationship).
On the other hand, for a Put option, the option’s price increases when the underlying stock’s price decreases, and decreases as the underlying stock’s price increases (negative relationship).

Example:
Suppose the stock price ABC is on a downtrend. You expect that the stock price ABC will continue to drop further. To take advantage of this opportunity, you short-sell the stock at $20, and place a Buy Trailing Stop Limit order with Trailing Amount = $0.3 and Limit Offset = $0.2.
In this case, the initial Buy Stop Price will be $20.3 and the initial Limit Price is 20.5.
When the stock price falls to $19, the Buy Stop Price will adjust accordingly to $19.3 and Limit Price to $19.5.
If the stock price continues to drop further to $18, the Buy Stop Price will adjust to $18.3 and Limit Price to $18.5.
Suddenly, the stock price stops to drop and begins to increase. In this case, the Buy Stop Price will remain at $18.3. Once the Stop Price of $18.3 is hit, the order will convert into a Limit Order to buy back the stocks at the price $18.5 or lower.
As with the risk of Stop Limit Order, this order may never get filled if the market price is worse than the Limit Price. Hence, the position can continue falling with no more protection for the position.
In this example, suppose the stock price gaps up to $27 and continue to increase, the order will never get filled. This makes Trailing Stop Limit Order a risky method for protecting a position / taking profit, and hence not advisable.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns

Market Analysis Video: Where is Nasdaq heading to?

2009-09-02T23:57:00.001+08:00

Nasdaq market is showing a negative divergence on the MACD indicator. Is it really a sign that the market may potentially move back downward?
Find out more detailed analysis on the current Nasdaq market in this video.

Learn how to use MACD Divergence to find the clue of a potential market turning, and how to combine the analysis with Fibonacci tool.
Hope you can benefit from this. :)

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Candlestick Charts
* Learning Charts Patterns

TRIPLE TOP PATTERN – Part 2: Important Characteristics

2009-08-28T23:05:00.004+08:00

Go back to Part 1: Triple Top Formation.

Important Characteristics of Triple Top Pattern
Existing Trend:
There should be an established existing UPWARD trend prior to the pattern.

Shape of Triple Top Pattern:
1) The Three Peaks:
The peaks / tops should be sharp and distinct / well separated. The price peaks do not have to be exactly the same, but it should appear reasonably equivalent to each other.
If the last top (3rd peak) is lower than the middle top (2nd peak), there is a relatively higher chance of stronger decline. A lower top in the last peak might indicate weaker buying sentiments, as the buyers attempt to reach the previous high or make a new high but fail, suggesting that the buyers might have been drying up & exhausted.

2) The Two Troughs:
The lows of the troughs can appear more rounded.

Duration:
Triple Tops pattern can be considered a long term pattern.
The duration of the formation of the pattern can take several months, normally range from 3 to 6 months, with an average of about 4 months.
Basically, the longer the time duration the pattern takes to develop, the more likely the pattern could work out as a reversal pattern or the stronger the price might move once the breakout occurs.

Breakout:
Even when the price has declined from the 3rd peak, the pattern is not completed yet. The chances that the existing uptrend will continue are still higher than the chances of reversal to take place, as it is normal during an uptrend for the price to test a resistance level a few times, then retreat, and then resume the uptrend again.

Triple Top pattern is only completed and confirmed when the price declines and closes below the lowest lows of the troughs in between the 3 peaks, which serves as the key support level in this pattern. This lowest low is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is uptrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing below the Confirmation Point, accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Triple Tops pattern.

In addition, as Triple Tops is forming, the formation may also resemble few other patterns. Before the 3rd peak is formed, the pattern may look like Double Tops (reversal pattern). The three equal highs may also be seen in Rectangle pattern (neutral pattern) or Ascending Triangle pattern (bullish continuation pattern).
Nevertheless, all these patterns have similar principle to follow, which could help differentiate between the above patterns or avoid jumping the gun: Always wait for the decisive breakout to occur before entering into any trade.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches below the Confirmation Point, but then it moves back up again & resumes uptrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes BELOW the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Volume should be higher during the formation of the 1st peak and then get lighter as the pattern develops the subsequent two peaks, showing an indication that the buying pressures are getting weaker.
The volume may sometimes pick up when the price hits each of the peaks, but overall, volume tends to be diminishing as the pattern is forming.
During & after the breakout of the Confirmation Point, the volume should significantly increase again.
When during the decline from the 3rd peak, the price experiences an accelerated drop, perhaps with a gap down or two, accompanied by an expansion in volume, this might give a good sign, as the price decline tends to drop further, and hence it may provide higher chances that the pattern is a bearish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The distance between the highest high of peaks (which serves as the resistance) and the lowest low of the troughs (i.e. the Confirmation Point, which serves as the key support).
2) To compute the potential price target: Subtract the result from the Confirmation Point (i.e. the lowest low of the troughs).

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new resistance level before continuing their moves in the direction of the breakout. (Remember that the support now has become a new resistance level).
This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

TRIPLE TOP PATTERN – Part 1: Formation

2009-08-16T22:37:00.005+08:00

Triple Top Pattern is a bearish reversal pattern that normally forms after an extended uptrend, which marks a shift in trend from bullish to bearish.

The Formation of Triple Top Pattern

Triple Top Pattern contains three consecutive, distinct & sharp peaks / tops at about the same price level, with moderate troughs in between the peaks, followed by a breakout through a support.
This pattern forms when the price is in an existing uptrend. It occurs when the price increases to a resistance level (forming the 1st peak), then decline (forming the 1st trough), and then return to the resistance level (forming the 2nd peak), then decline again (forming the 2nd trough), and then return to the resistance level again (forming the 3rd peak), before subsequently decline further.

Although the price peaks do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price declines and closes below the lowest low of the two troughs, which serves as the key support level in this pattern. This lowest point is called the “Confirmation Point”.

This pattern occurs because the buyers attempt to push the price higher, but are not able to do so as they are facing resistance, which prevents the continuation of the uptrend. After three failed attempts, the buyers in the market exhausted and gave up, and the sellers begin to be more aggressive to take control of the market and drive the price lower, sending it down into a new downtrend.

To be continued to Part 2: Important Characteristics of Triple Top pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Trailing Stop Order

2009-08-09T23:10:00.003+08:00

Trailing Stop Order is a Stop Order that continually adjusts the Stop Price as the market price of the security moves (i.e. trailing the security’s market price).
The Trailing Stop Price is placed at a set distance (either as an absolute dollar or as a percentage of the market price) below or above the market price, depending on whether it’s on a long or short position.
The Trailing Stop Price will then adjust as the market price of the security moves, maintaining the set distance.

If the market price hits or passes through the Stop Price, the order would convert into a Market Order, and will be filled at the best available price in the market at that time.
The same advantage & disadvantage of Market Order apply to Trailing Stop Order as well.

