How to Trade Options:

Swing Trading

Warren Ray Benjamin

Table of Contents

Introduction
Chapter 1: Swing Trading – The Basics

Chapter 2: Swing Trading Indicators

Chapter 3: A Review of Options
Chapter 4: Options Trading
Chapter 5: Options Trading Strategies
Chapter 6: Top Mistakes Made by New Traders

Chapter 7: Special Tips for Swing Traders

Chapter 8: The Mindset of the Swing Trader

Conclusion
Introduction

Congratulations on beginning your journey to greater wealth and financial

independence!

Most people are very familiar with "normal" stock investing. You buy a
diverse set of stocks – even better into a mutual fund or exchange-traded
fund – and then hold onto them until retirement, when you start to slowly
cash them out for income.

People are also familiar with day trading. When it comes to day trading,
however, most people have a cartoonish view of it, believing that day
trading is some kind of scam or get rich quick scheme where you try to
make tens of thousands of dollars in a few hours. That really isn't true, day
trading, while riskier than long term stock investments, is a disciplined and
scientific approach to making money from stock trades. But it does require
significantly more dedication in time, knowledge and effort than most
people are willing or able to put into their investing activities.

What people don’t know about is the glorious middle between these two
possible ways to approach the stock market, and that’s swing trading. This
offers a type of middle in between day trading and long-term investing,
where you can hold stocks for days or even a few months, in order to take
advantage of some of the longer term growth that comes with good stocks,
but also get some of the edges that day traders have. Swing trading provides
are a more secure way to "play" the markets than day trading, and in fact,
the reality is that swing traders often make far more money than day
traders. You can also do swing trading in many cases without capital
requirements or regulators breathing down your neck the way they might
with day trading.

In this book, we’ll introduce you to swing trading, and we’re going to talk
about swing trading with options. This is another way of investing that the
“average Joe” isn’t familiar with. We’ll explain what options are and how to
use the power of leverage options provide to make more profits and
amazing ROI on your money. If you want a more detailed exposition on
options, please see my first book in this series, How to Trade Options.
Chapter 1: Swing Trading – The Basics

Swing trading sounds suspicious, but as we'll see it's a solid middle-road
type of investing in the stock market that will appeal to many people.
Before we get into the specifics of what swing trading is, let's quickly
discuss its evil twin, day trading. How does that work? Very briefly, day
trading is a strategy that hopes to take advantage of a single day gain or
loss. Some people see it as a "fast money" or "get rich quick" approach to
stock market trading, but it's nothing of the sort. In order to engage in day
trading, you must have an account with a minimum of $25,000 with a
broker. So, if you're looking to make money on the stock market, but are
short on cash, day trading isn't going to be something you can use to get
rich.

Besides having a specific capital requirement, day trading requires active

participation in the stock market that involves getting deeply invested in
following financial news from many sources, trying to stay on top of
rumors and breaking news, and watching every little move of your stocks
throughout the day. You must do your due diligence with day trading. It also
involves having some highly technical skills that most people who invest in
the stock market would rather not bother with. The bottom line is that day
trading is serious, and high-risk business. For our purposes, the key
takeaway is that day trading attempts to leverage stock market gains (or
losses, if you are shorting a stock) that occur within a single trading day. At
the close, you're out of all your positions. This can be an advantage in that
you avoid overnight risks, stocks can often take hits with trading on Asian
and European markets.
We all know what long-term investing is. Basically, people try to set up a
diverse portfolio of stocks (and other securities like bonds, mutual funds,
etc.) in order to build long-term wealth. The definition of long-term might
vary from person to person, it might be five years, ten years, or even three
decades. Most people are probably thinking of building up some wealth
over the course of their adult working years, so we are probably talking
about a 25-30-year time window in most cases. Long-term investors may
not even actively manage a portfolio, they might let a professional take care
of that for them. If they do manage their own portfolio, they are going to
invest using techniques like dollar cost averaging that minimize risks and
take advantage of the average, longer-term behavior of the stock market.
Over time, the trend of the stock market is up – and that is what people are
after so they can build a ‘nest egg'.

Some of us are more impatient, and, like the active involvement in the
markets that day trading can provide. We love pouring over charts and
graphs, studying companies and stock movements. Is there some kind of
middle ground for these kinds of folks, who aren't up for day trading?

It turns out there is – and it's swing trading that we are after. Swing trading
simply involves holding stocks for multiple days. One of the goals of swing
trading is to give your investments some room for growth. With day
trading, you're taking advantage of short-term gaps that increase the value
of a stock. In swing trading, you're taking advantage of multi-day gaps up,
so that you can build more gains from your investments. People think that
day traders are the people who get rich on the stock market – and some do –
but it's often swing traders who will make more money over the course of a
year.

Since you’re holding your investments for a bit longer, swing trading cuts
down some of that risk that day traders have of making bad bets and
incurring streaks of losses. So how long to swing traders hold their stocks?

It can vary quite a bit. Sometimes a swing trader will only hold a stock for a
day or maybe two. But some swing traders hold stocks for 10 days, a
month, 50 days, two months, or even out to 100 days (the definitions vary
among swing traders – most would probably say 2 days up to a few weeks).
You may completely hold onto a position, or you may sell a small part like
15% after 5 days and hold the rest for 30 days. There are more possibilities
with swing trading.

Since you're holding your securities for a longer time period, you're
exposing yourself to some risks that day traders aren't exposed to. For
example, there can be short-term, dramatic events that can significantly
influence stock prices over the course of a month or two. These could
include war, terrorist attack, or even simply remarks from the President or
The Fed. Swing traders are also more exposed to bad company news.
Maybe the CEO gets arrested for corruption, or perhaps the company’s
product results in the deaths of some children. Swing traders, unlike day
traders, hold their investments overnight, and so can be at a disadvantage
when there are bad results in off-hours trading. These kinds of events are
bad for all investors, but swing traders are more likely to take a negative hit
from them than day traders. And long-term investors too – if you’re holding
stocks (and probably funds like the S&P 500) for anywhere from 5-30
years, those sorts of events often amount to background noise. Not so for
the swing trader.

That said, in most cases swing trading provides a solid middle ground in
between day trading and long-term investing that can help you grow wealth
fast. Swing trading is also a bit slower paced than day trading. Many people
view day trading as demanding, and that’s a realistic perception. Swing
trading is an alternative that lets people who like getting into the nitty-gritty
of the markets but don't want the high pressure.

Of course, there are no guarantees in life, but let's start looking at the
strategies employed by swing traders to help them earn profits.
How much capital do you need for swing trading
Unlike day trading, where brokers require you to have a minimum of
$25,000 (and $30,000 is recommended) there aren’t formal requirements
for swing trading. Brokers pay special attention to day traders (and
regulators do as well) but not so much for swing traders. That said, you will
have to evaluate how much money you need to invest in order to reach your
goals. But you can start small to get started if you like and remember that
options trading lets you leverage a lot more power over the markets with
smaller investments, so trading options is one way you can reduce your
initial capital requirements.

However, a general rule of thumb according to market experts is that you

should have around $10,000 in your account if you are a swing trader.
Moreover, you should only risk 1% in a single trade, which for $10,000
would be $100. If you are more of a risk taker, you could risk up to 2%.
You can manage your risk using stop-loss orders, which we will talk about
below. The risk of a security losing value is called downside risk.

When it comes to minimum capital requirements, the following rules apply:

A day trader is someone who makes more than 4 trades a week that
open and closes on the same day.
A day trader must have $25,000 in their account.
There are no minimum requirements for swing trader accounts.
However, if you cross that line of more than 4 trades a week that
open and close on the same day, you’ll be labeled a day trader and be
forced to follow the rules for day traders.
Swing traders have 2x leverage. So, if you invest $10,000, you can
buy $20,000 worth of stock. Use leverage carefully, however. If you
lose on your trades, you can end up owing more than what’s in the
account.
When you're trading, you need to worry about commissions, not just
the loss or gain on the stock. You should risk at least $100 on a trade
to deal with commissions. Otherwise, they will eat up your profits or
magnify your losses.

