Twelve Must Know Secrets to Gain

the Traders Edge

**Mostofthesesecretscanbeappliedbyeitherstockoroptiontraders.
Secret#1
Bearmarketsordayswithinacorrectionoftenopenhigheratthestartoftheday,butthen
closedownfortheday.Bullmarkets,ontheotherside,canopenthedaylowerbutclosethe
dayup.Holdyourpositionsuntilafterthefirstmorningreversalperiod,soyouarenotshaken
outunnecessarily.
Secret#2
Alwaysexityourtradeonthesameruleyouusedtoenterthetrade.IfyouusedaPPOcrossup
toenteracalltrade,useaPPOcrossdowntoexitthetrade.Ifyouusedanoversoldindicator
suchasStocasticsorWilliams%Rtobuyablockofstocktobeheldshortterm,thenexitthe
tradeoncetheequitymovesoutofanoverboughtcondition.
Thisruleeliminatessecondguessing.Itpreventschangingtherulesofthegameonceyouve
enteredatrade.Itgivesyouafirmexitpointthatisaknownfactoratthetimeyoupurchase
thestockoroption.Ittakesyouremotionsoutoftheequationsoyourenotapttolookat
anotherindicatorandsay,But,maybe,thepullbackisjusttemporary.LookattheADXorRSI,I
stillhavesometimeleftonmyposition.
Congratulateyourselfforfollowingthroughwithyourtradingrules.Preserveyourprofits.Even
iftheequitydoesanaboutfaceandyoumissalittlemoreprofit,stickwiththeruleonfuture
trades.Itwillserveyouwellon10timesoutof12trades.

Secret#3
Howdoyouknowifarallyattemptisreallythestartofanewuptrend?Whatisthe
confirmationsoyoudontgetfakedoutonthefirstorsecondupdayofasuckerrallythatturns
backdown?
Ifoneofthemajorindicespostsasignificantincrease(+1.75%ormore)onhighvolume(higher
thanthedaybefore)onthethirddayoftheattempt,thefourthupdaywillthenbethe
confirmationdayofarallythatstartedonthefirstdayup.Theconfirmationdayofanew
uptrendusuallycomesbetweendayfourandsevenofarallyattempt.Decliningmarketsoften
attempttorallyforafewdays,andtheniftheindicesvolumepicksupbutclosesdownforthe
day,itcanbeasignalthattherallyattemptisfailingandwillresumeitsdowntrend.
Secret#4
Alwayspurchasestockorenteryouroptionpositionstowardstheendoftheday,duringwhat
traderscallprofessionalhour.Duringthelasthourofthetradingday,theequityspriceis
known,ratherthanchasingthestockspriceinthemorningasyoutrynottomissoutonits
anticipatedmovement.
Ifnotduringthelasthour,thenplaceyourorderswellafterthefirsthourofthetradingday,
amateurhour.Thisisnotanactualhour,butanamefortheperiodoftimewhenordersthat
wereplacedbeforethemarketopenedareclearedthroughthebrokers.
Secret#5
Itisadvisabletohaveatleast25institutionalholdersofthestockyouareinterestedinbecause
theyarethebigmoversofthestockthroughtheirpurchases.Institutionalbuyersdotheir
researchandseldombuycheap,lowpriced,lowqualitystocksthathavepoorbacking,sowhy
notfollowintheirtracks.Alistofinstitutionalbuyersforyourstockcanbefoundat
http://www.reuters.com/finance/stocks/financialHighlights?symbol
Secret#6
Whatotherqualitiesshouldyouconsiderforcompaniesyoudliketopurchasestockoroptions
on?
10StepsinEquitySelectionFunneling:
1. LocateafewstockswithloftyRelativeStrengthRatings.InvestorBusinessDaily(IBD)
listsstock,depictingtheirratingsfrom991.99beingthehighest.

2. Earningspershareinthelastquartershouldbeupatleast25%(preferablymore)versus
thesamequarterthepreviousyear.Thesefigurescanbecomparedat
http://earnings.com.

3. Verifythecurrentmarketatmosphere.Rally?Downtrend?Flat?Channel?Donttryto
swimagainsttheflow.

4. SelectleadingSectorandIndustryGroupsidentifyleadingstocksfromwithinthese
groups.(Thisweeklyinformationisprovidedathttp://www.finviz.com/groups.ashx.
Assesseachstockspriceandvolumeactionfromthestocksonyourlistthatfitintoone
ofthesetopsectororindustrygroups.
Themarkettrenddictatesthedirectionof3outofevery4stocks.Sectorandindustry
groupstrengthplaysamajorpartinthestocksperformance.Eachmarketcycleisledby
specificgroups,sowhynotbenefitfromthisaddedmomentum.
5. Aresmall,midorlargecapstocksleadingthemarket?Concentrateyoursearchfor
stockswithinthatclassification.