The advantage of Trailing Stop Order is that it can allow traders/investors to let the profits run (as long as the price does not fall to the Stop Price), while at the same time, limit the losses without continually having to adjust and place new Stop Loss orders.

Depending on the position on the market you have (long or short), there are 2 types of Trailing Stop Order:
a) Sell Trailing Stop Order (Trailing Stop to Sell)
This is the trailing stop order when you have a long position on a security.
In this case, the Trailing Stop Price is placed at a set distance (either as an absolute dollar or as a percentage of the market price) below current market price of the security.

The Stop Price will then rise as the market price increases (i.e. The Stop Price will be trailing the increasing market price from below: Stop Price = Increasing Market Price – Trailing Amount).
However, the Stop Price will remain the same (will not go lower) when the market price decreases.
Once the market price hits or passes through Stop Price, the order would convert into a Market Order to sell the security at the best available price in the market at that time.

b) Buy Trailing Stop Order (Trailing Stop to Buy)
This is the trailing stop order when you have a short position on a security.
In this case, the Trailing Stop Price is placed at a set distance (either as an absolute dollar or as a percentage of the market price) above current market price of the security.

The Stop Price will then move lower as the market price decreases (i.e. The Stop Price will be trailing the decreasing market price from above: Stop Price = Decreasing Market Price + Trailing Amount).
However, the Stop Price will remain the same (will not go higher) when the market price increases.
Once the market price hits or passes through Stop Price, the order would convert into a Market Order to buy the security at the best available price in the market at that time.

Note:
When placing Trailing Stop Order for an Option, the order will be triggered based on the market price of the option, NOT the market price of the underlying stock. Therefore, the Stop Price should be set based on the option’s price as well.

Therefore, just remember how the price of Call and Put options are related to the underlying stock price:
For a Call option, the option’s price increases when the underlying stock’s price increases, and decreases when the underlying stock’s price decreases (positive relationship).
On the other hand, for a Put option, the option’s price increases when the underlying stock’s price decreases, and decreases as the underlying stock’s price increases (negative relationship).

Example – Trailing Stop as an Absolute Dollar:
Suppose the stock price ABC is on a downtrend. You expect that the stock price ABC will continue to drop further. You bought Put option contracts of that stock at $3/contract, and place a Sell Trailing Stop order, with an absolute Trailing Amount at $0.5. That means the initial Stop Price is set at $2.5.
When the stock price ABC is falling and, as a result, the price of the Put option has increased to $4, the Stop Price will adjust accordingly to $3.5.
If the stock price ABC continues to drop further, and the price of the Put option then rises to $5, the Stop Price will adjust to $4.5.
Suddenly, the stock price ABC stops to drop and begins to increase. Consequently, the Put option’s price will drop. In this case, the Stop Price will remain at $4.5.
Once the Stop Price of $4.5 is hit, the order will convert into a Market Order to sell the Put option contracts at the best available price in the market at that time.

Example – Trailing Stop as a Percentage:
Similar as above, except that you place a Sell Trailing Stop order as Trailing Percentage at 20%.
In this case, the initial Stop Price will be set at $2.4 (= 3 – 20% x 3 = 3 – 0.6).
When the stock price ABC is falling and, as a result, the price of the Put option has increased to $4, the Stop Price will adjust accordingly to $3.2 (=4 – 20% x 4 = 4 – 0.8).
If the stock price ABC continues to drop further, and the price of the Put option then rises to $5, the Stop Price will adjust to $4 (= 5 – 20% x 5 = 5 – 1).
Suddenly, the stock price ABC stops to drop and begins to increase. Consequently, the Put option’s price will drop. In this case, the Stop Price will remain at $4.
Once the Stop Price of $4 is hit, the order will convert into a Market Order to sell the Put option contracts at the best available price in the market at that time.

As you can see here, when setting Trailing Stop as a percentage, the Trailing Amount will get bigger as the Market Price of the security increases.
On the other hand, when setting Trailing Stop as an absolute dollar, the Trailing Amount will remain the same.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns

Trading Educational Video: Technical Tips from Dan Gramza

2009-07-30T23:10:00.002+08:00

Good news for everyone, particularly for those who have missed the chance to learn from the trading experts (for free) through the 4 trading educational videos I shared previously.

There is a new free trading educational video from Dan Gramza.
If you’re interested, you may want to grab this opportunity soon, so as to prevent disappointment from losing the chance to learn something to enhance your trading knowledge.
What is this video about? Here is the introduction of the video...

**************

Hello everyone, this is Dan Gramza and welcome to Gramza Market Studies Technical Tip.

Well today we're going to be talking about selling rallies. Now what does it mean when people say, "sell the rally" when you want to get into a trade? Or they sell a pull back? Or you hear things like, "The Trend Is Your Friend?"

Well we're going to explore this here in just a minute. I want to show you the technique and I want to show you some examples of how these markets behave in those settings.

I want to show you an example, but before I can talk to you too much about this example I need to define a few things for you. First candles... the approach that I use with Japanese candle charts, and that is what you're looking at here, is not the standard approach. So from my perspective, I don't focus on patterns, I focus on behavior. If we see a green candle that represents buying, that means that the closing price is higher than the open. If you see a red box that represents selling it means that the closing price is below that opening price. If you see a white line on top that's called a shadow, I think that represents selling. If you see a White line on the bottom that represents buying. Now with that in mind, the sizes of the bodies and the shadows tell us about the degree of buying or selling.

Now let's talk about this set-up here...

To get the rest of the tips, please visit this link and WATCH me!

Update as at 15 Jan 2010:
The above video is no longer available for free. Sorry if you've missed this opportunity. However, there are even more interesting videos available for FREE.
Find out more here.

Market Analysis Video: How high the S&P market can potentially go?

2009-07-25T10:17:00.010+08:00

The S&P market has been moving very strong. But the question is how high the market can potentially go?
Find out the market analysis and prediction in this video.

Also, learn how to use MACD Divergence to find the clue of a potential market turning.
Hope you can enjoy & learn something from it.

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Candlestick Charts
* Learning Charts Patterns
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value

Paper Trading Experience with tradeMONSTER Online Brokerage (Review)

2009-07-18T09:57:00.009+08:00

Recently, I tried the free online paper trading platform from tradeMonster. Just want to share my experiences with the readers here.

What I like about the trading platform:
* Very easy customization of interface, really user-friendly.
If we want to customize / change the layout of the screen, it can be done just by one click.
This easy customization is offered in each screen.
For example:
In the Option Chain screen, with just one click, we can expand/collapse the Calls/Puts sides of the Option Chain.
When we expand the Calls side (and collapse the Puts side), for instance, we can see all information about Bid/Ask Price, Volume, Open Interest, Implied Volatility (IV), etc. for various strike prices, all can be viewed in one page. We can even choose to view all those info for different expiration months.
In addition, in case we want to customize (add/remove) the column/s (e.g. add High and Low Price, Greeks info, such as Delta, Gamma, Vega, Theta, Rho), we can simply check or uncheck boxes provided. Marvelous!