The way risk works

It’s important to understand how traders evaluate risk. Some readers may
misunderstand, thinking that when we say that you can risk $100 if you
have a $10,000 account, that means you take your $100 and try to find a
share or a few shares to buy. That isn’t how it works.
First, you put in a stop-loss order. This is an order that you place after
buying a stock that puts in an automatic sell order on your behalf if the
stock price drops below a specific level. If we buy 10 shares of XYZ stock
for $100 each, which will cost in total $1,000 (ignoring commissions, for
the sake of simplicity), say we will place a stop-loss order of $90. This
means that if the XYZ stock drops to $90 a share, our shares are
automatically sold and we lost $10 a share, for a total loss of $100. If the
stock is rapidly dropping, maybe it dropped to $85 a share. So, a stop-loss
order is a type of insurance in the stock market, that prevents you from
losing your shirt. It's also helpful for people who can't be in front of the
computer all day long managing their investments – that way you have
some automatic protection built in if things go south while you're not there.
If you didn't place a stop-loss order and for some reason XYZ really tanked,
you could end up losing a huge amount of money.

So, we see that the actual risk that we’re talking about is going to be
determined by looking at the price per share minus the amount we specify
on the stop-loss order. Let’s summarize:

If a share is going for $200, and you place a stop-loss order of $180,
the trade risk is $20.
That means the amount you are willing to risk on a trade of 10 shares
is $20 x 10 = $200. This is the account risk.
If you have a $10,000 trading account, then your risk is 2%, since
0.02 x $10,000 = $200.

How much you risk is up to you, but these types of conservative figures are
given because it’s entirely possible that you’re going to make multiple bad
trades all right in a row. Of course, we’re giving examples that aren’t going
to fit every situation. You can also minimize risk to different levels. In fact,
more active traders put more stringent limits on risk than long-term
investors do. The reason why is the following.

A stop-loss order has a risk of its own. Throughout the day, stock prices
fluctuate a lot, and it has a random pattern over the short term that looks
chaotic. So even if a stock is set to increase in value over the case of a day
or a couple of days, over shorter time periods it may have some downturns
in price. The risk is that one of these random fluctuations could drop the
price at or below the limit you specify on the stop-loss order, and your
shares will be sold. But then the stock climbs right back up. Day traders are
concerned with fluctuations of the stock over the short term, so put tighter
limits. As a swing trader, you might be planning on holding the stock for
some time, but a lot less than a year. There could be longer-term trends that
might trigger a stop-loss even though you're planning on holding the stock.

To see how this works, let’s suppose that you bought some shares of Apple
on 12/18/18, at $166.07 per share. We could put a stop-loss order on that of
5% to minimize our risk. Since 5% of $166.07 is $8.30, our stop-loss order
will go in effect if the price drops below $157.77. That happened on
December 20, when it dropped to $156.83. Our shares would have been
sold. The stock bounced around a little and even dropped to $142 after New
Year’s so we might have felt good about ourselves at that point. However,
by 3/21/19, the stock had climbed back up to $194.09. So, we missed out…
The bottom lines. You should use stop-loss orders. You need to protect
yourself against losses so that you don’t lose your shirt. But think about
them carefully. The shorter time period over which you intend to hold the
stock, the smaller the percentage you should be willing to risk, and vice
versa. So, a day trader might use 1-5% while a long-term investor might use
15%. You will have to use a level that you’re comfortable with. You’ll have
to sit down with each trade you make and calculate how much money you
are willing to lose on the deal and then set your stop loss accordingly.
Sometimes you’re going to be wrong and miss out on a rebound but that’s
life. Now let’s learn some basic concepts that are important in swing
trading.
Trends
A big part of swing trading is recognizing trends in stocks, whether they are
up or down. We will also want to look for points at which the trend will
reverse. This works no matter how you’re trading. If you are looking for
long investments, then you’re looking for the end of a downturn for buying
opportunities, and peaks for selling opportunities. In other words, we are
looking to buy low and sell high. If you are shorting the stock, then you’ll
be looking at the opposite trends.
Swing Traders Use Trends
To make money swing trading, you're going to utilize trends in order to get
into a stock and determine when to exit the stock and book your profits.
You are seeking to take advantage of a single move in the stock or a
"swing" in the stock price. When a stock swings, then that means the
opposing pressure is about to take over. So, you may be looking to exit your
position. Alternatively, you may be looking for a good buying opportunity.
In the next chapter, we will look at indicators of changing trends. The
bottom line is that swing traders usually go with the prevailing trend. If
you’re bullish, you look for upward trends in the stock and book your
profits on the upside. If you’re bearish, then you’re looking to capture gains
on the downside.
Chapter 2: Swing Trading Indicators

Swing trading relies on using several indicators to spot changing trends in a

share price. We use these indicators to determine when it’s a good time to
buy and sell our securities. These will be points at which the stock market is
signaling through buying and selling of large numbers of traders and
institutional investors that demand is overwhelming people selling off or the
desire to get out of a stock is overwhelming new buyers. Depending on
whether you are investing in calls or puts these are times to either get in or
out of an investment.
Support and Resistance
While swing trading isn't as fast paced as day trading, we're going to want
to look for turning points in the market. The goal is to be able to spot price
reversals before they get fully underway. This could be a buying or selling
opportunity depending on the situation and how you're investing.

Support: Support is a lower boundary on a stock – it’s a price level

that the share price doesn’t drop below for a given period of time
(over the long term, anything can happen). In other words, it's a lower
limit to the stock price. If you're spotting support in a stock chart,
then that is a time to buy if you are hoping to go long on the stock
(i.e. hold it for a while until it rises enough that you can book some
profits by selling). Support indicates that the stock is probably going
to go up in price because buyers are starting to enter the stock and
buying up the stock is starting to overcome selling pressure.
Resistance: This is an upper bound to a share price that the stock
doesn’t seem able to rise above. If you’re long on a stock, resistance
 indicates this is probably a good time to sell and book your profits.
This is a time at which people are starting to get out of stock. Put
another way, selling is starting to overcome buying pressure.

Basic supply and demand concepts lie behind support and resistance.
Suppose that a stock’s price has been dropping. As the price drops, unless
there is something major going on (like say, the CEO being arrested or the
company going bankrupt) then as prices fall, demand will start to increase.
Support happens at a critical mass when buyers start to match in number
against sellers, so the price stops dropping. This is a good indicator that the
price will probably start going up. You can find periods of support by
drawing a straight line through the lowest lows over the time period. Rising
demand causes to support and will start to cause rising prices.

Resistance works the same way but in the opposite direction. It’s caused by
declining demand. For whatever reason, the price of a stock has been going
up and now traders are thinking they want to get out. If you’ve bought the
stock at a lower price and you’ve been hoping to make profits, now is
probably a good time to do so.
If the share price goes below the support or above a resistance price level,
then they switch roles. That is, suppose that a stock has been bouncing
around a support level of $45. If $45 is the support level, the share price
hasn’t dropped below that. But suppose it drops to $42. That indicates the
stock will be going lower, so now we consider $45 to be a resistance.

Of course, these are guidelines, they are not absolute rules.

What is a candlestick
Most people are used to seeing line charts of the stock market, but traders
rely on candlesticks. You will see candlesticks on specialized stock charts,
and they are colored based on whether they are bearish or bullish. The thick
mid-section represents the open and closing price. The longer the
candlestick body, the bigger the difference between open and closing prices.
Thin “wicks” or shadows emanating from the candlestick represent the
highs and the lows that occurred between opening and closing. Charts can
be displayed for differing time periods so a candlestick might represent a
day, or five minutes, or one minute. Candlesticks originated from Japanese
rice merchants who used them to keep track of changing rice prices on the
markets.

A bearish candlestick is either red in color, or if the chart is black & white
it’s solid black. A bullish candlestick is green in color. Candlesticks contain
a lot of information and it’s important to understand what they represent to
understand what is happening in the markets. This is a bearish candlestick:

This is a bullish candlestick:

The length of the candlestick indicates the pressure. So, a long bullish
candlestick (green in color charts) indicates strong buying pressure. A long
bearish candlestick (red on color charts) indicates strong selling pressure.
Indecision Candlesticks
Traders need to look for indecision candlesticks. These have narrow or
skinny bodies and long wicks. They are sometimes called "dojis" as they
were known in the Japanese markets. Indecision candlesticks represent the
possibility of a changing trend in the market. Indecision candlesticks are
informative but must be considered together with the trend they are
incorporated in, but they are often found at the top or bottom of a trend.
However, indecision candlesticks don't always represent a coming change,
so you use them in context with other ways to evaluate what is going on.
Here is an example of an indecision candle.
If the top wick is much longer than the bottom wick, this is called a
“shooting star”. A shooting star that is found at the top of an uptrend can be
a bearish signal. If you are in a long position, it can indicate that this is a
good time to sell. If you are shorting or investing in puts, it might be a good
time to get in the market.