6. Lookatthestockstechnicalandfundamentalpicture.Checktoseeifthestockis
completinganewbaseorpullbacktothe50SMA.HeadandShouldersorInvertedHead
andShoulderspattern?Cup&Handle?DoubleBottom?BaseonBase?Isitnearingtoa
buypoint?

7. Locatesupportandresistancelevelsandanalysisthedistancetoeach,makingsureyou
haveroomtoreachyourpricetargetgoalsbeforethestockreachestheselevels.

8. Fundamentalsarekey.Surveyrecentquartersearningsandsalesgrowth.Isprofit
growthrampinguporslowingdown?Acceleratingearnings,newcontractsorincreased
salesareaplus.

9. Readthroughthelatestnewsandpressreleasesonthecompanyofinterest.

10. Beawareofthestocksnextearningsdate.Youdontwanttobecaughtunaware.
Earningsdatesandpastresultscanbeeasilycheckedatwww.Earnings.com.
Secret#7
Stockswithapricerangeuptothe$7080pricerangewillusuallycontinuetheirupwardprice
movementuntiltheyreach$100.Andstocksthatreach$100willusuallyclimbuntiltheyreach
$120130pricerange.
Thismaysoundlikeanoversimplificationbutthispricemovementconceptstandsasareliable
predictionoffurtherpriceincreasesoverthelongterm.
Itstandstoreasonthatthestocksgrowingtheircompanysearningsandnetwortharethe
sameoneswhosepricewillreachthe$7080pricerange,and$100afterthat.And,those
reaching52weekhighsarethecherriesonthestockmarketsundae.
Oftenstocksthatreachthehighestlevelsof$130willsplit.Youcanchecktheagendaofthe
nextstockholdersmeetingforpresentation/discussion/voteonthesplit.Ifastockhashada
recentstocksplit,itshouldbeevaluatedonthepresplitpricei.e.astockthatiscurrently
tradingat60aftera21splitshouldbeevaluatedastradingat120.Earnings.comlistsstocks
thataresplittingeachday.Atradercancheckaheadinthemonthiftheyareinterestedin
tradingasplitstrategy.
Also,stocksthathavesplitinthepastwilloftensplitasecondorthirdtimewhenthereachthe
previouspresplitpricelevel.
Secret#8
Tradersnewtooptionsaretaughttopurchaseoptionsoncontractsthatshowopeninterestof
morethan100.Theyarealsotaughttorecognizesupportandresistancelevelsasseenona
stockschart,indicatingpricemovement.
Examiningastocksopeninterestontheoptionchain(thenumberofputandcallsatvarious
strikeprices)isusefulforzeroinginonanothertypeofsupportandresistance.Ifthestrike
priceofgreatestputopeninterestis65andthegreatestcallopeninterestis80,wewilloften
seethestockspricecontainedbetween65and80strikesthroughtheexpirationdayofthose
options.
Whydotheselevelsactaspotentialsupportandresistancepoints?First,traderslikeround
numbersandthesenumberlevelstendtoserveassupportandresistance,asinvestorsview
pullbackstolevelssuchas65asgoodentrypointsforlong(calls)orpotentialcloseoutpoints
forshort(puts)positions.
Inthissamemanner,traderswillselltheirlongpositionsorgoshortfollowingralliesto
resistancelevelssuchas80.Shortbuyerswillconsider80agoodentrypointifthestock
indicatesareversalatthislevelandoverallmarketconditionssupportthismovement.
Pleasenotethatthesestrikesdonotalwaysactaspreciseresistance/supportlevels,butoften
do.Thus,ithelpstobeawareofopeninteresttoknowwhyastockbehavesinawaythatmost
tradersdonotunderstand.
MakeanoteoftheseopeninterestlevelsonyourTradePlannerforms.Bealertonceastock
comesclosetotheselevels.Isittimetoselltopreserveprofits?Isittimetobuy?
Secret#9
Acceptlossesinthesamenonemotionalveinasyouacceptyourwinningtrades.Become
desensitized.Profitsareachievedbysellingstockandoptioncontractsatpricesthatgainin
excessofaveragelosses.Itsafactoftradinglife,youwillexperiencesomelosses.Thegoalis