* Real-time, streaming data throughout the trading platform, such as Quotes, Charts, Option Chains, Time & Sales, etc.
It allows quick monitoring of the fast changing market and also helps to make trading a lot more convenient, e.g. for setting the limit price.

* Browser-based trading platform.
We don’t need to download any software to start the application and, therefore, can trade from anywhere. I like this, because it is particularly convenient when we need to work on a few different computers (e.g. office and home computers), or when we want to change from old to new computer. We don’t need to reset our preferred interface settings all over again when we need to use another computer.

* Easy click trading.
Whenever we want to trade, we can simply click on the symbol (whether stock or option), and then a new window will pop up to allow for a quick trade. We can do this at any page/window we’re in, such as Watch List, Option Chain, Market View, Quotes.
With this quick trade window, we don’t need to type in the symbol when we want to trade, so it’s much easier and faster, especially for trading options (e.g. spreads, strangle, straddle, condor, butterfly, etc.)
I believe that option traders who like to trade more complicated strategies as mentioned above would love this!

* There are brief descriptions/explanations about the technical indicators just below it.
It helps to give some ideas (e.g. what it is for, how it is derived) before applying the study to complement chart analysis.

* Provide comprehensive research and fundamental analysis about a company.

* Provide comprehensive & clear Help menu.
It even has pretty cool introduction videos that show all the capabilities of the interface.
So, it’s very easy to learn and familiarize ourselves with how to do certain things using this interface.

* Provide free Investor Education, including live webinars, articles, and interactive courses.

Areas of Improvement:
* The Technical Analysis studies for chart analysis are currently still rather limited.
For example, there is no Fibonacci tool for chart analysis. Of course, this limitation may be subjective. This may not matter to other people, because they might not need to use this analysis tool as I normally do.

* The use of chart is not as convenient as the other interfaces.
For example, when I’m interested to analyze the particular area of the chart, I cannot zoom in to that particular area to by simply dragging the cursor. Also, I cannot show and monitor several charts for different symbols simultaneously in one screen. However, these can easily be done using Prophet’s JavaChart.

* While there is an advantage of being a browser-based trading platform, there is also disadvantage.
When clicking some tabs / buttons, it takes some time (a few seconds) to load the application. The loading speed will depend on our internet connection. The faster the internet connection is, the faster the loading speed will be. However, once the application is already uploaded, we need not go through the loading process again, as the interface is already “cached”.

Wish Lists:
If I could wish, it would be even much better if the trading platform provide the following:
* Screener for Stock and Chart Patterns
* Options Calculator / Pricer

This is particularly useful for those who like to use technical analysis to help their trading and option traders. As if most their needs can be fulfilled in one integrated application.
Though they are not available yet now, I heard that many improvements for trade analysis tools are under development.

PRICING:
The commission charges for Options are $0.50 per contract, with a minimum commission of $12.50 for single leg orders, and $7.50 per leg for multi-leg orders.
For Stocks, the commission charge is $7.50 per trade (regardless how many shares bought), unless trading in after-hours where there is a 1.5 cent per share added charge.
Here are the tables for some comparison:

For Options – Single Leg Order:

For Options – 2-Leg Option Spread:

For Stocks:

As comparison, for options trades, my broker (Interactive Broker) charges commission $0.70 / contract, with minimum per order is $1.00.
So, for those who usually trade 18 contracts or more per trade, TradeMonster will be cheaper.
For those who trade less than 18 contracts per trade, Interactive Broker would be cheaper.

However, the good thing about TradeMonster is that there is no minimum monthly fee. Hence, in case you’re on holiday and do not trade at all or do not actively trade for that month, you don’t need to pay any fee. Whereas for Interactive Broker, there is a minimum monthly fee of $10, even if you don’t trade at all for the month.

In addition, for Interactive Broker, if you make any cancelation or modification to the order (that has not been executed yet), it will charge you some fees as well. However, no such fees will be charged by TradeMonster.

Closing Note:
Actually, it’s rather difficult to describe how easy and simple the customization of interface is. Like when I was trying to explain about how easy and simple to customize Option Chain, actually words are still not good enough to describe. Of course, it’ll be much better if one can experience it himself. Hence, if you’re interested, you may want to try the free paper trading provided from this broker. One good thing about its paper trading platform is that it allows you to execute trade during non-trading hours. So, you can try it anytime, during the weekend or your own free time.

Opening a paper trading account is very easy. You don’t need to open the real account or fund the account first. You just simply apply by filling up some particulars, then the free paper trading account will be open instantly, no need to wait for approval process, etc.
Happy trying! =)

DOUBLE BOTTOM PATTERN – Part 2: Important Characteristics

2009-07-10T20:57:00.007+08:00

Go back to Part 1: Double Bottom Formation

Important Characteristics of Double Bottom Pattern

Existing Trend:
There should be an established existing DOWNWARD trend. The downtrend should be fairly long and healthy (at least about 3 to 6 months).

Shape of Double Bottom Pattern:
1) The Two Bottoms:
* The bottoms can be either sharp & narrow (like V) or a bit rounded looking & wider. Ideally, the price bottoms should be the same. However, some difference in the price bottoms is still acceptable.
Although the price bottoms do not necessarily need to be exactly the same, but it should appear near the same price level. The price difference between the two bottoms should be less than 3%.
If the price difference between the two bottoms is more that 3%, the pattern may not be Double Bottom.
* If the low of the 2nd bottom does not hit the low of the 1st bottom, it is less worrying.
However, if low of the 2nd bottom is even lower than the low of the 1st bottom, we should be more cautious, as the probability that the downtrend would resume is still higher.

2) The Peak:
The height of the peak between the two bottoms should be around 10% - 20% from the bottom (It could be even more than 20%, but it should not be less than 10%).
In general, the higher the peak between the two bottoms, the better the performance of the pattern.
If the two bottoms are not exactly the same, the higher bottom should be used as the benchmark for the height measurement.

Duration:
Since Double Bottom is an intermediate to long term reversal pattern, the pattern should not be formed in just a few days.
The duration of time period between the two bottoms may vary from a few weeks to many months (generally about 1 to 3 months). Normally, the formation of Double Bottoms should take longer time and less volatile in price swing than Double Tops. Hence, bottoms tend to be wider (due to longer duration to develop) and flatter (as a result of less volatile price swing) than tops.
Basically, the longer the time duration between the two bottoms, the more likely the pattern could work out as a reversal pattern.
Hence, we should be extra cautious if a pattern only has a few days apart between the two bottoms.

Breakout:
Even when the price has increased from the 2nd bottom, the pattern is not completed yet. The chances that the existing downtrend will continue are still higher that the chances of reversal to take place, as it is normal during an downtrend for the price to test a support level a few times before resuming the downtrend again.

Double Bottom pattern is only completed and confirmed when the price increases and closes above the highest point of the peak in between the 2 bottoms, which serves as the key resistance level in this pattern. This highest point is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is downtrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing above the Confirmation Point, with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Double Bottoms pattern.

