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Showing posts from January, 2019

THE 10 POWER PRINCIPLES MAKING SURE THAT YOUR TRADING PLAN WORKS

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THE 10 POWER PRINCIPLES MAKING SURE THAT YOUR  TRADING PLAN WORKS Having a trading plan is like having a solid blueprint to build your home, or having a map when traveling to a new location. You already know that a professional trader won’t survive in the markets without a good trading plan. Now that you’ve defined your goals and created your trading plan, you need to make sure it really works. Thus far, everything might look great, but how can you be sure that the system works when you start trading it with real money? Evaluating a trading strategy is easier than you think. In this topic you'll find 10 Principles of Successful Trading Strategies that we’ve developed and refined over the last couple of years.You should use these Power Principles to evaluate your trading strategy, whether you developed it on your own or are thinking about purchasing one. By checking a strategy against these principles, you can dramatically increase your chances of success.  Pr

EVALUATING YOUR STRATEGY

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EVALUATING YOUR STRATEGY Once you’ve determined which markets you want to trade, selected a time frame, and defined your entry and exit rules, it’s time to test and evaluate your trading strategy. There are three ways to test your trading strategy: Back-Testing Back-testing is a method of testing which will run your strategy against prior time periods. Basically, you’re performing a simulation: you use your strategy with relevant past data to test its effectiveness. By using the historical data, you’re saving a ton of time; if you tried to test your strategy by applying it to the time periods yet to come, it might take you years. Back-testing is used for a variety of strategies, including those based on technical analysis. The effectiveness of back-testing relies on the theory that what has happened in the past WILL happen again in the future. Also, keep in mind that your backtesting results are quite dependent on the moves that occurred in the tested time period. I

GENERAL PRINCIPLES OF TRADING AND HEDGING

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GENERAL PRINCIPLES OF TRADING AND HEDGING to be a good option trader, one must first be a good trader. Sometimes the particular complexities of managing an option position can blind us to this fact. In order to be successful, we have to put ourselves in situations where we can buy low and sell high. Humans have been trading forever. Despite this, there is no consensus about what good trading practices are. Perhaps when it comes to specifics this is to be expected. By its nature successful trading can destroy the anomalies that make it possible. However, at a more general level we can state the essential characteristics that all successful trades must have. Further, it is almost certainly a better idea to improve upon a method that others have found to be successful than to try to find something completely new. I want to emphasize the place of this chapter. This is meant to complement innate trading skill, which I certainly believe exists. I do think that a solid grasp of t

OPTION STRATEGIES PART - 2

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OPTION STRATEGIES PART - 2 We will examine four market outlooks with trading strategies corresponding to each: Bullish -  The expectation of an increase in price. This category has two subcategories: * Moderately bullish-Although the outlook is for higher prices, the increase is not likely to be dramatic. * Extremely bullish  - Expecting a dramatic, explosive increase in price (generally anticipated to occur in the short term) Bearish -  The expectation of a decrease in price. This category has two subcategories : * Moderately bearish - Although the outlook is for lower prices, the decrease is not likely to be dramatic. * Extremely bearish - Expecting a dramatic sell-off in the stock (generally anticipated to occur in the short term) * Neutral (front spread) - Expecting little price movement over a given time period. Neutral strategies enable the trader to make money in a market where prices remain the same or move little. * Volatile (back spre

OPTION STRATEGIES

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OPTION STRATEGIES Options allow the investor to sculpt the returns in their portfolio. When you buy a stock and the price rises $1, you make $1. You lose $1 if the price declines $1. Your profits are linear and directly related to only the change in the price of the stock. Interest and dividends will make a slight change to the outcome though these factors are also linear. Options blow apart this linearity. Options are called convex instruments because the returns are not linear but curved. We saw that in the previous chapters. You can literally create millions of possible returns through the use of options. You can mix and match options to create just about any return possible.   Selecting a strategy is a multi step process. You should go through a systematic process before initiating a trade. Each step should lead to further refinement of the strategy. It can be very dangerous to your bank account to disregard some or all of the major factors that affect options prices.

ADVANCED OPTION PRICE MOVEMENTS

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ADVANCED OPTION PRICE MOVEMENTS The concepts outlined in this chapter form the basis for the option strategies in Part Two. These concepts expand on the basics in Chapter 3. They are not necessary for most traders who are mainly looking at option strategies to hold to expiration. The first topic in this chapter will be a quick introduction to option pricing models, particularly the Black-Scholes Model. Also discussed will be the greeks and how they affect the price of an option; probability distributions and how they affect options; option pricing models and their advantages, disadvantages, and foibles and using them. The final major topic will be the concept of delta neutral. which is a key concept for many of the advanced strategies in this book. Which option should you buy? What if you are looking for the price of Widget futures to move from 50 to 60 over the next four months? Do you buy the option that expires in three months and roll it over near expiration? Or d

THE GREEKS OF OPTION

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THE GREEKS OF OPTION Purchasing a stock has an obvious risk/reward profile. If the stock goes up, you make money: If it goes down, you lose money. The reverse is true if you sell a stock short. We refer to this loss exposure as directional risk (refer to Graph ) . Furthermore, the amount of the profit or loss is easy to anticipate. If you purchase 100 shares of XYZ, for each $1 increase in price the position increases in value by $100, and for each $1 reduction in price, the position loses $100 in value. If you sell 100 shares of stock short, for each $1 decrease in price you will make $100, and you will lose $100 for each $1 increase in price. By contrast, determining the risk/reward profile of an option position is much more complicated. As we have seen, an option's value can be affected by a change in anyone of these five variables : * Stock price * Time until expiration * Volatility * Interest rate * Amount and timing of dividends When two or more of the