If you see a very long wick on the top with little or no wick coming out of
the bottom, and the candlestick is at the bottom of a downward trend, that is
an inverted hammer. This may be a bullish signal. It could indicate that the
trend may be reversing and prices are about to rise.

Another concept you want to think about when looking at candles is

engulfing. What this means is that a candle in a given position has a larger
body than the previous candle, and they are opposite types. Two examples
to pay attention to are seeing several red candles in a row in a downward
trend, with the last red candle engulfed by a green (bullish) candle. This can
possibly represent a coming upturn in the share price so it may represent a
buying opportunity for long positions. Conversely, if you are looking at an
upward trend, and green candles are engulfed by a red (bearish) candle, that
might mean that the stock price will soon turn downward. That could be a
signal you could interpret to mean it's a good time to buy puts or short the
stock. If you are in a long position, that is a good time to sell.
Uptrends
Bullish swing traders look for uptrends. Over the short term, stocks move
up and down a lot, but this short-term up and down movement is random
and takes place within a larger trend that may be straight up or straight
down. In other words, there is a kind of zigzag pattern that is inside some
overall trend. For example, we can see this type of movement in a 3-month
chart of Google stock. The chart is clearly trending up with time but
bounces around a bit on the way up.

We know the stock is in an uptrend when linking together the shorter-term

zigzag patterns they fit together pointing toward a higher stock price, as
seen with Google over the displayed time period. However, countertrends
will occur when a stock is moving in a larger uptrend. A swing trader wants
to look for these countertrends to spot opportunities for investment. What
you want to see is evidence of an uptrend that then runs into resistance. This
can produce a countertrend. So, if the stock is in a long term upward rise,
the countertrend will be a small downturn followed by some sideways
movement. You look for the stock to begin an upward trend again, and a
good time to enter the market is at this point when the stock is resuming its
long march upward. In the chart below, the dotted line represents the overall
upward trend. We see that in the midst of the overall trend, there is a short-
term countertrend during which the stock price drops, where it languishes a
little with support. Then the stock begins to resume its longer term trend
which is upward. This can be a good place to buy, then you can hold the
stock until you see a solid resistance signal and sell to book your profits.
Using One-Cancels-Other Orders
A one-cancel-other order is a great tool for swing traders. This allows you
to lock in sale prices for price rise or a price drop. To understand how this
works, you need to know what a limit order is. Simply put, a limit order is
an instruction to the broker to sell your shares if the price meets the limit or
goes higher. So for this example, the limit order is your profit taking price.
Of course, it's possible you might miss out on further gains in the share
price, this is a risk you take using this strategy, and it's not for everyone.
But the way this type of order works, is you specify a profit-taking price
and a stop loss price, setting bounds on what's acceptable to you in the
trade. If the condition for one of the orders is met, then the other order will
be canceled. These are sometimes known as OCO orders.

A bullish swing trader can use an OCO order to their advantage when a
stock has been going up for several days, and then it's a countertrend,
followed by support. Then wait for the beginning of the upward trend to
resume and place your order. A good place to look for entering your
position is when the stock goes higher than the previous day’s low.

Let's suppose that you buy XYZ stock at $40 a share, and it's been in a
fairly long-term uptrend. You can use the bottom of the previous support to
set a stop loss price, say it was $38. We can take our profit-taking price to
be $45. If the price enters a downturn again, and it drops to $37.75, our
shares are sold since the stop-loss order was triggered, and the price taking
order is canceled. On the other hand, if the price continues the long-term
trend upward and hits $45, then we take our profit and the stop loss order is
canceled. Using this type of order, we are able to get what we want out of
the trade without having to spend all day in front of the computer watching
the stock. Traders who are more actively involved may wish to keep a
closer eye on the stock and look for selling signals.
Bearish Strategy
A similar strategy can be used for bearish traders. In this case, we'd be
looking at a downward trend that lasts for several days. There may be a
countertrend, or the stock may simply hit support with a sideways
movement for a time. Then you look for it to resume the downward trend.
You are looking to enter your position when the stock drops below the
previous day’s low. A bearish trader will look to use a sell-stop-limit order.
So, you will borrow shares from the broker and immediately sell them.
When the price drops to a level where you can take profits, then you buy
them back and return them to the broker. Note the stock is in a downward
trend. The difference between your selling price and the price at which you
bought the shares back is your profit (not counting commissions).

Fading
Most swing traders go with the prevailing trend. However, you can also use
fading, which is looking to take advantage of the countertrend. A bearish
trader who is looking to fade wants to get in at the high of the swing, in the
expectation that the stock is going to drop. You short the stock at the high or
buy puts. A bullish trader will look to get in at the stock low and buy calls
or buy shares waiting for the next upturn.
Bull Flags
A bull flag is another way to take advantage of the momentum of a stock.
As a swing trader, you’ll be looking for bull flag signals on a daily stock
chart, and not in the short term the way a day trader would. A bull flag is
characterized by a short-term major rise in the stock. So, you will see a
nearly vertical increase in the stock price. Prices will rise a certain amount,
and then there will be a pullback, where the price moves sideways for a
while. The rapid rise followed by the pullback gives a flag pattern in the
stock chart. The hope here is that following the "flag" pattern, there will be
a breakout to a higher stock price where you can take your profits. Volume
is a strong indicator with bull flags. You should look for a strong volume
signal that comes with a sharp rise in prices. There should also be some sort
of external signals, such as a major company announcement or something
in the news. Set your stop-loss at just below the sideways pullback price
level. It's also possible to use an OCO order here. You can set your stop loss
and a limit order where you'll take your profits. The profit target per share
should be a 2:1 reward to risk level. So, if you risk $1, then you should set
your limit order such that your profit is $2.
Bear Flag
For the bearish trader, there is the bear flag, which is a similar pattern in
reverse. In this case, there is a strong downward trend in the share price,
followed by a sideways movement or pullback, setting up support. Again,
there should be a large volume and hopefully, there is some external news
that led to the sudden selloff in shares. In this case, you are looking for it to
resume a downward trend. As a swing trader, you're looking at daily charts
for flag signals, you're not going to be working them as a day trader.
Spotting Reversals
We can use candlesticks to look for potential reversals when the trend of the
stock suddenly shifts to move in the opposite direction. A reversal is going
to be different from having the stop drop down, hit support, and possibly go
up afterward. A reversal is going to be an abrupt change. Engulfing
candlesticks can be a signal of a reversal. Look at the body of a candlestick
that is a different color/type than the previous candlestick. So, this could be
the appearance of a bearish or red candlestick after many green or bullish
candlesticks that have come with an upward trend in price. If the bearish
candlestick engulfs the green candlesticks that came before it, this can be
taken as a reversal signal. The strength of a reversal signal is determined by
the size of the reversal candlestick body. If it's larger, that is a stronger
signal and more of an indication that you may want to enter a trade. If we
are looking at a bearish candlestick, then we have an opportunity to short
stock or to buy puts.

On the other hand, when we see a stock going down with several red or
bearish candlesticks in succession, and then there is the sudden appearance
of a green or bullish candlestick, that may be an indication of a reversal that
will lead to rising share prices. The same criteria apply here, we are looking
for a bullish candlestick that engulfs the previous bearish candlestick. This
can be an indication that many buyers are starting to see the stock as
something they want to get into. Therefore, it may be an opportunity to go
long or buy calls.

One candlestick isn’t a trend, so look for several candlesticks that go in a

row to make a trend upward or downward, followed by an engulfing
candlestick of the opposite variety.