Nevertheless, sometimes the price may also make a deceptive/invalid breakout whereby it touches above the Confirmation Point, but then it goes back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes above the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Usually, volume is lower during the formation of the right bottom than the left bottom, showing an indication that the selling pressures are getting weaker.
In general, volume tends to be diminishing as the pattern is forming. The volume may pick up when the price hits the 2nd bottom, but it is often only a slightly higher than the average volume during the peak.
When the price is breaking out the Confirmation Point, it should happen with an increase in volume.
Monitoring volume for Double Bottoms is more crucial than for Double Tops, as a breakout from the key resistance (i.e. Confirmation Point) accompanied by an expansion in volume may indicate increased buying pressures and a potential change in sentiment from selling to buying. Hence, it may provide higher chances that the pattern is a reversal pattern.
It is even better when the price is rising from the 2nd bottom, the price experiences an accelerated increase, perhaps with a gap up or two.

Potential Price Target:
1) Compute the height of the peak: The distance between the bottom (support) and the Confirmation Point (resistance).
If the two bottoms are not the same, the higher bottom should be used for this calculation.
2) To compute the potential price target: Add the result to the Confirmation Point.

Hence, the above formula implies that the higher the peak between the two bottoms, the larger the potential of the increase.

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new support level before continuing their moves in the direction of the breakout. (Remember that the resistance now has become a new support level). This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value

Market Analysis Video: Potential Head & Shoulder pattern in the S&P market?

2009-07-03T23:35:00.003+08:00

Are we potentially looking at the Head and Shoulder pattern in the S&P market?
Find out the answer in the comprehensive in this video.
Not only you benefit from the current market analysis & tips, but more importantly, learn how to do the analysis itself.
Hope you can learn something from it.
Enjoy! :)

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Candlestick Charts
* Learning Charts Patterns
* Option Greeks
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

DOUBLE BOTTOM PATTERN – Part 1: Formation

2009-06-27T23:07:00.005+08:00

Double Bottom Pattern is a bullish reversal pattern that normally forms after an extended downtrend, which marks a shift in trend from bearish to bullish.
Sometimes, this pattern is called “W pattern” because it looks like one.

The Formation of Double Bottom Pattern

Double Bottom Pattern contains two consecutive, distinct bottoms at about the same price level, with a moderate peak between the bottoms.
This pattern forms when the price is in an existing downtrend. It occurs when the price increases to a support level (forming the 1st bottom), then increase (forming the peak), and then return to the support level again (forming the 2nd bottom) before subsequently the price increases further.

The bottoms can be either sharp & narrow or a bit rounded looking & wider.
Although the price bottoms do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price increases and closes above the highest point of the peak in between the 2 bottoms, which serves as the key resistance level in this pattern. This highest point is called the “Confirmation Point”.

Double Bottom Deception
Although Double Bottom is viewed as a common pattern and quite easy to identify, it’s actually not the case. Many people have actually incorrectly identified patterns that look like “W” shape as Double Bottom, but in fact it is not a Double Bottom formation.
Actually, this pattern can be quite difficult to identify correctly. Even when a pattern follows the characteristics of a Double Bottom, the failure rate is still high particularly when one never waits for the breakout. However, one waits for the breakout through the Confirmation Point, the failure rate would be considerably lower.

Therefore, one should pay close attention & take proper steps to analyze the characteristics of Double Bottom in order to minimize / avoid deceptive Double Bottom.
Some important characteristics of a Double Bottom that need to be paid more attention are the duration / time taken to develop the formation, the height of the peak, the volume during the formation of the pattern, and the breakout from the Confirmation Point

All these characteristics will be discussed in more detail in the next post.

To be continued to Part 2: Important Characteristics of Double Bottom pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Option Greeks
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Trading Video: Combining Various Technical Analysis Techniques

2009-06-18T22:33:00.003+08:00

In analysing market using Technical Analysis, various techniques are often combined to complement and support one another.
This video of the current S&P 500 market analysis shows an example of that.

Some of the analyses mentioned in the video are as follow:
* 200 Moving Average & 50 Moving Average Crossover
* Doji candlestick
* MACD Indicator
* Trendline
* PSAR (Parabolic Stop and Reverse)
* Double Top reversal pattern
* Fibonacci Retracement

(In case you need more information about the above analysis, you can click the links above to the articles in this blog that discuss further about those topics)

Other than learning the tips how to make use & combine various technical techniques to complement and support certain analysis, from this video you can also get some useful tips for your trading.

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Candlestick Charts
* Learning Charts Patterns

Stop Limit Order

2009-06-13T09:53:00.006+08:00

Stop Limit Order is an order (buy/sell) to close a position that only executes when the current market price of an option/stock hit or passes through a predetermined price (i.e. Stop Price).
Once the Stop Price is passed, the Stop Order becomes a Limit Order, and can only be executed at a specific price (i.e. Limit Price) or better.

As you may have noticed, Stop Limit Order is almost similar to Stop Order. The main difference is that in Stop Limit Order, when the Stop Price is passed, the order will be converted into a Limit Order, whereas for Stop Order, it’ll convert into a Market Order.

Depending on the position on the market you have (long or short), there are 2 types of Stop Limit Order:
a) Sell Stop Limit
This is the stop limit order when you have a long position on a security.
In this case, the Stop Price is placed below current market price of the security, and the Limit Price should be placed at least the same as or lower than the Stop Price.

b) Buy Stop Limit
This is the stop limit order when you have a short position on a security.
In this case, the Stop Price is placed above current market price of the security, and the Limit Price should be placed at least the same as or higher than the Stop Price.

Characteristic & Risk of Stop Limit Order:
Stop Limit Order will remain inactive until the Stop Price is passed. Once the Stop Price is passed, the order will be activated as a Limit Order to buy/sell at the specified Limit Price or better.
Therefore, the advantage of Stop Limit Order is that it provides control over the price at which the order will get filled (i.e. at the Limit Price or better).
However, the disadvantage is that a Stop Limit Order may never get filled if the market price is worse than the Limit Price. As a result, the position can continue falling with no more protection for the position. This makes a Stop Limit Order a very insecure stop loss method, particularly for the extremely volatile stocks that often experience a gap up or gap down in prices.
Due to this risk, using Stop Limit Order to protect a position is not advisable.

Example:
Suppose a Sell Stop Limit order were placed to protect a long position on an option with a Stop Price at $2/contract and Limit Price at $1.5. The current market price is $2.5/contract.
This order would remain inactive, unless the price reaches or drops below $2. When that happens, the order would then turn into a Limit Order.
As long as the order can be filled at $1.5 or higher, the order will be filled.
However, in case the market price gap down at $1 and then continue to fall, the order will not be filled.

