All Entries Tagged With: "Volatility"
Video Review of the Indexes 10-9-2011
October 9, 2011 at 1:45 pm
The indexes broke major support zones last week to mark new 52-week lows, but by week’s end, it proved to be a bear trap.
Video Review of the Indexes 10-2-2011
October 2, 2011 at 1:03 pm
September marked the 5th straight monthly decline for the S&P 500, and yet the indexes remain range-bound for now. A break could be imminent, and with short-term lower highs in place, that’s not an encouraging sign for the bulls.
As we head into a brand new week of trading, let’s examine some important levels to keep an eye on in the days ahead. That will have the greatest influence on how individual stocks are going to move, so it’s where the trading week begins.
Be sure to view in HD and full-screen mode for best quality in the video.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
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Sitting Still
August 10, 2011 at 8:34 am
July 2, 1982 was a special day for Larry Walters. That’s the day the truck driver strapped 45 helium-filled weather balloons to a patio chair armed with a six pack, sandwiches, a camera, and a pellet gun to pop the balloons.
His intention was to go up and look around, but he quickly found himself terrified, having dropped his pellet gun, and over 15,000 feet in the sky in the primary approach path for Long Beach Airport.
When asked why he did it, he simply replied “A man can’t just sit around.”
Lawnchair Larry Wasn’t a Trader
There are multiple occasions when sitting still is the right thing to do in trading.
Sitting still with regard to open positions that are working is definitely a time to be less active. For instance, most of us are familiar with the quote attributed to legendary trader Jesse Livermore:
“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”
Right now, we’re seeing yet another example of a time when sitting still is a worthwhile approach for traders having a timeframe outside of a couple hours. Volatility is extreme, indecision is running high, and prices are ripping back and forth ’round the clock.
Stated otherwise, it’s really hard to manage risk effectively in a tape like this. It’s a scalper’s dream, but if that’s not you, this is a time to sit still. Let the dust settle, and be patient. Big opportunities are going to result from this.
Do you just head for the couch and flip on the TV with a bag of Cheetos? No!
Work on your game. Clean out your watch lists. Study your trades. Read a great trading book. Get inspired for greatness. Practice Winning. Do anything that will make you better. But don’t just sit around.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Trading Scene Still Great
December 8, 2010 at 12:30 pm
On Nov 1, I mentioned the scene was set to improve, and since then we’ve seen exactly that. I didn’t base that post on the notion of higher prices necessarily, because UP does not equal GOOD – just as DOWN does not equal BAD.
I’m a trader, so for me it’s all about the movement. It’s volatility that makes for a great trading environment, especially when the technicals are playing such a prominent role. We’ve seen a pick up in volatility of late, which simply delivers faster moves for us as traders.
Lately, we’ve seen exactly that. Individual stocks and the indexes alike have respected trend lines and important resistance and support levels, allowing for some excellent trading opportunities for the astute trader to capitalize on.
Taking it to the Charts
For example, the indexes have been textbook in their respect of key levels. The S&P 500 has been range-bound between 1173 support (with numerous tests of that level in recent weeks) and 1227 resistance (tagged a few times but no close above it yet). That’s perpetuating the short-term trading range, which could easily serve as a stepping stone for another advance if it’s resolved to the upside.
The DJIA also has been highly respectful of key levels. The mid-May post-flash-crash bounce carried the senior index up to the 10920 area, and since then that level has been revisited. Currently it’s serving as support over the past few weeks, while the early-November high at 11451 was tested and held on Tuesday.
Individual stocks have also made exceptional moves through important trend lines as well as out of well-defined patterns. Here’s a look at a few examples:
So the general trading scene continues to improve, which means there’ll likely be ample opportunity in the weeks ahead to capitalize on. But the market won’t give you money – you’ve got to know where to find it and how to extract it. If you’re preparing daily with several if/then scenarios, and you’re managing your risk appropriately, you’re positioning yourself for continued success.