Sometimes indecision candlesticks can precede a reversal. So rather than

seeing multiple candlesticks of one type followed by an engulfing
candlestick, you may see the appearance of some indecision candlesticks
prior to the change.
Moving Averages
Moving averages are an important tool to be aware of as a swing trader.
Traders are using them en masse, so a moving average provides a way for
you to "go with the crowd", which can be a good idea since trends in price
changes are nothing more than lots of traders making the same moves.
There are two types of moving averages that you need to think about. The
first type is called the EMA. This means an exponential moving average.
As you can deduct from the word exponential, this is a fast-moving
average. An exponential moving average gives more weight to recent price
changes, and it will reflect these changes rapidly. One downside of this is
that the EMA is also more likely to give wrong information going forward
because it's too sensitive to these recent price changes. There are also SMA
or simple moving averages. These are slower than exponential moving
averages. When there is a price change, it's going to take longer to see it
reflected in the SMA than in the EMA. Both tools are useful, but swing
traders are in their positions longer than day traders, so the EMA is of more
interest to day traders generally than the SMA, while for swing traders the
SMA is more useful. Day traders who are looking for quick gains or shorts
are more interested in the type of information the EMA can provide them
because you're interested in the short-term price movements. A swing trader
isn't interested in the short-term price movements and zigzag behavior. So,
the SMA provides a smoothed-out average that is more useful for the swing
trader. You can look at different moving averages (besides the type) by
looking at the period length. Swing traders want to smooth out the noise in
the stock market and avoid premature signals. The moving averages that
swing traders are interested in are those with higher periods. The more
periods, the longer the time period of price action that will be incorporated
into the moving average. This is also something that will correlate with the
length of your trades, if you are going to hold your position for a shorter
time period, then you'll want fewer periods in your moving average. Swing
traders, in particular, are looking for a compromise between long term
moving averages and short-term moving averages. For that reason, the
standard chosen by most swing traders is the 50-period moving average.
However, this is not the only option of interest to swing traders. You're
going to be interested in other indicators like supports, resistance, and
trends, and different moving averages can help you in that regard. For
trends, use a 20-period moving average. A 100-period moving average will
help with support and resistance. It's also good for doing analysis on a daily
or weekly basis. If you want one year of price action with daily charts, you
can use a 200 or 250 period moving average.

Looking at the 21 period EMA, you are going to find that it fits upward and
downward trends nicely.

Beginners will probably want to stick with one moving average until you
gain some experience working with livestock charts, and a beginning swing
trader should probably look at the 50 periods moving average. However, it's
possible to have one stock chart with many moving averages and this
provides a lot of information so you will want to use it. Faster moving
averages are colored in red on stock charts. Swing traders can also use 10-
period exponential moving averages for trend signals. When you're swing
trading, you want to be trading with the trend unless you're fading. If a
stock is trading above the 10-day EMA, then this is a buy signal for an
upward trend. If the stock is trading below the 10-day EMA, this is a sell
signal. You can use the 20/21 period EMA for this purpose as well. Again,
if the trading is above the 21 periods EMA, this is a buying signal. If it's
trading below the 21 periods EMA, that is a selling signal.
Golden and Death Crosses
For the swing trader, golden and death crosses are important to use for
spotting long term signals. A golden cross occurs when a short term moving
average crosses a long-term moving average (that is the short-term moving
average goes above the long-term moving average). Swing traders will
watch the 200-day moving average and 50-day moving average. The golden
cross will happen when the 50-day moving average crosses and goes above
the 200-day moving average. This is a bullish signal. You want to enter a
long position when the 50-day average goes above your 200 days moving
average.

The opposite type of crossing is called a death cross. In that case, the 50-
day moving average drops below the 200 days moving average. This is a
signal the stock is going to enter a downward trend. So this is a bearish
signal, and the 50-day moving average crossing to move below the 200
days moving average either means you should sell your position if you are
long or if you are bearish then you'll want to short the stock or buy puts.

When looking at golden and death crosses, check trading volume. High
trading volume is a data point that supports what the cross is telling you.
Always confirm a golden cross or death cross with other trading signals.
While they are quite reliable, golden and death crosses often lead to false
signals.

Caution for ranges

A range is when the share price is moving about between a support and a
resistance. If this is happening, then you will want to ignore the moving
averages for the time being. They will not provide you with useful
information in this situation and could mislead you possibly leading to
trading losses.
Bollinger Bands
Bollinger bands use standard deviation calculations to provide an envelope
around stock prices, measuring market volatility and giving indications
where support and resistance may lie. There are three things that you can
glean information about from Bollinger bands:

Volatility (how much the price is fluctuating up and down).

The extent of price movement.
Trend lines that define support and resistance.

There are formulas for Bollinger bands, but I'm confident that most readers
aren't really that interested in the formulas themselves, and only interested
in getting an idea of what Bollinger bands can do to help your trading
strategies. Bollinger bands are calculated relative to a moving average. So,
you will want to use a moving average of relevance to swing trading like a
21 day or 50 days moving average. The Bollinger band is going to give you
information on the spread of prices about that moving average. The
information is calculated by using closing prices over a given time period.

You will see Bollinger bands displayed on stock charts encompassing the
candlesticks. You’ll want to see how wide or narrow they are about the
actual stock prices. If the bands are narrowed, then that means that prices
are less volatile and staying fairly close to one another over a small range.
Wide Bollinger bands indicate more volatility. The closing prices for each
period will be divergent.
Bollinger bands can give use to buy and sell signals by indicating whether a
stock is oversold or overbought. For this information, you'll want to see
how the wicks of the candlesticks relate to the Bollinger bands. An oversold
stock indicates a buying signal, and this is indicated when the wick of a
candlestick touches the Bollinger band below. We look to the upper
Bollinger band for selling signals and again look at the upper wick of the
candlesticks. If the wick touches or crosses the upper Bollinger band, that is
a signal the stock is overbought. In that case, you will want to sell.

Like all technical signals, you will want to take it with a grain of salt until
you find supporting confirmation from other signals.

Candlesticks hitting the Bollinger bands can indicate a reversal (we were
talking about wicks above, now we are talking about candlesticks). A
hammer at the bottom of a Bollinger band after a downturn can be an
indication that a downturn is about to reverse into an upward trend. Looking
at the upward Bollinger band above the moving average, considered an
upward trend, if you see a shooting star touching the band this may be
indicating a reversal and a coming downward trend.
ABCD Strategy
This is a basic strategy that is often used by day traders. Swing traders can
also use ABCD strategies but over the longer time periods, that swing
traders focus on. What is doing is looking for patterns in the movements of
the stock in order to get ideas about longer-term trends. A basic ABCD
pattern begins with an upward trend to point A, followed by a countertrend
to point B. The trader is looking for a breakout signal, which could occur if
the price level goes above the point A after the countertrend. Peaks that
drop off into a countertrend in the midst of an overall upward trend may do
so because large numbers of traders were happy with their profits and so
closed their positions. Of course, it's important not to look at stock charts in
a complete vacuum. So, if there was bad news that hit the markets when
there was a drop off from point A in the chart, then this analysis wouldn't
apply, and you might not expect any upturn in the near future.

An ABCD pattern can be bearish or bullish, depending on where the ending

point of the chart lies. This chart shown here is bearish when you are at the
point D in the chart. Between points B and C, there are plenty of buying
opportunities. For a swing trader, we are looking for this pattern occurring
over the time of more than one day, it could even be a longer-term trend. A
day trader is hoping to enter the position at point C and then exit the
position at point D, on the same day. For a swing trader, this type of pattern
might be over days, weeks or longer.
Let’s suppose that ABC company closes at point A on Monday, which is
$45 a share. At opening the following day, it drops to B at $35 a share, but
by close the second day it’s approaching point C which is $38 a share. A
swing trader may enter their position if hoping for an upward trend if there
are other signals to confirm. The next morning the stock opens and enters a
strong upward trend, reaching point D at $55 a share. The support price
level defined by point B $35 a share could have been taken as the stop loss.
If an OCO approach were used, the trader could have set a limit order for
$50 a share and booked a profit when the price went above it. Since we
aren’t day trading, we would not have to worry if the stock didn’t quite
reach that level right away. A swing trader would be comfortable holding
the security for several days, or even weeks or a month or more waiting to
see what the price did and giving the stock room to grow if it’s a part of a
larger trend for this security.