The Difference between Stop Limit Order and LIT Order:
Stop Limit Order is actually quite similar to Limit-If-Touched (LIT) order.
The difference between Stop Limit Order and LIT order is basically on the placement of predetermined price that triggers its execution (i.e. “Stop Price” for Stop Limit Order and “Trigger Price” for LIT Order) and Limit Price relative to the current market price.

* For Sell order, the Stop Price & Limit Price for a Sell Stop Limit Order are placed below the current market price, whereas the Trigger Price & Limit Price for a Sell LIT Order are placed above the current market price.

* For Buy order, the Stop Price & Limit Price for a Buy Stop Limit Order are placed above the current market price, whereas the Trigger Price & Limit Price for a Buy LIT Order are placed below the current market price.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Learning Charts Patterns
* Getting Started Trading

Market Analysis Video: Is S&P Losing Momentum on the Upside?

2009-06-08T20:45:00.002+08:00

While the market still seems to be higher, it also appears that it is losing momentum on the upside.
This can be seen in the market’s second attempt to close above the 950 level.
In addition, some of the momentum indicators are also showing negative divergences.
This means that while the S&P 500 is making new highs for the move, the momentum indicators are not making new high, but instead showing lower high.
The appearance of negative divergences could often be the first indication of a potential market correction.
See the video for more detailed analysis.

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Trading Tips Video: Fibonacci Retracement, Support/Resistance, Stop Loss, Price Target
* Learning Candlestick Charts
* Learning Charts Patterns

Market Analysis Video: S&P 17 Week Cycle

2009-05-30T23:48:00.002+08:00

Found an interesting video on S&P 500 analysis.
You can watch and see whether you agree with the analysis.
Personally, I just feel that in June and July we might need to be extra cautious in trading, as the market is already extended and it’s possible that correction may happen in the near future.
Certainly, no one knows whether it’s going to happen. Only time will tell.

Take care... and meanwhile, have a good weekend! :)

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Trading Tips Video: Fibonacci Retracement, Support/Resistance, Stop Loss, Price Target
* Learning Candlestick Charts
* Learning Charts Patterns

How much are you paying per course?

2009-05-27T23:41:00.002+08:00

Even in these tough economic times companies are still trying to exploit people’s desire to expand their trading minds!

Companies are charging hundreds and even thousands for access to 2-3 hours’ worth of mediocre education from their own experts. If anyone has actually paid for the education, they quickly realize that in order to continue and get the “expanded education” they need to continue to spend! It’s all a vicious cycle to separate you from your hard earned pay checks without actually providing you with worthwhile material.

There is only one place where you have access to over 150 experts and 500 hours of seminars, for one price and that’s INO TV.

INO TV gives its 30,000 members access to massive amounts of educational material that has been handpicked to provide you with the most for the least. If you’ve been duped in the past, here is your way to get back at those companies… learn something and stretch your pay check!

Visit the education page of INO TV to learn more.

Full access to INO TV will not cost you thousands, and won’t cost you hundreds. A full year subscription is only 99.95. Yes, access to the world’s top experts, streaming on demand, and new authors being added monthly, will not cost you a month’s salary.

It’s important that you continue to design your trading methods that fit your lifestyle, and with INO TV you can do that with access to hundreds of experts who have done it before and want to show you their strategies.

Learn more about INO TV and see if you’re ready to refresh your knowledge base.

DOUBLE TOP PATTERN – Part 2: Important Characteristics

2009-05-23T09:52:00.002+08:00

Go back to Part 1: Double Top Formation

Important Characteristics of Double Top Pattern

Existing Trend:
There should be an established existing UPWARD trend. The uptrend should be fairly long and healthy (at least about 3 to 6 months). “Healthy” uptrend means the price trend has generally moving upwards with some moderate retracements in between (forming a “stair-step” shape) and should never undergo a retracement in an extended decline.
The longer the price has been in a healthy upward trend, the more likely the pattern to develop into a reversal pattern. If the uptrend is short, the pattern has lower probability to work out, and the upward trend is more likely to continue.

Shape of Double Top Pattern:
1) The Two Peaks:
* The peaks / tops can be either sharp & narrow (like inverted V) or a bit rounded looking & wider. Ideally, the price peaks should be the same. However, some difference in the price peaks is still acceptable.
Although the price peaks do not necessarily need to be exactly the same, but it should appear near the same price level. The price difference between the two peaks should be less than 3%.
* If the high of the 2nd peak does not hit the high of the 1st peak, it is less worrying.
However, if high of the 2nd peak is even higher than the high of the 1st peak, we should be more cautious, as the probability that the uptrend would resume is still higher.

2) The Trough:
The depth of the trough between the two peaks should be around 10% - 20% from the peak (It could be even more than 20%, but it should not be less than 10%).
In general, the deeper the trough between the two peaks, the better the performance of the pattern.
If the two peaks are not exactly the same, the lower peak should be used as the benchmark for the depth measurement.

Duration:
The duration of time period between the two peaks may vary from a few weeks to many months (generally about 1 to 3 months).
Basically, the longer the time duration between the two peaks, the more likely the pattern could work out as a reversal pattern.
However, we should be extra cautious if a pattern only has a few days apart between the two peaks.

Breakout:
Even when the price has declined from the 2nd peak, the pattern is not completed yet. The chances that the existing uptrend will continue are still higher that the chances of reversal to take place, as it is normal during an uptrend for the price to peak at a resistance level a few times, then retreat, and then resume the uptrend again.

Double Top pattern is only completed and confirmed when the price declines and closes below the lowest point of the trough in between the 2 peaks, which serves as the key support level in this pattern. This lowest point is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is uptrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing below the Confirmation Point (preferably with an increase in volume), in order to avoid jumping the gun and/or prevent deceptive Double Tops pattern.

Nevertheless, sometimes the price may also make a deceptive/invalid breakout whereby it touches below the Confirmation Point, but then it moves back up again & resumes uptrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes below the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Usually, volume is lower during the formation of the right peak than the left peak, showing an indication that the demand is drying up.
In general, volume tends to be diminishing as the pattern is forming. The volume may pick up when the price hits the 2nd peak, but it is often only a slightly higher than the average volume during the trough.
During the breakout of the Confirmation Point, the volume should preferably increase again, although not always necessary to be so.
However, when the breakout occurs with high volume, the price decline tends to drop further and it may provide higher chances that the pattern is a reversal pattern.
(It is even better if during the decline from the 2nd peak, the price experiences an accelerated drop, perhaps with a gap down or two).

Potential Price Target:
1) Compute the depth of the trough: The distance between the peak (resistance) and the Confirmation Point (support).
If the two peaks are not the same, the lower peak should be used for this calculation.
2) To compute the potential price target: Subtract the result from the Confirmation Point.

Hence, the above formula implies that the deeper the trough between the two peaks, the larger the potential of the decline.

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new resistance level before continuing their moves in the direction of the breakout. (Remember that the support now has become a new resistance level).
This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Trading Tips Video: Using TREND LINES in Analyzing the Market

2009-05-16T13:32:00.007+08:00

Trend Line Analysis is one important tool in technical analysis. It is normally used for trend identification as well as confirmation.