Trade Like A Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Options vs. Common Stock
November 17, 2010 at 11:13 am
Traders face many hard decisions every day…buy or sell, add or lighten, stand aside or get involved. Among them is the choice between trading options or common stock.
There are no doubt benefits and shortcomings of both choices, as everything literally is a trade-off.
Common is usually much more liquid, it can be traded in the after hours or premarket, and it’s by definition 100% exposure to the company. However, it is more capital-intensive since it’s not a leveraged position, which means less room for other positions in an account. Common alone is also going to carry with it greater dollar risk, as a major headline can bring tremendous gap potential.
Options are leveraged, they offer lots of versatility and possibilities (speculation, hedging, income, etc.), and they are less capital-intensive. However, liquidity is often inferior compared to common, they can’t be traded as many hours of the day as stock, and they offer only fractional exposure to the underlying stock.
The Case for Options
Options can be an excellent vehicle for trading, provided the situation is well-suited to them. The biggest 3 considerations for options are (1) the time expectation for the trade, (2) the liquidity of the options being traded, and (3) the risk involved in the trade. Let’s break those down.
Timeframe
First things first… The time you expect to be in the play is important because options will carry a bid/ask spread often times up to maybe .10-15 cents. For a stock that’s not a huge deal, but for an option which might only be trading at say $2 or lower, that’s a big percentage if you pay the spread both ways (market order getting in & out). So if you’re looking at being in a trade for at least a couple of days, that’s usually much better for an options trade than if you’re just looking to scalp it over the next half hour.
Liquidity
Second, there are quite a few stocks which have high trading volume, but for whatever reason their options are just not heavily traded. For any trade I take, whether a stock or an option, I want to feel confident there will be buyers when I go to sell, and sellers when I go to buy. Sufficient liquidity is a requirement for any trade, whether in options or common. So taking a look at the open interest, the volume, and the bid/ask spread is important in gauging the liquidity of the options. When in doubt, take a look at the highly liquid options like QQQQ, SPY, or mega-cap stocks like MSFT or INTC. That will help you get a feel for how tight the market is in the options you’re considering. You don’t ever want to be the ‘big player’ in any contract.
Risk
Third, limited risk is an advantage which options carry, such as buying put options vs. being short stock. Risk is defined with the puts, and theoretically unlimited with the short stock. Options are a great choice in particular when the stock has the potential to gap big, whether due to news coming out or simply based upon recent price history of the stock. Always consider the risk involved when weighing options vs. common, as that’s an important element of the decision-making process.
Finally, here are a few occasions to consider options rather than the common shares:
1. In front of big news (earnings, conference calls, or anything else scheduled).
2. When limited on capital (the leverage of options helps offset a limited amount of funds).
3. When the stock moves are too shaky to sit through (when a really wide stop is necessary).
4. Trade timeframe is between a couple days and a few weeks.
** If you’ve got something else to add, please share it in the comments.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
21 Questions from Last Week’s Chat
August 13, 2009 at 11:41 am
Last week’s trader chat generated quite a few questions. A number of them we were able to address during the chat, but many more went unanswered.
If you were in attendance and didn’t get your question answered, look for it below. But even if you weren’t there, hopefully you’ll find this useful to observe.
Here are 21 unanswered questions from the session:
1. Footbargain: Jeff, what kinds of things do you look for to “trade the trader?”
- Thanks for your question Footbargain. I wrote about this 3 1/2 years ago, and I still think it’s a very good exercise to regularly consider the flip side of your trade. Obviously “they” are looking for a move in the opposite direction as you, but weighing their possible reasons, emotions, and technical exit criteria can really shed a lot of light on what it is you’re up against. Of course, you’ll need to abide by your own designated levels on each trade, but understanding when the other side may get frustrated or overconfident can certainly give us a better feel for the trade and whether or not it deserves to be on our screen.