Bullish ABCD patterns can be seen as well when the stock is showing a
downward trend. This provides alternatives for bearish investors as well,
who may be looking at investing in puts early in the downturn. The bullish
investor will be seeking signals of an upward trend after the stock bottoms
out at point D.
In an ABCD pattern, the lines A-B and C-D are called the legs. When there
is a temporary reversal in the price of a stock against the long-term trend,
we say that this is a retracement. This is also the countertrend discussed
earlier. On the other hand, a correction is a real downturn in the stock price
that is significant and represents the market bringing the stock price back
down to a level that is either more consistent with the underlying
fundamentals or due to news or overall trends in the market. The line B-C is
a retracement or a correction.
Chapter 3: A Review of Options

An option is a type of contract. There are many types of contracts that are
options, not just on the stock market. A typical example that is given to
illustrate the use of options is a couple wants to buy a house in a newly
developed area, but they want to see if other changes are made to the area
such as the promised construction of a nearby school. So, they give the
developer a $10,000 deposit for the option to buy a home in the
development for $250,000 within six months. An arrangement is a contract,
so if another buyer comes and offers the developer $350,000 for the same
house while the contract is still in effect, the developer cannot sell the house
to the second buyer. However, the first couple has the option of exercising
their right to buy the house on or before the contract expires. Let's say the
school they are hoping will be built is approved by the city government and
construction begins. So, they decide to go ahead with the purchase. The
developer must sell them the house for $250,000 and they move in. He has
to sell them the house for $250,000 no matter what the market is doing, so
for example if the construction of the school increased demand for homes in
the area and prices have risen to $300,000, it doesn't matter, the developer
has to sell the house at the pre-arranged price of $250,000. Now on the
other hand, if the school was canceled and the couple decided not to buy the
house, the developer can keep the $10,000 deposit, and then once the
contract expires, he can sell the house to someone else for $350,000. The
developer was obligated to carry out the terms of the contract, while the
couple had the option to exercise their right to buy the house, or not.
Another example of an option is more common in daily life. That is a
coupon. Of course, you don't always pay for coupons, but they give you the
option to take an offer by a store. For example, a furniture store might offer
a dining room set for 25% off over a limited time period. There is an
expiration date and the person with the coupon has the option to exercise
their right to buy the product at the offered price, or not.

Stock options work in much the same way. An option is a contract about
underlying shares of stock. A seller writes the option, which comes with an
expiration date. The option is sold for a price which is called the premium.
Each option contract represents 100 shares of stock, and the premium is
quoted on a per share basis. So, if you hear that the premium is $4, you will
have to pay $4 x 100 shares = $400 for the options contract. The option in
the contract is that you will have the right to buy or sell shares. The shares
of stock that the contract is about are called the underlying. A major part of
an option contract is setting a pre-arranged price for the stock, this is called
the strike price. Most options last for three months, so you are agreeing to a
price for the stock that must be honored over the entire life of the option
contract.

There are two types of options:

Calls: A call is an option to buy stock.

Puts: A put is an option to sell a stock.

A call is an option for a long position. So, you'll buy a call option if you
believe that the market price of the stock will rise above the strike price. In
that case, you'll get a bargain price for the shares. Let's say that you are
bullish on XYZ stock, which is trading at $50 a share. You buy a call with a
strike price of $55. The price of the call is the premium, which we'll say is
$5, so the total cost of the call is $5 x 100 = $500. Your analysis holds true,
and XYZ spikes in price 30 days after you've bought the option contract to
$70 a share after XYZ announces a snazzy new smartphone. The seller of
the call must sell you 100 shares of XYZ at $55 a share, so you're "in the
money" at $70 a share. You buy the shares for $55 and then you can sell
them immediately for $70 a share. Your profit per share is the sales price
minus the strike price minus the premium:

$70 - $55 -$5 = $10 per share

Of course, you'd have to pay a commission to the broker for the trades as
well.

The seller of the call didn't do all that badly. Even though they didn't get the
benefit of being able to sell at $70 a share, they were able to sell the shares
at $55 and make a profit as compared to the $50 a share they were trading
at when you entered the contract. However, the main reason the seller of the
call would go for a deal like this is to get the premium, which is a way to
leverage your stocks to get income. When you write a call contract and its
stock that you currently own, that is called a covered call.

You can write a call on stocks you don’t own. That’s a naked call. However,
if the buyer exercises their right to buy the shares, you’ve got to come up
with them. In the scenario described here, you’d be in serious trouble. Since
you didn’t own the shares, you’d have to buy shares at $70 a share and sell
them to the buyer of the call for $55 a share since that was the agreed upon
strike price. In other words, you’d lose $15 x 100 = $1,500. Your loss
would be partially offset by the $500 premium.

Now let's look at puts. This is an option to sell a stock. ABC is trading at
$50 a share, but you're bearish on the stock. You buy a put for $5 a share,
with a strike price of $40. Before the contract expires, the stock crashes on
bad news to $20. So, you buy 100 shares at $20 a share. The seller of the
put contract has to meet their obligation, so they are forced to buy the
shares from you at the strike price, which was $40 a share. So, on a per
share basis, you made (not including commissions):

$40 - $20 - $5 = $15 per share

To summarize, you pay a premium for the right but not the obligation to
buy stocks when you buy a call. Or you pay a premium for the right but not
the obligation to sell stocks when you buy a put.

People who own shares of stocks sell calls and puts to generate income. As
we described above, a covered call is the safest way to sell options. By
selling covered calls you can generate income from shares of stock you
own.

All options contracts have an expiration date, which is typically the third
Friday of the month. You can look at options tickers to see what the
expiration date is. An option has more value the further it is from the
expiration date, and it loses value the closer the contract gets to the
expiration. The reason is that if the stock price hasn't passed the strike price,
then the less time there is remaining on the contract the less time is
available for the stock to move in order for the option to be exercised. The
value of the option and the time remaining until the expiration date is
captured in the concept of time value.

Options are cheaper than the stocks underlying the options contract. So, this
is a way for traders to leverage stocks because when you buy options
contracts you essentially control 100 shares of stock even if you don't
currently own them. We've discussed how you can use options to profit by
exercising them in this chapter. However, only about 12% of option
contracts are actually exercised. Many simply expire worthlessly. In other
words, if you reach the expiration date for the option, if the share price has
not met the strike price the contract isn't worth anything (and actually strike
price + the premium, otherwise the trade would not be profitable). The
seller keeps the premium no matter what, so walks away from a worthless
contract with the premium in their pocket.

Besides expiring worthless or being exercised, the third option for options
is to trade them. In fact, that is what happens to most options, they are
traded on options markets. In the next chapter, we will discuss trading
options and how you can profit from that.
Chapter 4: Options Trading

Options contracts on stocks can be bought and sold, in other words, they
can be traded. This is where some people get confused (if they weren't
confused already). An option is a contract over underlying stock. The value
of the option is related to the value of the underlying. However, the option
has value in and of itself. People are interested in trading the options
themselves, and this is where you can make good profits without having to
actually exercise the options and buy and sell the underlying stocks
(although you could do that as well if you wanted to). The return on
investment or ROI for options is far higher than it is for stocks. We will
illustrate this with some examples. So, some advantage of options trading
includes:

It's far cheaper to buy options than it would be to purchase the

underlying stock.
When the price of a stock appreciates, the value of an option goes up
as well. If you owned the stock, you would be able to sell it for a
profit. However, as we’ll see, you can make a much higher ROI on
options than you can on stocks.
One difference between stocks and options is that stocks don't have
an expiration date. Options come with an expiration date. As the
option gets closer to the expiration date, it's not worth as much
because time will be running out on the ability to trade the option or
to exercise the rights that come with the option should the stock reach
the strike price. There is also less probability that the stock price will
 move past the strike price and be profitable as time is running out on
the contract.
Options contracts typically last for three months. However, there are
other types of options with shorter expiration dates known as weekly
and minis.

Options can be thought of as a type of insurance. This is one reason why

investors will buy puts. If you own a stock that is $100 a share, you could
buy a put at $95 a share, so that if the stock crashed to say $60 a share, you
would be able to sell your shares for $95 a share, the pre-arranged strike
price.

You don't have to hold an option to the expiration date. The movement of
the stock price may make you want to sell the option before the expiration
date. We will explain this in a bit.

Calls: In the Money and Out of the Money

The relationship between the strike price and the current stock market price
of the underlying stock has a big influence on the price of the option. As the
stock market price changes, the price of the option will change as well.
When we say an option is “in the money” this means that the option could
be exercised, and you would make a profit. For a call, that means that the
strike price is less than the share price of the stock. So, you could exercise
the option of buying the shares at the strike price, and then sell the shares
on the open market for a higher price. Alternatively, if the option was in the
money, you could simply trade the option itself, so sell it.
Let’s say for an example that stock XYZ is trading at $100 a share. Call
options will be available for many different strike prices, but we’ll say that
there are 7 available for our simple example, three strike prices below the
current market price of $100 a share, one at $100 a share, and three at strike
prices that are above $100 a share.

If the option expires, the three contracts with strike prices above the share
price would be worthless. However, as long as there is still time on the
contract, they are still worth money. The reason is that before the contract
expires, the stock could still move in a direction to turn the worthless
contracts from out of the money to in the money.

Let's say that the option with the $100 strike price (which happens to now
match the share price) at 30 days to expiration is $5. Remember, that is the
price per share, and there are 100 shares per option contract. So, the
premium you have to pay to buy that options contract is $5 x 100 = $500.
Options contracts with a strike price that is below $100 will cost more than
$5. Suppose we have:

Strike Price $90. This option is currently trading at $7, so total price
is $7 x 100 = $700.
Strike Price $80. This option is trading at $10, the total price of
$1,000.
Strike Price $60. This option is trading at $20, the total price of
$2,000.