What is Trendline?
Trend line is a straight line which connects two or more price points. The line is then extended to the future to act as a Support or Resistance line.
In technical analysis, the general rule to establish a trend line is that it takes two price points to draw a trend line. The third point is typically used to confirm the validity.

There are 2 types of Trend Line:

1) UPTREND LINE
An uptrend line is a trend line that has a positive slope (trending upwards).
It is formed by connecting two or more low points. The second low must be higher than the first low.
An Uptrend line will act as a Support line. As long as prices stay above the uptrend line, the uptrend is considered solid and intact. A break below the uptrend line indicates that buying forces are weakening, and a change in trend could be imminent.

2) DOWNTREND LINE
A downtrend line is a trend line that has a negative slope (trending downwards).
It is formed by connecting two or more high points. The second high must be lower than the first high.
A Downtrend lines will act as Resistance line. As long as prices stay below the downtrend line, the downtrend is considered solid and intact. A break above the downtrend line indicates that selling forces are weakening, and a change in trend could be imminent.

How To Use Trend Line Analysis For Trading
Trend line analysis is used in several ways by traders.
One way is when the price returns to an existing trend line, it provides an opportunity to open / add new positions in the direction of the trend.
In Uptrend Line, buy when the price make a pullback to the support trend line.
In Downtrend Line, short when the price make a retracement to the resistance trend line.
This is because in technical analysis, it is believed that the trend line will hold and the trend will continue further. Basically, “Trend is your friend”.

A second way is that when prices break through the existing trend line, it may indicate that the trend might be going to fail. In this case, traders may consider exiting positions in the direction of the trend, or start to find opportunity to trade in the opposite direction of the existing trend.

Markets are made up of several different kinds of trends. There are short, intermediate and long-term trends.
However, basically the longer the trend line, the greater the importance.
It is the recognition of these trends that will largely determine the success or failure of your long-term or short-term investing / trading.

There is a video that show a good example about Trend Line Analysis.
Some more, it’s relevant to the current market situation. Therefore it may provide a trading opportunity for you as well.
Check it out HERE.

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Trading Tips Video: Fibonacci Retracement, Support/Resistance, Stop Loss, Price Target
* Trading Tips Videos: How To Determine MARKET TREND & How To Use FIBONACCI To Measure Market Retracement
* Learning Candlestick Charts
* Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

DOUBLE TOP PATTERN – Part 1: Formation

2009-05-09T10:20:00.010+08:00

Double Tops Pattern is a bearish reversal pattern that normally forms after an extended uptrend, which marks a shift in trend from bullish to bearish.
Sometimes, this pattern is called “M pattern” because it looks like one.

The Formation of Double Top Pattern

Double Top Pattern contains two consecutive, distinct peaks / tops at about the same price level, with a moderate trough between the peaks.
This pattern forms when the price is in an existing uptrend. It occurs when the price increases to a resistance level (forming the 1st peak), then decline (forming the trough), and then return to the resistance level again (forming the 2nd peak) before subsequently decline further.

The peaks / tops can be either sharp & narrow or a bit rounded looking & wider.
Although the price peaks do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price declines and closes below the lowest point of the trough in between the 2 peaks, which serves as the key support level in this pattern. This lowest point is called the “Confirmation Point”.

This pattern occurs because the buyers are trying to push the price higher, but are not able to do so as they are facing resistance, which prevents the continuation of the uptrend. Then they try to make a second attempt to drive the price higher again, but still fail. In the end, the buyers in the market have dried up & exhausted, and the sellers begin to be more aggressive to take control of the market and drive the price lower, sending it down into a new downtrend.

Double Top Deception
Although Double Top is viewed as a common pattern and quite easy to identify, it’s actually not the case. Many people have actually incorrectly identified patterns that look like “M” shape as Double Top, but in fact it is not a Double Top formation.
Actually, this pattern can be quite difficult to identify correctly. Even when a pattern follows the characteristics of a Double Top, the failure rate is still high particularly when one never waits for the breakout. However, one waits for the breakout through the Confirmation Point, the failure rate would be considerably lower.

Therefore, one should pay close attention & take proper steps to analyze the characteristics of Double Top in order to minimize / avoid deceptive Double Top.
Some important characteristics of a Double Top that need to be paid more attention are the duration / time taken to develop the formation, the depth of the trough, the volume during the formation of the pattern, and the breakout from the Confirmation Point

All these characteristics will be discussed in more detail in the next post.

Continue to Part 2: Important Characteristics of Double Top pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Useful Learning Resource:
FREE Trading Educational Videos: APPLYING TECHNICAL ANALYSIS ON TODAY’S TRADING by John Murphy
Note:
This video has been available for free for quite some time already, and hence, like what has happened previously, it may not be offered for free anymore anytime soon. So, if you’re interested to learn from it, don’t delay anymore to watch it.

Update as at 22 May 09:
Effective from 18 May 09, the above video is no longer available for free.
Sorry if you've missed this opportunity. However, I'll update you again when there are new free trading educational videos. Hope you won't miss the chance to learn from trading experts for free anymore next time.

Difference between STOP Order and Market-If-Touched (MIT) Order

2009-05-01T08:39:00.005+08:00

Stop Order is actually quite similar to Market-If-Touched (MIT) order.
The difference between Stop Order and MIT order is basically on the placement of predetermined price that triggers its execution (i.e. “Stop Price” for Stop Order and “Trigger Price” for MIT Order) relative to the current market price of the security.

* For Sell order, the Stop Price for a Sell Stop Order is placed below the current market price of the security, whereas the Trigger Price for a Sell MIT Order is placed above the current market price of the security.
Note:
Sell Stop Order is a normally used for "Sell To Close” order, which is a order to sell to close the long position you previously entered.
Sell MIT Order is a normally used for “Sell To Open” order, which is a order to sell in order to open/enter a short position.

* For Buy order, the Stop Price for a Buy Stop Order is placed above the current market price of the security, whereas the Trigger Price for a Buy MIT Order is placed below the current market price of the security.
Note:
Buy Stop Order is a normally used for “Buy To Close” order, which is a order to buy to close the short position you previously entered.
Buy MIT Order is a normally used for “Buy To Open” order, which is a order to buy in order to open/enter a long position.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* A Chance to Learn from World Class Trading Experts For FREE You Should Not Miss
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Learning Candlestick Charts
* Learning Charts Patterns

Stop Order

2009-04-25T08:09:00.004+08:00

Stop Order is an order (buy/sell) to close a position that only executes when the current market price of an option/stock hit or pass through a predetermined price (i.e. Stop Price).
Once the Stop Price is passed, the Stop Order would convert into a Market Order, and will be filled at the best available price in the market at that time.
Stop Order is also known as Stop Loss Order or Stop Market Order.

Stop Order is commonly used to limit / reduce losses on a position when the price moves sharply against the trader/investor, or to lock in profit from a position to prevent you from “giving your profit back to the market”.