tolimitthoselossesastheyaremorethanoffsetbymuchlargerprofitsthatyouwillachieveon
yoursuccessfulpositions.Forexample,duringaperiodofmarketdowntrend,youcouldlose50
percentonallyourcallpositions,butprofitbyanaverageof100percentonyourputpositions
foranexcellentoverallgain.
Remembertherewillalwaysbelosingtrades,buttheideaistocutlossesshortandletprofits
runthefullcourse.
Asolidtradingstrategyistoalwaysachieve100%return,especiallyifyouworkwiththe
leverageofoptions.Itmightstandtoreasontoexitalosingtradeifitdevelopsintoa2530%
loss.Thiswillusuallyallowyoutoachievea3to1profitlossratio.Takingsmalllossesis
essentialtoinvestingsuccess.Atradercantakemanysmalllossesandstillmake100%overall
returnwithjustone200300%winningtrade.
Todeterminepercentageoflossorgain,dividegain/lossbytheopeningtradeamount(amount
paidforstockorcontract/s).2contracts@$5.00premium=200x$5.00=$1,000.Closing
transaction$3.50x2(200)contracts=$750,alossof$250.Percentofloss=250dividedby
1,000=25%loss.
Dothemathpriortoenteringatrade.Multiplytheamountpaidforthecontractsby2030%to
determinehowmuchofalossiswithinyourrisktolerance.Onceitreachesthatpoint,youve
takenouttheemotionaldecisions.Capthelossbyselling.$1,000x(2030%)25%average=
$250.The3to1ratioiscalculatedbydividingtotalprofitsbytotallossesandisagoodoverall
yardstickofreward,versusrisk.
Furtherexplanationofriskreward3to1ratio,$1,000investedinanoptionthatachievesa
100%targetprofit(doublingthepremiumprice)willrealizeaprofitof$1,000.Iftwoother
$1,000positionsarecutshort,resultinginlossesof25%or$500($250x2contracts).This$500
lossequatestoanetprofitof$500($1,000profit$500loss),whichisa17%gainonthe
$3,000totalinvestment(3contracts@$1,000).
Secret#10
Selectatradingsystemthatfitsyourtradingstyle.Askthesequestions:Doesthesystemwork
inthecurrentmarket?Doesitrequiremoretimethanyoucandevote?Doesithavealarger
riskthanyouarewillingtotake?Doeseachtraderiskanappropriatepercentageofyour
portfolio?
Secret#11
Basedonthestrategythatyouareimplementingandtheintendedtermofholdingthe
investment,determineyourtargetexitpointandyourprojectedclosedatebeforeyouenter
thetrade.Atargetexitpointisthestockoroptionpricethatresultsinasubstantial,yet
attainableprofit.Thecloseoutdatedetermineswhenthepositionistobeclosedifyourtarget
exitpointisnotachieved.
Inthecaseofoptions,thattargetexitisoften30dayspriortoexpirationtoavoidaccelerating
timedeterioration
Ifyouutilizeanexpirationmonthshorttermstrategy,thetargetexitpointmightbe50%and
thecloseoutdatemightbedaysorhoursbeforethecloseofexpirationFriday.
Secret#12
Thehardestpartabouttradingasystemisfollowingtherules.Emotionsoftengetintheway,
andtugyouawayfromadheringtothedisciplines.Stop,dontdothat!Itsalmostacertainty
thatyoullbewrongbecauseyouremotionswilloverlookthesystemsstatisticsandoverall
performance.
Bonus
Secret#13
Highvolatilityisbasedpurelyonexpectations.Ifimpliedvolatilityonanoptionyouarelooking
totradeisfarhigherthanthehistoricalvolatilityofthestock,particularlyiftherecentstocks
volatilityhasnotbeenhigh,theoptionisoverpriced.Donotpurchasetheoption.Sinceimplied
volatilityisincorporatedinthecalculationsoftheoptionspremium,itwillbeoverpricedand
thespreadwillbeexcessivelyhigh.
Aruleofthumbistoavoidoptionswheretheimpliedvolatilityisgreaterthanoneandonehalf
timesthehistoricalvolatility.Example:historicalvolatilityof24,tradeonoptionswithnomore
than32impliedvolatility.
Itisasadstorytoberightinyourstocksmovementbutnotmakeanymoneybecausethe
optionspremiumwasoverpricedrightfromthegetgo.