2. Tom: Greetings Jeff, assuming we do get the “inevitable pullback,” what support levels would you be looking at to re-enter long positions?
- Hi Tom! Using levels from the S&P 500, spots which have served as resistance or support in recent months would mark logical areas for other buyers to step in. The ones I’m watching are 956 and 875. I might add that if the market is selling off sharply into those levels I would not look to jump out in front of it. Some stabilization in those areas would have far greater appeal.
3. Jeff: Hey Jeff, I’m a paid subscriber and I do like your work. Is Worden the main charting software that you use?
- Yes Jeff, TeleChart and StockFinder are the only charting programs I use. I’ve found them to be very powerful and robust programs which offer many more features than I could ever possibly utilize, and yet they’re very simple to use.
4. Dharm: Do you believe it is a bear rally? Or are you in agreement a bull trend has begun?
- Hi Dharm, this really is a timeframe-based question, which leaves it open-ended. In the short term and intermediate term, we’re without question in bull market mode. The move up from the lows has exceeded 50%, which certainly qualifies as a bull market for me. However, zooming out to the long-term timeframe, we are still well off the highs set less than 2 years ago. We also on the long term timeframe have yet to pull back and produce a higher low, so for that timeframe I’m reluctant to classify this as a technical trend change yet (although I do think it will ultimately result in one).
5. Ken: On stops being too tight, where would you place percentage wise on entry? How often do you adjust the stop once you’re in the trade?
- Hi Ken, check out this post on stop loss placement for adjustment purposes(also includes links to prior stop loss posts which you may find helpful). When it comes to the entry, I don’t have a set percentage I go by. Rather, I’m going to base it on the chart, and most notably a failed pattern. For some setups that might mean 3%, for others it might mean 6%, so it will vary.
6. Ron: Do you ever stay with the levered ETF’s more than a day, say a week?
- I do trade them in retirement accounts that way Ron, although I don’t want them to become long-term holdings. What I prefer to do is start a position when I think the market is at an important turning point, then do my best to stick with that trend until it seems to have exhausted itself. I have done well with the levered ETF’s in this fashion, and because they’re also optionable I don’t mind selling calls against them along the way.
7. Julie: I have lightened up significantly during the past three days. The long I do have is an ETF. How far down would you be comfortable seeing a pullback on the S&P?
- Hi Julie, I wouldn’t at all mind seeing a pullback reach the 956 zone or even 875 again (a level which has proven itself several times over the past year). When it comes to your trade though, your original basis for entry and the timeframe you intended it to be should be the biggest consideration. If it’s worked out well for you, then be sure to retain the bulk of those gains. That may mean a partial sale up here after the run, or it may mean raising your stop, or a combination of the two. I’ve found in my own trading once I start getting uneasy with a trade that it’s probably time to draw some lines in the sand and ensure that I get paid from that winning trade without giving it too much room back down should a pullback happen to arrive sooner than later.
8. BullishBeauty: Jeff, I do believe the correction is coming and I’ve lightened up as well. Question is when a position gets to almost profit today, close it or hold til Monday?
- Hi BullishBeauty! This question was referring to last Monday, so since we now have that hindsight let me instead address this from a conceptual standpoint. When you’ve designated a target which is nearly reached but not quite, it’s decision-making time. You either (A) stay patient and allow the stock to move away from that target and trust that it’ll eventually move through it, or (B) you recognize that your target may have been just a little too aggressive, and that therefore you should book (at least some of those) profits now. My tendency is to go with choice B since I like to keep my capital turning over frequently and I like to ring the register often. If you’re a more patient trader, the former scenario may be the way to go. I do want to stress though, that whichever you choose, be consistent in it! That way you’re decisive and the law of averages will run its course.
9. Charles: For the rookies can you explain the price and volume you use?
- Hello Charles. I really like to focus on these 2 things, as they are the most important. All else is derived from them, so they are the source of technical info for us as traders. Price is of course where the stock is currently trading, but it’s also the price action. I like to see how price is moving. Is it moving fast, is it moving steadily, is it indecisive and confined to a trading range of some sort? Basically, who is winning the battle? And with volume, I want to see how it corresponds to price. Is volume spiking as price climbs? If so, it indicates to me that there’s a lot of participation among buyers and that therefore the move may have further to go. Volume is the fuel that propels prices higher, so the more gas that’s in the tank, the farther it can go.
10. Tom: Jeff, can you offer some relevant scanning criteria for day/swing trading?
- Hi Tom, this is something I get asked quite often. For me, I don’t rely heavily on scans to locate the plays I take. What I actually do is start with all the stocks out there, then knock off some huge chunks of stocks which I know I don’t want to trade. Those are the low-priced, illiquid stocks which hold no appeal to me as a trader. By eliminating those, I get stocks with the ability to fluctuate regularly and which carry adequate volume for trading actively (I want plenty of buyers when I’m selling and plenty of sellers when I want to buy). This generally means I’ll eliminate single-digit stocks and anything with fewer than 500,000 shares traded on an average day. That still gives me a large list of stocks, and from there it’s a matter of spending the time to eyeball the list, extract the setups with some potential, and continually refine the list until I get some trading candidates.
11. Dirk: Hi Jeff & Charles…first of all thanks a lot for this great opportunity to share your knowledge with us. I have a very general question regarding position sizing: Given a certain allocation of money to swing trade, and based on that amount, a fixed amount (like 8-10%) one is willing to risk on a trade, is a large position (cheaper stocks) with a tighter stoploss preferable over a smaller position (higher priced stocks) with a wider stop loss?
- Hi Dirk, thanks for your nice comment and this question. There really is no right answer here, as it will simply boil down to your own preference. Give each style a try and see which one works best for you. And I should clarify, that isn’t necessarily based upon the stock’s price, but rather how tight the pattern is that’s being traded.  I’d say it will really depend on your personality. If you’re a patient trader and don’t mind waiting for a move to develop over the course of several days to several weeks, then wider stops are suitable. If on the other hand you’d rather keep your money moving more often, then the tighter stops and more of a ‘base hit’ mentality for more frequent but smaller moves would be appropriate. Personally, I fall into the latter category of tighter stops as I prefer to know rather quickly whether I’m right or wrong in the play.
12. Brian: What event do you think could cause the second leg down?
- That’s a great question Brian. I suppose it could be economic data which begins to disappoint, or it could be that the prospects for growth begin to subside and a wave of profit-taking evolves into a deeper correction. I honestly don’t know what it might be, but I’m also not a macro guy. I figure sticking with the technicals will tell me all I need to know (when momentum slows, when selling pressure intensifies, when dips fail to get bought aggressively, etc.).
13. Jon N: I have a stock purchased as a medium to long term holding. At what point would you consider changing this position and just taking profits (I am using trailing stops to protect profits)?
- Hi Jon. I’m big on beginning with the end in mind and therefore knowing an exit strategy before entering a position. Perhaps you designated some targets for this position when you initiated it, so I’d encourage you to stick with them. But if you did not, then as I told Julie, I’d encourage you to weigh your comfort level in the trade. If you’re getting uneasy about possibly giving back substantial open profits, then make some of those paper gains real by selling a portion of your position. There’s some real value in making partial sales. By lightening up into strength, you’re booking profits and raising cash to be re-allocated after a pullback takes place. Having cash on hand after some widespread weakness sets in will be a great thing, and although many have forgotten right now that the market can still go down, they’ll eventually be reminded. So I’d say once you’re uneasy, sell some and designate a stop for remaining shares as a safety net on the rest.
14. Erb: I have witnessed a lot of traders who I deem to be professional traders use terms like “I really just don’t have the feeling today” or another example would be what you just mentioned confidence. I find these terms confusing as I do my best not to trade emotionally. The chart is what it is, the price action is what it is. So as a newbie again I find this quite confusing. Not sure what is meant by the “feeling” or confidence if we are supposed to just trade what we see?
- Hello Erb, this is an excellent question. And I never want to be confusing, so allow me to explain. Newer traders don’t yet have a basis for ‘confidence’ or ‘feeling.’ Those both come over time after many many trades and lots of time spent watching the market. Observing it closely over time will develop the occasional “I’ve seen this before” moments which will then play a role in the decision-making process. But early on in one’s trading career, you are correct in that trading what you see should be the sole basis for decisions. I also do not advocate trading emotionally, but what I’m saying here is that over time as you develop a feel for the markets, that will become part of what you see.
15. George: How do you build your watch lists for swing trades or longer?
- Thanks for your question George. Beyond my comments for #9 and #10 above, it really is a process of digging through the charts to find setups which are being constructed and then weighing the risk/reward associated with each of them. What I do is spend considerable time nightly to hunt through hundreds of charts, designating the occasional stock to be reviewed again. The second run through will be on that limited list of stocks which seem to be exhibiting some momentum and/or are behaving as if they’re ripe for a move. I’ll draw my trend lines to clarify the pattern being built, then I’ll gauge the urgency of the pattern based on price and volume in the most recent days. Once I weigh that and decide if there’s a clear-cut entry and exit for the play, then I’ll set up the swing trade. The key here though is that when I’m swing trading, I understand my entry, stop, and target levels before I place that bracket order for the trade.
16. Juergen: Jeff, I often get stopped out because of too tight stops. I do this because I don’t want to lose money when I’m positive. Any advice to change this (set a wide stop first and narrow it down when the stock moves in my direction)?
- Hello Juergen, I’m glad you asked this. Getting shaken out of trades frequently can be frustrating, unless it’s an acceptable part of your methodology. For example, the trader who takes many small losses but catches the occasional huge winner can be just fine over time. But it sounds like you’re not satisfied with that so let me offer a suggestion. First, cut your trade size in half. Ultra-tight stops and the fear of losing tend to come along with positions which are too large, so change that first. Next, start setting wider stops. Consider how much the stock in question tends to move on an average day, or set stops beyond short-term support zones. That will allow the stock to fluctuate normally and keep you in the trade longer, taking you out only once the stock has truly shown a change of character.
17. Naif: Jeff, can you name a couple of your favorite books on trading?
- You bet Naif. Jack Schwager’s Market Wizards series is excellent. They are each interview-style books where each chapter is a conversation with a different trader. There are many markets, timeframes, and styles represented in those books, and they offer a ton of insight. Another book is by Martin Schwartz and is called Pit Bull
. He was in a Market Wizards book, and his candid story offers a ton of value, making it another excellent read. Nicolas Darvas’ How I Made $2,000,000 In The Stock Market
also is one of my favorites. He shares the tough early beats of his trading career and explains how he devised a method to avoid making his most common mistakes, leading him to big success. Finally, Edwin Lefevre’s Reminiscences of a Stock Operator
is right at the top of my list when it comes to favorite trading books. A very old book, it carries with it countless lessons applicable to today’s trading, making it a timeless book and a must-own. I’ve read each of these multiple times and I gain something new from them each time I re-read them!
18. Eric: It looks to me like a blow-off top in FUQI. Am I reading this right?
- Hi Eric. FUQI has certainly been a huge mover in recent months, and it’s gone parabolic in recent weeks. As you know, the largest moves tend to occur during parabolic uptrends, but trading them also involves added risk. Currently the stock is basing between $26-30, but I have no desire to call a top there yet. Although a sharp drop could develop there at any time, the momentum train is running and deserves respect. If you’re long, this is a great spot to do some selling, but if you’re looking to initiate a short sale, then waiting for some confirmation of a top (with the formation of a lower high) would be best.
19. John: Jeff, to develop your style of trading, did you do backtesting or did you mainly use trial and error?
- Hello John, thanks for your question. Truth be told, I am not a proponent of backtesting. I believe that might reveal some insights for what has historically happened when certain conditions are present, but when it comes to basing confidence of trades on what data says, it’s incredibly difficult to make the transition. Backtesting involves no emotion, and yet trading carries with it a lot of emotion, so there’s a major disconnect there in my opinion. Instead, I go with trial and error, or what I recently referred to as testing 1-2-3. When I have real money on the line, I will learn faster and more intently than simply reviewing data. By doing this, it also elevates my trust in a certain methodology over time, whereas taking a computer model and converting it into trading a real account is a very different story.
20. Jay: Can you speak a bit about how you track your trades, and do you use a trading journal? Thanks.
- Hi Jay. I’ve always noted my trades on a sheet of paper, an actual grid marking several conditions (Time, Prices, P&L, etc.). Noting the reasoning for a trade, what was thought about it during the trade, and of course having the hard numbers to help calculate a variety of things tied to one’s results are imperative to have in my opinion. My newsletter also serves as a diary of sorts for me, as I note each day when I’m in swing trades what I like or dislike about the price action and why I’m adjusting my stop. So that’s my current system. For those who would rather automate this process, there’s an excellent tool called StockTickr which can import trades from various brokers and is capable of generating all kinds of reports tied to your results data. It’s a great way to see visually what’s working and what isn’t, usually shown to you in a different light than you’ve ever considered.
21. Benjamin: Hi Jeff, thanks for doing the Friday chat and am really enjoying it. What do you make of the relatively light trading volumes in the last few weeks, especially in the face of rising stock prices? Do you view them as bullish or bearish signs or neither?
- Hello Benjamin, I’m happy to have had the chance to do the chat (and this follow-up).  With the relatively light trading volumes, I think there are a few factors there. One is that there’s a lot of contentment in the market. Prices keep rising, volatility is very low, and therefore fewer see the need to take action on the sell side. So traders accumulate gradually, and we see some lighter volume than we saw last fall when the bottom was falling out. Another factor is that it’s summertime, and that’s just common. Traders take vacations, leaving fewer at their desks to buy and sell, and resulting in some lighter volume. I’m not trying to read too much into it, because the biggest issue is what price is doing. Right now it’s trending higher, so I’m reluctant to get bearish until price gives me a reason to.
Thanks for stopping by and I’ll see you here soon with more. Until then…
Trade Like a Bandit!
Jeff White
Are you following me on Twitter yet?
Stop Loss Placement, Part 4
August 6, 2009 at 8:50 pm
As we complete this series on stop loss placement, we’re going to discuss trailing stops. But be sure to catch Part 1, Part 2 and Part 3 first!
In this segment, I specifically want to discuss the importance of managing our risk throughout a trade, not only to reduce losses but also to preserve profits. This is achieved by adjusting our stop, or through the use of a trailing stop.
When and Why to Adjust a Stop Loss
A rock climber knows the importance of anchoring himself to the wall along the way up, just in case he happens to slip. The anchor set early in the climb at a low altitude is every bit as important as the ones set at higher levels, but the more a climber ascends, the less useful a low anchor will become. As a result, it’s wise to keep raising it along the way.
Trading is similar in that the stop loss we initially set for a position may not be appropriate once that trade has progressed, so it’s likely to need adjusting along the way.
Setting some rules for ourselves, sticking with them consistently, and maintaining an adequate reward-to-risk structure throughout the trade can keep us in good shape.
Watch this clip and let me explain more thoroughly with some specific examples. It was also posted over at the Trading Videos site, but I’ve embedded it here for your convenience.
Let me highly suggest clicking the “HD” on the video player and then going full-screen for best quality.
Update: Check out Part 1, Part 2 and Part 3 of this series!
Thanks for stopping by and I’ll see you here soon with more. Until then…
Trade Like a Bandit!
Jeff White
Are you following me on Twitter yet?