Depending on the position on the market you have (long or short), there are 2 types of Stop Order:
a) Sell Stop Order
This is the stop order (to limit losses or to lock in profit) when you have a long position on a security.
In this case, the Stop Price is placed below current market price of the security.

b) Buy Stop Order
This is the stop order (to limit losses or to lock in profit) when you have a short position on a security.
In this case, the Stop Price is placed above current market price of the security.

Note:
When placing Stop Order for an Option, the order will be triggered based on the market price of the option, NOT the market price of the underlying stock. Therefore, the Stop Price should be set based on the option’s price as well.

Therefore, just remember how the price of Call and Put options are related to the underlying stock price:
For a Call option, the option’s price increases when the underlying stock’s price increases, and decreases when the underlying stock’s price decreases (positive relationship).
On the other hand, for a Put option, the option’s price increases when the underlying stock’s price decreases, and decreases as the underlying stock’s price increases (negative relationship).

Characteristic & Risk of Stop Order:
Stop Order will remain inactive until the Stop Price is passed. Once the Stop Price is passed, the order will be activated as a Market Order.
Therefore, the disadvantage of Stop Order is that while it guarantees execution, the order cannot guarantee that it can be filled at the specified price.
Basically, once the Stop Order has been triggered (i.e. when the price hits or passes through the Stop Price), it turns into a Market Order, which will be filled at the best available price in the market at that time.
This price may be “worse” than the predetermined Stop Price (i.e. lower for Sell Stop, or higher for Buy Stop), particularly during volatile price movement.
Hence, basically the same advantage & disadvantage of Market Order apply to Stop Order as well.

Example:
Suppose a Sell Stop order were placed to protect a long position on a Call option with a Stop Price at $2/contract. The current market price is $2.5/contract. This order would remain inactive, unless the price reaches or drops below $2. When that happens, the order would then be triggered and turn into a Market Order, and the option will be sold at the best available market price.
Hence, in case the market price gap down at $1, the price at which the order will get filled would be around that price, which is much worse than the stipulated Stop Price.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* A Chance to Learn from World Class Trading Experts For FREE You Should Not Miss
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Learning Candlestick Charts
* Learning Charts Patterns

How To Effectively Use Stop Loss To Protect Your Capital And Lock In Profits

2009-04-19T23:39:00.002+08:00

As mentioned in the earlier post, a Trading System should be able to answer the following questions:

a) What stock to enter.
b) When to enter (Entry strategy).
c) How much to enter per position
d) When to exit (Exit strategy).

While many people place too much emphasis on the entry, they don’t really know when to exit. Actually, a trader should focus more on exit strategy than on entry strategy. Exit strategy is much more important than Entry strategy.
There are 2 types of exits a trader must consider to be parts of his trading system:
* When to exit on your losing position (i.e. Where to put your initial stop loss).
* When to exit on your profitable position (i.e. When to take your profit).

Trader’s Blog has previously discussed further and even posted a video about various Stop Loss strategies to protect your capital and lock in profits effectively.
Check it out! Get more insights from the “Comments” below that article too.

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Trading Tips Video: Fibonacci Retracement, Support/Resistance, Stop Loss, Price Target
* Learning Candlestick Charts
* Learning Charts Patterns

Understanding Option's TIME VALUE

2009-04-18T07:10:00.003+08:00

I’ve previously written a number of posts on Option’s Time Value. Understanding the behavior of time value is very important in options trading.
For your convenience & easier future reference, I put the links of all posts on this topic below, and place this on the top left corner Click the following links to read each of the posts:

1) More Understanding about Options Time Value
2) Main Factors that Affect Option’s Time Value

3) Option’s TIME VALUE – Putting It Together:
a) Part 1: Understanding What It Is
b) Part 2: Main Factors – Degree of Options Moneyness
c) Part 3: Main Factors – Implied Volatility & Time to Expiration
d) Part 4: Behavior

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Learning Candlestick Charts
* Learning Charts Patterns
* Getting Started Trading

Trading Video: Double Tops and Pivot Points Explained

2009-04-12T17:17:00.003+08:00

A number of readers asked me if I’m going to write about reversal patterns (such as Double Tops / Bottoms, Triple Tops / Bottoms, Head & Shoulders Tops / Bottoms, etc.), as so far I only have posts on continuation patterns.
The answer is yes, it’s on my plan. While the articles on reversal patterns are still under preparation (coming soon, I promise), I found a cool trading video, which shares about Double Tops pattern.

Double Tops is one of the most frequently seen and common patterns, which can be traded in different time frames.
This video gives an example on Double Tops pattern under 15-min chart for S&P 500 on 6 Apr 09.
Hope you can learn something from this video.

Note:
Got this video from Trader’s Blog. It’s a great blog.
If you like it, you may want to subscribe to their updates, so that you can receive an alert when there’s new post or video.

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Charts Patterns
* Learning Candlestick Charts

Happy Easter 2009

2009-04-11T10:00:00.002+08:00

"He himself bore our sins in His body on the tree, so that we might die to sins and live for righteousness; by His wounds you have been healed."
(1 Peter 2: 24)

HAVE A HAPPY & BLESSED EASTER 2009!
May this Easter reminds us of His love in our life.
GOD bless you!

Option’s TIME VALUE – Putting It Together – Part 4: Behavior

2009-04-06T22:42:00.008+08:00

The Behavior of Time Value
As mentioned in Part 3, the Time Value component of an option price will decline or “erode” as expiration is nearing (i.e. Time Decay).

The rate of decline of option’s time-value resulting from the passage of time (i.e. rate of Time Decay) is known as THETA, which is one of the Options Greeks.

Comparing Theta at a certain point of time between ATM (At-The-Money), ITM (In-The-Money) & OTM (Out-of-The-Money) options, Theta is typically highest for ATM options, and gradually decreases as options move towards ITM and OTM.
This is understandable because ATM options have the highest time value component, so they have more time value to lose over time than an ITM or OTM option.

Comparing Theta over time, there are different behaviors between ATM and ITM / OTM options:
For ATM options, as the Time Value component of an option price decreases when the option is approaching expiration, the rate of time value decrease is accelerating (i.e. Theta is increasing) as it is getting closer to expiration.
This means that the amount of time value disappearing from the option price per day gets bigger with each passing day. For ATM option, time value decreases sharply particularly in the last 30 days before expiration.

On the other hand, for both ITM & OTM options, Time Value actually decreases at a decelerating rate as expiration nears. In other words, Theta decreases as the option is approaching expiration.
This means that the amount of time value disappearing from the option price per day gets smaller with each passing day.

This Time Value behavior can be seen in the following graphs:

1) Time Value of ATM Option:

2) Time Value of OTM Option:

Note: Both pictures courtesy of Sigma Options

Therefore, based on the above, we can summarize as follow:

For ATM options, Theta (i.e. the rate of time value decline as the time passes) is typically the highest (as compared to ITM & OTM options), and will be increasing (i.e. the rate of time value decrease is accelerating) as the option is nearing expiration.