The further below the share price the strike price for an in the money call
option is, the more it’s worth. If you had bought the second option with the
strike price of $80, and at the time the share price was close to the strike
price, then when you bought the option it was probably quite a bit cheaper
since now the stock is trading at $20 over the strike price. Let’s say for the
sake of example that you bought the option a month earlier for $600. So,
you could sell the option now for $1,000, earning a $400 profit on your
$600 investment. All three of the options contracts above are "in the
money" call options because the strike price is currently below the share
price. Now if the share price dropped to $88, then the first option with the
strike price of $90 would be out of the money because the strike price
would be above the share price. As a result, the premium for the option
would drop. Remember – stock prices are currently changing, and the price
of the option is dependent on the price of the underlying stock and moves
with it (that is why this type of contract is sometimes called a derivative, the
price is derived from the underlying asset behind the contract).

For our example, we also have three out of the money call options, that
have strike prices above the share price. They are still worth some money
because the stock could move to overtake them. The further above the share
price the stock price is, however, the less the option is worth. Suppose we
had these three options contracts:

Strike Price $110. This option is currently trading at $3, so total price
is $3 x 100 = $300.
Strike Price $120. This option is trading at $2, total price $200.
Strike Price $140. This option is trading at $0.25, a total price $25.

If the option expires, all three contracts would be worthless, because you
could not exercise the option to buy the shares.
Put contracts are priced in the opposite manner. A put is in the money if the
strike price is above the share price. On the other hand, if the strike price is
below the share price, then the put is out of the money. Again, we will use
the same example with the same share price of $100. For the put contracts,
the three contracts with strike prices above $100 are in the money, and the
higher the share price the more in the money they are (so we are imagining
that when the contracts were written, the share price was above $140).

Strike Price $110. This option is currently trading at $10, so total

price is $10 x 100 = $1,000.
Strike Price $120. This option is trading at $20, the total price of
$2,000.
Strike Price $140. This option is trading at $30, the total price of
$3,000.

The put contracts with strike prices below the share price would be trading
at lower values:

Strike Price $90. This option is currently trading at $4, so total price
is $4 x 100 = $400.
Strike Price $80. This option is trading at $3, total price $300.
Strike Price $60. This option is trading at $1, total price $100.

The numbers and strike prices here are not necessarily realistic but chosen
for illustration purposes so that you can understand how options trading
works.
When the option reaches zero days to expiration, the price of the option is
strictly the difference between the strike price and the share price. For
simplicity, suppose that the share price was $100 with zero days left to
expiration. Let’s write down what our in the money calls were priced at 30
days out:

Strike Price $90. This option is currently trading at $7, so total price
is $7 x 100 = $700.
Strike Price $80. This option is trading at $10, a total price of
$1,000.
Strike Price $60. This option is trading at $20, the total price of
$2,000.

Now, the prices will be the difference between the strike and share price:

Strike Price $90. This option is currently worth $10, so total price is
$10 x 100 = $1,000.
Strike Price $80. This option is worth $20, the total price of $2,000.
Strike Price $60. This option is worth $40, the total price of $4,000.

So at zero days, you could buy the option with the $60 share price for
$4,000, but you’d have to buy the shares for $60 x 100 = $6,000. So, you’re
in for $10,000. Then you could sell them for $100 and break even (well
actually you’d lose because of commissions) or hold onto the shares hoping
they would go up. Bottom line? You want to buy options contracts before
they expire. This is because the time value has run out. Time value is part of
the pricing and now its $0. Time value is also called extrinsic value.
When there’s more time, there’s more money
The price of the options contract is affected by the distance between the
strike price and the share price. It is also affected by the time left on the
options contract. Time value decreases as the expiration date approaches.
Or put another way, the price of an option drops as the time left on the
options contract decreases. The relationship between price and time left on
the contract is exponential, that is the price of the option begins dropping
rapidly as the time left on the contract decreases. For example, we could
have something like the following:

Price of an option 90 days out $1,000

Price of an option 45 days out $500
Price of an option 30 days out $250
Price of an option 10 days out $100

The drop-in price as time passes is called time decay. Again, the numbers
are for illustration only to illustrate the point. You can watch some real
options on the market to see how they actually behave (but remember the
prices are also influenced by the underlying stock price). Time value is
always decaying.
Volatility
This is the last factor that works into pricing when trading options.
Volatility tells you how much and how often the price of the stock swings
up and down. More volatility means more risk to the person who owns the
shares of stock. Option prices are higher for more volatile stocks. Volatility
can change with time.
Options – better than stocks?
Options trading provides a huge ROI as compared to stocks. This is part of
the power of leverage. I am going to borrow a real example that was
explained in a YouTube video discussing buying options for Apple stock.
At the time, Apple was $515 per share. So that means 100 shares would
cost $51,500. When the stock went up to $530, you could have sold,
realizing a $15 gain on each share. With 100 shares, this translates into a
profit of $1,500. The ROI or return on investment is:

ROI = % on yield = $1,500/$51,500 *100 = 2.9%

Most people would consider that a great return. But now look at what
would happen had you invested in options instead, with a $520 strike price.
At the time one three-month contract with that strike price had a premium
of $1,990. So, you’re able to invest at a much smaller price. When the
shares beat the strike price, you get a profit of $630. A profit of $630 on a
$1,990 investment is much better. Specifically:

ROI = % on yield = $630/$1,990 *100 = 31.1%

Honestly, that is pretty incredible. As you grow then you can invest in
multiple options contracts, and the amount of profit as compared to direct
stock market investing is quite astounding. Imagine if you had invested
$51,500 in options instead of the stock…
Chapter 5: Options Trading Strategies

In this chapter, we will discuss some strategies for trading options.

Vertical Spreads
A vertical spread is the combination of a call and a put with different strike
prices but the same expiration date. A vertical spread is simultaneously
trading both options. This is done to minimize risk. Suppose that XYZ is
trading at $90. We can sell a naked call at $3 with a strike price of $100.
Everything is fine, we made $300 if the share price never goes above $100.
If it happens to go to $120, however, then we are in big trouble with a huge
loss.

But we can buy a call to act as insurance that can offset some losses if they
happen. So, we simultaneously buy a call with a strike price that’s a little
higher than our naked call, say $105. This will come with a lower premium
(since its strike is further away from the share price). Say it’s $1.50. Total
cost $150.

In the event that the share price does skyrocket to $120, then we are out of
luck on our naked call. It’s a loss and we calculate that as follows:

Loss – 100 shares at $3 with strike price $20 below share price = $2,000 -
$300 premium = $1,700

However, we profit from the call we bought for $150. We make $15 per
share x 100 shares = $1,500, minus the cost = $1,350. Our total loss will be:
$1,700 - $1,350 = 350

So, we only end up losing $350.

Now suppose that the share price stayed below $100. That means both
contracts are worthless, but we keep the $300 premium from the call we
sold. However, we lost $150 from the call we purchased. We still profit,
however, at $300-$150 = $150.
Iron Condor
The Iron Condor gives you some insurance against time decay. With an iron
condor, you simultaneously sell a call and a put. You do this hoping that the
stock price will stay in between the strike prices, with the strike price of the
call higher than the strike price of the put. For insurance, you buy a call and
a put that have strike prices further out from the share prices than the call
and put that you sold.

The options we sell are naked options. These have unlimited risk if the
stock price went outside the strike price. So, for example, if XYZ was
trading at $80, we could sell a call at $90 and sell a put at $60, hoping the
price of the stock would stay in that range until expiration, and then we
could profit from the premium. Suppose they were $2 each.

Then you buy a call at a strike of $100 for $1 and buy a put with a strike of
$50 for $1. You can actually do an iron condor as one single trade, so it’s
not as complicated as this looks.
If the stock stays within the strike prices of the options we sold, then we
pocket the premiums which at $2 gives us $200 + $200 = $400. The options
we bought for $1, expired worthless. So, we are out the premiums, which
were $1, so a total of $200. That leaves us with a total profit of $200.

The call and put we bought were insurance. They can also minimize losses
if the stock goes above the naked call we sold.

Suppose that it goes to $110. The two puts expire worthlessly. We net $100
from the puts, with the $200 premium on the put we sold, and then we lost
$100 on the “insurance” put we bought.

For the calls, the $90 call we sold for $2 is 20 points below, so we lost
$2,000. Since we sold it for $200, our loss so far is $1,800. Now we’ll see
how the second call we bought acts as insurance. The call we bought for $1
with a strike of $100 is 10 points below, so we earn $1,000 from that one.
It cost us $100 though, so we are left with $900. Our net loss from the calls
is $900. Adding in the net profit from the puts, the total trade lost $800.
Now we could have lost $1,600 – if the original call and put were all we
had. So, the iron condor cut our losses in half.

In the event the stock price dropped, the logic would be the same, but with
the role of puts and calls reversed.
Chapter 6: Top Mistakes made by New Traders

Swing trading isn’t as risky as day trading, but it does still carry risks. Let’s
look at the top mistakes made by new swing traders.

Failing to use a stop-loss

Always use a stop loss on your orders so that you minimize potential losses.
Risking too much on a trade
Remember to only risk 1-2% of the capital in your investment account on
an individual trade.
Not being careful with leverage
Remember swing traders can use 2:1 leverage. If you’re careless, this can
get you into big financial trouble.
Letting yourself be driven by emotion
Many new traders get worked up with emotion watching securities move.
During this experience, they can get impatient or find themselves fearing
they will miss out on a big win. However, this leads to bad moves by the
trader, selling too soon or throwing too much money after something they
think is a sure thing that turns out to be a bust. Or maybe they enter the
trade too early. Instead of being driven by emotions in the heat of the
moment new traders need to stay focused on using the analysis and
techniques described in this book and go into deeper research to learn more.
Unrealistic Expectations
Swing trading is not a get rich quick scheme. Many new traders have
unrealistic expectations that they will become a millionaire overnight. Not
only does it take time to become a successful trader and build wealth, but it
takes an awful lot of hard work. To become a successful trader, you have to
spend a lot of time studying the markets, paying attention to financial news,
learning how to read charts, studying the companies and so on. None of this
is easy, it takes work.
Giving in to panic
Panic can lead traders to sell and take losses or fail to realize gains they
could have had. Again, this is an emotional response. Instead of fearing that
you’ll lose everything you should follow the suggested rules for risk and
always use stop loss orders to minimize potential losses.
Greed
Staying in a trade too long in the hopes of getting rich quick has undone
many new investors. A new trader should set profit goals for each trade and
stick with them. Use OCO orders so that the order takes care of the profits
as well as the losses for you so that you don't stay in a position too long and
then miss out on profits, losing money instead as the stock price declines.
Getting arrogant after a few wins
In the event that you rack up a few successful trades, you might get cocky
about it and become overconfident. But be aware, if you are not careful the
bad trades will find you and the losses will come. Getting arrogant rather
than maintaining a humble attitude which will lead you to carefully study
the markets and taking precautions while shooting for realistic profits can
lead to big trouble over the longer term.
Failing to Plan
Trading for the hell of it is not a plan. Neither is trading hoping that
millions will come, so trading as if you are playing the lottery, this is not a
good strategy to follow. You need to lay out a specific plan before you place
your first trade. Have realistic goals and always know what your goals are.
Once you meet the goals then you can readjust. Your goals should be
modest in the beginning, that way they will be easier to meet. Set out ahead
of time how much capital you are going to risk and what your specific goals
for profit are going to be. When you meet your goals, don’t blow it by
losing focus. Set more realistic and attainable goals with reasonable levels
of risk.
Failing to take time to learn
Congratulations! No, I mean that seriously. By reading this book, you have
already shown that you are the kind of person who is willing to sit down
and take the time to learn about the markets before diving in. However,
there is a lot to learn about stocks, trading, and options. You should be
constantly learning, reading as many books as possible, watching YouTube
videos, and taking a training course. You may also benefit from personally
getting to know other traders in your area to learn from them and trade
experiences. The stock market is very complicated, and even seasoned
veterans make large mistakes and lose a lot of money. You can never learn
enough about it so be sure to keep putting in the time to improve your
knowledge. When it comes to the stock market, trading, and options, you
should consider yourself a lifelong learner.
Don’t buy out of the money options
Out of the money options are cheap, however, remember that the
probability of the stock moving enough to turn an out of the money option
to one that is in the money is relatively low. An out of the money option is a
bad way to invest.
Ignoring Time Value
Remember that the three things that impact the price of an option are
whether it’s in the money or out of the money, that is what the strike price is
relative to the current stock price, volatility, and time value. Time value
always decreases with each passing day, so you need to know where the
option stands with respect to time value.
Buying options close to expiration
This is somewhat similar to buying options that are out of the money. As an
option gets closer to expiration, they get cheaper. New traders think they are
snapping up bargains by buying options that are close to expiration.
However, the closer an option gets to expiration, the more worthless it
becomes especially if it’s out of the money. Buying an option that is both
out of the money and close to expiration would be a really bad move.
Trade in the right time frames
Swing trading is a short-term activity, but it's not day trading. How long a
time frame is involved depends on whom you ask. Many swing traders will
be trading on a 2-6-day time frame. If that isn't comfortable for you, that's
fine. You can always stretch it out further, even out to 100 days or so. But
don't be so risk averse that you fail to exit your positions. If that becomes an
issue maybe long-term investing is more your style. On the other hand, if
you find that swing trading isn't exciting enough when you've put together
enough capital to open an account (you are going to need $25,000 at a
minimum) then maybe day trading is where you belong. The reality is that
you are going to have more success trading at a level that is most
comfortable for you. Don't swing trade because other people think day
trading is too dangerous or do it because you're a long term investor who's
getting mocked by their trading friends.
Chapter 7: Special tips for Swing Traders

In this chapter, we will provide some tips, especially for swing traders.
Swing trading isn't as well known or popular as day trading or simply
investing so it will help to review the basic principles that you may not be
hearing in general.
The trend is your friend
The biggest lesson about swing trading, although there are some swing
traders who fade or short, is that the uptrend is what most swing traders are
looking for. With this in mind, spend time studying all the signals that you
can so that you can take advantage of opportunities early on. You should
also become deeply familiar with candles and learn to recognize the signals
that candles can give you about developing trends and reversals in the
market.
Follow the big trends
Traders often get too focused on individual stocks. Of course, that is the
ultimate name of the game but don't forget that these stocks are trading in a
larger world and that sometimes the trends seen in the overall market are
going to be very impactful. One place that we haven't talked about but
where you should be focusing your attention is on the S & P 500. This
index is a very good measure of where the overall market is heading. Of
course, on a detailed level, individual stocks are not going to be following
any given index, but for longer-term trends, the S & P 500 and other
indexes are going to set the tone that most will be following. So, you can
learn a lot about the state of the market by paying close attention to it.
Larger market trends often have a nasty habit of asserting themselves on
individual stocks. So, it's always a good idea to know what those larger
trends are doing and to take them to be yet one more signal that you should
take into consideration before making any trading moves. The S & P 500 is
also going to be very sensitive to big news and events so you may be able to
get wind that something is happening that has large institutional investors
spooked (or happy about) by looking at the big indexes. They get news
before you do, and while you may not have the news yet by tracking trends
in the big indices you may be able to deduce that something is going on
even if you don't know what that is in detail yet.
Don't be a one-way trader
When appropriate, you should be ready to short. With options trading, you
can use puts for insurance purposes as well. If you are a bullish investor,
don’t get too caught up in it and become a rigid dinosaur. There are
opportunities for bearish investors too, so you should be ready to take them
when they arise. This also works vice versa. Some people like shorting so
forget about basic investing. You shouldn’t do that either.
Don’t rely on short term charts all the time
Short term charts are important. After all, you're looking to buy and sell
your stocks over short time periods and not hold them for years. That said,
you need to keep the big picture in mind. That means studying longer-term
charts for various time periods.
Never stop practicing
It is a good idea to continually hone your skills with simulators. That way
you can learn to swing trade without risking real capital. This will help you
become a seasoned investor without having to take all the risks that people
who came before you took. People don't like to practice, but can you
imagine how NBA games would go if nobody practiced? Even the best
basketball players in the world devote a significant amount of time to
practicing and training. Why should you, as a professional in your own area
of expertise, be any different?
Don’t ignore beta
Volatile stocks can carry some risk. However, you can also profit from them
as well. Moves by stocks with a high beta can far surpass moves by the
indexes themselves. Knowing what you know about options, use puts for
insurance and get involved with more volatile stocks. Just don’t put all your
eggs in one basket. But volatile stocks can offer you some solid
opportunities for growth.
Study Charts over different time frames
To really understand a given stock, you should know how it’s been
behaving on multiple time frames. Study long term (two years) weekly
charts for the stock. Also, study the fine details of the stock's movement on
daily charts. If you are going to risk your precious money on a stock, then
you really need to know how it behaves at all levels. It's too easy for
shorter-term traders to get lost in the short term only.
Enter Trends at the Beginning
Bailing at the bottom of a downturn and buying up stock at the top of an
upturn are things that people who don’t know anything about stock markets
do. They want to sell their shares and stuff the money in their mattress. As a
real trader, especially if you want to be a swing trader, you need to really
study trends, reversals, supports, and resistance. The goal is to be able to get
in on trends as early as possible. You should also learn to recognize when
things are too late and use options for insurance policies. If you come in
when it is too late to hit a peak, you can still gain from the trend by
shorting. But you need to be able to recognize where you stand relative to
the trend. If a stock is peaking, this is actually early for the bearish traders,
but late for the bullish traders. A good trader is bearish or bullish depending
on the situation. So if you missed out on an upward trend, then you can still
profit on the downside. But be ready to do so when you spot what's
happening.

Getting in on trends early helps minimize risk and it also helps you
maximize your profits.
Use Multiple Indicators
One mistake that new swing traders make is putting too much faith in a
single indicator. It sounds very sophisticated so you can be forgiven for
thinking that the right candle is a sure thing, or that you can't go wrong with
a golden cross. The reality is that underlying the order is chaos. The stock
market is inherently unpredictable except in the long term. You can never
be sure of a belief in the direction of a stock, you can only minimize
probabilities of being wrong. The way that you do this is by utilizing
multiple tools simultaneously. When one indicator is giving you a strong
signal, don't just run with it, you need to check that signal against all the
other ones that you know.
Get up early and watch financial news
The first thing you need to do each morning is, first, get up early. You really
need to hit the ground to be a successful trader. Then watch the financial
news and read financial websites and publications. Scan the financial news
for information about stocks and options you’re already holding and also
looking for information about securities you plan to trade later. You are not
going to get the information as fast, detailed, and furious as the large
institutional investors are going to, but you still need to stay on top of
what’s happening.
Avoid Impulse Buying
While swing trading isn’t day trading, it can instill some bad habits. One
possible bad habit you might pick up is getting into impulse buying. Now
and then, impulse buying will turn out to be profitable. However, it’s not
always going to work out. Impulse buying is really nothing more than
gambling. A swing trader is not a gambler.
Capital Preservation is a Value
If you run out of capital, your trading days are over. It also shows that you
are a reckless trader. If you find yourself unable to preserve the capital in
your account, then maybe you should just invest in mutual funds. You’re
letting your emotions get a hold of you if you find out that you are running
out of money. The thing to do is step back and breath if you find yourself in
the midst of a string of losses. Don’t panic and try to make rash moves in
desperate attempts to get your money back. You might even want to stop
and step back from the markets for a few days to keep a bad situation from
spinning out of control. Beforehand, always set a stop-loss when you make
a trade. This will help keep losses to a minimum, which should be a
maximum risk of about 7% for your entire account. You should also use
limit orders judiciously.
Don’t trip over dollars to pick up pennies
While we spend a lot of time talking about minimizing risk, some traders
are far too conservative. There is no sense in getting into trading to make a
few cents off dollar trades. If you take a hyper-conservative approach to
trading, then you will never see yourself getting anywhere. The tools exist
that will help you take reasonable risks. Make sure you pick entry points
that have more upside than risk. This is like any other business, if you are
not making profits there is no point in trading. Some restaurants shut down
on certain days or only serve lunch while their competitors are raking in all
the money. So not taking unwarranted risks is certainly reasonable but
getting into trades to make ten cents is not reasonable.
Never pull a stop order
Hope and desperation can get the best of anybody, especially when money
is involved. A big mistake many new swing trader make is to pull a stop
order, even though their trade is on a downturn. This can stem from hope, a
desperate hope that it’s going to turn back around, because well, it was a
sure thing! However, if your trade is dropping close to stop order territory,
that is probably a signal you shouldn’t ignore. It is the market telling you
that it’s going to go down further from that and there isn’t going to be any
recovery this time. You don’t know how big a loss is going to be and
ignoring the signals because you hope something will turn back into an
upswing is a bad gambling strategy, not trading. Remember every big loss
got started somewhere, and at one time the $20,000 loss was only $500.
Stop orders are there for a reason and a disciplined trader doesn’t operate
without them.
Chapter 8: The Mindset of the Swing Trader

Being a swing trader is a different kind of occupation. Most people are too
risk-averse to try and enter this world, so it takes a special kind of mindset.
A swing trader needs to have a higher level of mental toughness, but also
needs to be extremely rational to the point of scientific precision.

Keep a good mental attitude

When swing trading, you may be doing it from home, in fact, you probably
will. This can make it difficult to keep a good mental attitude. The reason is
you may be in for some major setbacks. This can happen even when you've
gained a lot of experience, but it's certainly going to happen when you're a
beginner. If you have multiple setbacks in a row it can be hard to keep your
chin up. Don't let negative emotions take over. Should bad trades just be
blown off? Absolutely not. But you don't want to dwell on them either.
Dwelling on a bad trade is counterproductive. That isn't to say that you
shouldn't learn from your bad trades. The point is to learn the lessons you
need to learn and move on as fast as possible.
Maintain detailed records
Make sure you know what you did and when you did it. This is part of
learning when mistakes were made. Note down what signals you are
looking at to get into or exit a position. That way when it didn’t work out
you can go back and look at the charts and compare to your notes to see
where you went wrong. We all need to learn from our mistakes, and by
detailing things it will help you learn quickly and avoid making the same
mistake again and again.
Be ready to move ahead
Some people get emotionally wiped out from a bad trade. That isn’t going
to help you establish a career as a swing trader. If you make a bad trade,
learn from your mistake and then get right back in the saddle. You need to
move forward into making your next trade, not impulsively, but as soon as
you’ve learned from your mistakes.

Making a bad trade can seem like a personal failure. Many beginning swing
traders get lost in the old game of "why didn't I do this" and "could have,
would have, should have". Again, use your mind and not your emotions in
swing trading. That means when you have a bad trade, you aren't going to
take it as a personal failure and beat yourself up about it. Instead, you are
going to apply the tools of reason and learn from the mistakes.

You also have to realize that you’re not going to be able to capitalize on
every little opportunity that comes up. We can all pull up stock charts right
now and see when some stock had a huge move to the upside. If only we
had bought shares! You have to remember that you’re not going to get in on
every possible win. And you also have to remember that there is always
tomorrow. The markets aren’t going anywhere, so if you were at lunch with
the cousins passing through town when a stock you were interested in took
a big ride up, and you missed out, don’t sweat it. Just come back tomorrow
looking for new opportunities. They are always coming.
Conclusion

I’d like to thank you for reading How to Trade Options: Swing Trading. I
hope that you found this book informative and educational. I would also
like to think that I helped broaden out your mind a little bit. Many people
haven’t heard about swing trading and don’t realize the options it can
provide. Also, we hope that you found our chapters on options useful so
that you can combine what you’ve learned about swing trading and what
you now know about the underlying dynamics of the stock market with
options and options trading.

Swing trading offers more ambitious investors the opportunity to play an

active role in the markets that is a bit safer and less dramatic as day trading
but is certainly as interesting. Moreover, it uses many of the same tools but
you're at far less risk of completely blowing it. Some people may use swing
trading as an intermediate step, after wetting your toes with it you may
decide that you want to take things up another level and get involved with
day trading. And that is perfectly fine if you do. For those who aren't
inclined to day trading, swing trading can be extremely lucrative with more
upside and fewer risks. So, you've come to the right place.

Options also offer lots of golden opportunities. They let you get into trades
without risking much capital and can provide much higher ROI than stock
trading. You can grow with options trading and soon you might be investing
as much as you would have with stocks but find yourself earning far higher
profits. They are also fun and exciting.
Remember that no matter what path you take, continuing education is vital
for the trader. We have barely scratched the surface with this small book.
There are many resources available online including paid courses, free
articles, free videos, and more. Plus, there are lots and lots of books to read
on these topics. Keep up the work of taking in new knowledge so that you
can continue to improve your trading skills.

I would like to thank you again for taking the precious time to read this
small book and I hope it helps you reach your trading goals. Be sure to drop
on Amazon and leave a review – we will certainly appreciate it!

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