For both ITM & OTM options, Theta is relatively lower (than ATM options), and will be decreasing (i.e. the rate of time value decrease is decelerating) as the option is nearing expiration.

The Impact of Implied Volatility (IV) on THETA
When Implied Volatility (IV) decreases, Theta will be lower, especially when it is approaching expiration.
On the other hand, when IV increases, Theta would be higher.

Why is it so?
As discussed earlier in this post, time value as the price that people are willing to pay for the chance / uncertainty as to whether or not an option will finish ITM.
The more uncertain, the higher the time value will be.

When IV decreases, such uncertainty will be lower, particularly when the option is nearing to expiration. This lower uncertainty will then be reflected in lower time value. Since Theta is the decrease of time value due to the passage of time, Theta will naturally be lower because it has less time value to lose over the remaining time to expiration.

Related Topics:
* FREE Trading Educational Videos You Should NOT Miss
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Trading Video: What If Market Moves Beyond 62% Fibonacci Retracement Level?

2009-03-28T09:35:00.004+08:00

From the previous videos (See “Related Topic” below), we have learnt a few tips of using Fibonacci Retracement in the real examples.

As learnt from the videos, markets tend to make price retracement / pull back at the level of 38%, 50% or 62%.
Generally, market will make retracement to level 38% or 50%, while retracement to a level of 62% tends to be an extreme move. Very seldom market will make beyond 62% retracement.

How about when market has moved beyond 62% retracement?
This video shows a real example in the current S&P 500 market.

Recently, the S&P 500 market is in a rally.
Is the rally in the S&P 500 market for real, or just a rally in a bigger bear market?
Watch the video to find out.

PS:
Did you notice the "Talking Chart" in the video?
Pretty cool, huh? :)

Related Topics:
* Trading Videos: Fibonacci Retracement Rules
* Trading Video: Using Fibonacci Retracement To Determine Stop Loss & Estimated Price Target
* Trading Video: Fibonacci Retracement & Support/Resistance
* FREE Trading Educational Videos You Should Not Miss
* Learning Candlestick Charts
* Learning Charts Patterns

Limit-If-Touched (LIT) Order

2009-03-22T17:51:00.004+08:00

Limit-If-Touched (LIT) is an order to buy / sell a security when the market reaches / touches a predetermined price level (i.e. Trigger Price) that is lower than current price for buy order, or higher than current price for sell order. This order is held in the system until the Trigger Price is touched. Once Trigger Price is touched, the order will be submitted as a Limit Order to buy / sell at the specified Limit Price or better.
The same advantage & disadvantage of Limit Order apply to LIT Order as well.

There are 2 types of LIT Order:
a) Buy Limit-If-Touched (Buy LIT) order is an order to buy a security at Limit Price or better (i.e. at Limit Price or lower for a buy order) if the market price of the security goes down to the Trigger Price, which is lower than current market price of the security.
Once the Trigger Price is touched, the order will turn to a Limit Buy Order, to buy at the predetermined Limit Price or lower.
The Limit Price should be set at least the same as or lower than the Trigger Price.

b) Sell Limit-If-Touched (Sell LIT) order is an order to sell a security at Limit Price or better (i.e. at Limit Price or higher for a sell order) if the market price of the security goes up to the Trigger Price, which is higher than current market price of the security.
Once the Trigger Price is touched, the order will turn to a Limit Sell Order, to sell at the predetermined Limit Price or higher.
The Limit Price should be set at least the same as or higher than the Trigger Price.

Example:
A trader identifies an ascending triangle pattern in Stock ABC. He believes that if the price rises and breaks a certain price benchmark (i.e. the breakout level of the ascending triangle pattern), it will continue to increase further. However, he also expects that the stock will make pullback first to the breakout level before continuing its upward movement.

Suppose that the breakout price is $80. The stock has already broken out that level, and is currently trading at $82. The trader wants to enter into a long position to buy only if the price makes a pullback to the breakout level. However, he also wants to enter at a slightly better price than that, and also does not want to carry a risk of entering at uncertain price.
He then submits a Buy LIT order with a Trigger Price at $80 (lower than current price of $82) and Limit Price at $79.90. His order will remain in the system until the Trigger Price is touched. If the stock does make a pullback and touches $80, the order will then be submitted as a Limit Order to buy the stock at $79.90 or lower. If the market price never goes down to $79.90 or lower, his order will not be executed.

For the list of other types of order, go to: Types of Orders in Trading.

Related Topics:
* A Chance to Learn from World Class Trading Experts For FREE You Should Not Miss
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Learning Candlestick Charts
* Learning Charts Patterns

Trading Video: Fibonacci Retracement & Support/Resistance

2009-03-15T20:40:00.003+08:00

I believe many people have benefited & learnt something from the video I shared few weeks ago where we learnt some trading tips.

That video has given us an example on how to use Fibonacci tools to predict market retracement.
Fibonacci Retracement is indeed a very useful tool in technical analysis, which I personally like and always use when analyzing a stock and preparing a trading plan.

However, when using Fibonacci Retracement to predict market retracement or to estimate price target, we should also consider the previous support / resistance level.
The new video here gives us some real examples about this.
Do watch carefully and learn something from it. Enjoy! :)

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Short Trading Videos: Fibonacci Retracement Rules
* Learning Candlestick Charts
* Learning Charts Patterns

Option’s TIME VALUE – Putting It Together – Part 3: Main Factors – Implied Volatility & Time to Expiration

2009-03-11T11:25:00.004+08:00

Go back to Part 2: Main Factors – 1) Degree of Options Moneyness

2) Implied Volatility (IV)
The higher the IV, the higher the option’s time value.

Why is it so?
Because higher IV reflects a greater expected fluctuation (in either direction) of the underlying stock price (e.g. due to earnings announcement is nearing, pending for FDA approvals, or some other important event / news, which is expected to move the stock price drastically).
Therefore, when IV is higher, the options would be more uncertain as to whether or not the options can finish ITM. This explains the higher time value.

3) Time Remaining to Expiration
The longer the time remaining to expiration, the higher the option’s time value.
Hence, all other things being equal, an option with more days to expiration will have more time value than an option with fewer days to expiration.

Why is it so?
Because the longer the time remaining to expiration, the underlying stock price would have more time to fluctuate, resulting in more uncertainty as to whether or not the options can finish ITM, and therefore the higher the time value.

As the option is approaching expiration, assuming all other things constant, the level of uncertainty will decrease, because the underlying stock price will have lesser time to move. Hence, the time value will decrease as the time to expiration gets shorter.

In general, for both Calls & Puts, as expiration is nearing, the Time Value component of an option price decreases or “erodes”. This is often called “Time Decay”.

Continue to Part 4: Behavior of Time Value

Related Topics:
* FREE Trading Educational Videos You Should NOT Miss
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks