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Shorting covered calls is a very popular option trading strategy that involves shorting a call option and taking a long position in underlying stock. On the upside, there is limited capped profit to the trader with limited and proportionate loss on the downside. Experienced traders apply this strategy with the right timing and careful selection of the expiry and moneyness of call options The risks in selling covered calls There's a common misconception that any option that is shorted, the potential for loss is unlimited. The same is thought of short covered calls, but this is not true. In fact, the maximum risk in a short covered call position is limited and can be managed efficiently - with the proper timing of the trade and selecting the covered calls on the right underlying. First things first: What’s the risk in selling covered calls? Let’s begin with an example. Assume we are creating a short covered call position on the NYSE-listed IBM stock with the underlying horizon of one year. Current market price (in mid-January 2015) for IBM stock is $155, one-year dated at the money (ATM) call with a strike price of $155 and expiry date of January 2016, trading at $13. For the sake of simplicity, brokerage charges will be considered at the end for this trade which assumes ONE share purchase and ONE call contract shorting. In real-life trading, stock options are available in hundreds of contracts and shares should be bought proportionally. Here’s what the covered call construction will look like: Fig 1 short-covered-call-payoff Purple Graph - Long position in IBM Stock at $155 (payable). Brown Graph – Short call position with strike price $155 and option premium $13 (receivable). Blue Graph – Net payoff function for overall covered call (net sum of purple and brown graph). Total Cost to create position = - $155 + $13 = - $142. Analysis (Profit and Loss Scenarios for a Short Covered Call): The blue graph is split as per the profit and loss regions for better understanding. Fig 2 short-covered-call-payoff If underlying IBM stock price remains above $155 at the time of expiry, the trader will get a maximum profit of $13 (minus the brokerage charges). This profit will remain capped at $13, irrespective of how high the stock price goes (indicated by horizontal region of the green graph above $155). If underlying IBM stock price remains between $142 and $155, the trader’s profit will vary linearly – i.e. higher the underlying IBM stock price, the higher the profit (indicated by the slanting yellow graph between $142 and $155). If underlying IBM stock price remains below $142, the trader will see a loss. The loss will vary linearly – the lower the IBM stock price goes, the higher the loss (indicated by the red graph below between $0 and $142). The stock price can never go negative. The minimum stock price can be $0 (i.e. case of company going bankrupt), which would be the maximum loss. As indicated, this maximum loss is capped at $142 when this scenario of zero underlying price occurs. Theoretically, if the stock price goes to zero, the short call option will expire as worthless, allowing the trader to keep the $13 received as option premium. He will suffer a loss of $155 on the long stock purchase. Net loss = - $155 + $13 =-$142, which matches with the maximum loss value indicated in the graph. How to minimize loss for short covered call option Let’s explore ways in which the risks can be mitigated. (To learn more, see: Managing Risk With Options Strategies). Loss area is indicated by the red graph between the underlying stock price of $0 and $142. To minimize the risks (and loss), we should explore ways to push this net payoff function upwards (including the red graph). This can happen if there is a net receivable amount available to the trader in some form, such as a dividend receipt. Risk management for short covered call using high dividend-paying stocks IBM has a generous history of regularly paying quarterly dividends. For instance, it paid $0.95, $1.1, $1.1, $1.1 respectively in the four quarters of 2014. Assume that IBM will maintain its regular dividend payout trend and will pay a total $5 dividend in the following one year. Long position in underlying stock, an aspect of the short covered call, would enable the trader to receive the dividend amount i.e. $5. Since this is a net receivable, this adds to the net payoff and pushes the overall payoff function higher by $5 as follows: Fig 3 short-covered-call-payoff If the underlying IBM stock price remains above $155 at the time of expiry, the trader will now get a maximum profit of $18 (minus the brokerage charges). This profit will remain capped at $18, irrespective of how high the stock price goes (indicated by horizontal region of DOTTED green graph above $155) If underlying IBM stock price remains between $137 and $155, the trader’s profit will vary linearly i.e. higher the underlying IBM stock price, the higher the profit (indicated by slanting DOTTED yellow graph between $137 and $155) If underlying IBM stock price remains below $137, the trader will be in a loss. The loss will vary linearly i.e. the lower the IBM stock price goes, the higher the loss (indicated by red graph below between $0 and $137) The hidden dividend payment has changed the profit and loss scenario significantly. First, it has shortened the loss region from the earlier ($0 to $142) to ($0 to $137) and second, it has added to the overall profit amount by $5 (maximum profit increased from $13 to $18) Properly timing the trade to create short covered call allows benefits of dividend payment. Experienced option traders take such positions just before the dividend ex-date to qualify for dividend receipt. Scenario analysis at expiry If the underlying stock price goes down significantly (i.e. it ends in loss region, at $120 for example), the loss = (-155+120) from stock + ($13) from now worthless option premium + ($5) from dividend payment = -$17 net loss. If underlying stock price ends in the yellow zone (e.g. $145), the profit = (-$155+$145) from stock + ($13) from now worthless option premium + ($5) dividend = $8 net profit. If underlying stock price ends in green zone (e.g. $165), the profit = (-$155+$165) from stock + ($13) from option premium + (-$10) for option exercise as option is now ITM + ($5) dividend = $18 net profit Risk management for short covered call using ITM calls: Instead of shorting ATM calls, an option trader can also look to shorten the loss area (red graph) by taking in the money (ITM) calls at partial expense to the profit. Shorting ITM calls allows a higher option premium collection, which is another way to increase the net receivable amount. Let’s create the same covered call option with an ITM call with strike price of $125 available at option premium of $35 (expiring January 2016, prices as available in January 2015). Fig 4 Short Covered Call Purple Graph - Long position in IBM Stock at $155 (payable). Brown Graph – Short call position strike price $125 with option premium $35 (receivable). Blue Graph – net payoff function for overall covered call (net sum of purple and brown graph), offering maximum profit of $5 above $125, variable profit between $120 and $125 and variable loss below $120. Total Cost to create position = -$155 + $35 = -$120 (comparatively lesser than that of ATM calls). As observed, the ITM call inclusion has narrowed the loss region to $120 (against earlier $142) at the expense of profit which is now capped at $5 (against earlier $13) Furthermore, if the same ITM short covered call is created on a high dividend-paying stock, the blue graph will shift upwards by $5 (dividend amount) improving profits and further limiting the losses: Fig 5 Short Covered Call with Dividend Payment The dividend payment ($5) has further reduced the risk area to $115 (red graph), improved the profit offerings in both the yellow range ($115 to $125) and green range (above $125), with maximum profit improved to $10. Compared to the earlier case of ATM call with same dividend payment, the risk region has reduced to between $0 to $115 as opposed to the former range of $0 to $137. But this came at the expense of the profit coming down from $18 to $10. One important point that was not included above is the option brokerage charges, which are net payable and thus bring down the net payoff functions, reducing the profits and increasing the losses. Brokerage charges should be carefully considered and should not surpass the profit potential. Keep in mind that options are usually traded in hundreds of contracts and sufficient capital should be allocated before commencing the options trading. Other important points to mitigate the risk: Option pricing mechanisms imply higher option premiums when volatility is high. Create short covered call positions when option volatility is high to gain higher option premiums as a seller. It increases the net receivable amount and improves the payoff by reducing the risk region. Few countries offer tax benefits on long term stock holding, which is an integral part of the short covered call. The covered call position should be created with sufficient long term view, which could enable benefits on taxes to add to profits and therefore further reduce loss. Dividend payment expectations usually provide support to underlying stock prices, which keeps the stock prices high even when the overall market is bearish. Other corporate actions like splits, acquisitions, etc. may not necessarily provide monetary payment like dividends, but will ensure higher valuations of the underlying stocks, making these eligible for short covered call for a selected period. It is advisable to stay prepared with pre-determined stop-loss levels to exit the position if there is a large downward move in underlying stock price. One should also prepare for steps at expiration. If the short call expires as worthless, nothing is needed on the trader’s part. One can maintain the long stock position and short a new call to make the next term covered call position. If short call gets into ITM, square off the long stock position to reap the profits and explore other underlying stocks for similar covered call strategy. In Summary The dynamics of options trading - involving combinations of multiple assets and positions, with significant impact within short interval price moves - can get tricky at times even for experienced traders. The complex structure of brokerage commission also impacts the profit and loss. Option traders should carefully consider the available profit potential against the risk appetite, and trade after a thorough analysis and carefully keeping pre-determined stop loss levels.

Traders generally buy and sell securities more frequently and hold positions for much shorter periods than investors. Such frequent trading and shorter holding periods can result in mistakes that can wipe out a new trader's investing capital quickly. Here are the 10 worst mistakes made by beginner traders: Letting losses mount One of the defining characteristics of successful traders is their ability to take a small loss quickly if a trade is not working out and move on to the next trade idea. Unsuccessful traders, on the other hand, get paralyzed if a trade goes against them. Rather than taking quick action to cap a loss, they may to hold on to a losing position in the hope that the trade will eventually work out. In addition to tying up trading capital for an inordinate period of time in a losing trade, such inaction may result in mounting losses and severe depletion of capital. Failure to implement stop-loss orders Stop-loss orders are crucial for trading success, and failure to implement them is one of the worst mistakes that can be made by a novice trader. Tight stop losses generally ensure that losses are capped before they become sizeable. While there is a risk that a stop order on long positions may be implemented at levels well below those specified if the security gaps lower, the benefits of such orders outweigh this risk. A corollary to this common trading mistake is when a trader cancels a stop order on a losing trade just before it can be triggered, because he or she believes that the security is getting to a point where it will reverse course imminently and enable the trade to still be successful. Not having a trading plan or sticking to one Experienced traders get into a trade with a well-defined plan. They know their exact entry and exit points, the amount of capital to be invested in the trade, and the maximum loss they are willing to take, etc. Beginner traders may be unlikely to have a trading plan in place before they commence trading. Even if they have a plan, they may be more prone to abandon it than seasoned traders if things are not going their way. Or they may reverse course altogether (for example, going short after initially buying a security because it is declining in price), only to end up getting "whipsawed." Averaging down (or up) to redeem a losing position: Averaging down on a long position in a blue-chip may work for an investor who has a long investment time horizon, but it may be fraught with peril for a trader who is trading volatile and riskier securities. Some of the biggest trading losses in history have occurred because a trader kept adding to a losing position, and was eventually forced to cut the entire position when the magnitude of the loss made it untenable to hold on to the position (or alternatively, because his bosses discovered the true extent of the trading loss). Traders also go short more often than conservative investors, and "averaging up" because the security is advancing rather than declining is an equally risky move that is another common mistake made by the novice trader. Excessive leverage: According to a well-known investment cliché, leverage is a double-edged sword, because it can boost returns for profitable trades and exacerbate losses on losing trades. Beginner traders may get dazzled by the degree of leverage they possess, especially in forex trading, but may soon discover that excessive leverage can destroy trading capital in a flash. If leverage of 50:1 is employed - which is not uncommon in retail forex trading - all it takes is a 2% adverse move to wipe out one's capital. Trading too frequently: Overtrading can erode returns to the point where nice profits turn into significant losses. While experienced traders have generally learned the hard way that trading too frequently can be severely detrimental to overall returns and performance, new traders may have yet to learn this lesson. Following the herd Another common mistake made by new traders is that they blindly follow the herd, and as a result they may either end up paying too much for hot stocks or may initiate short positions in securities that have already plunged and may be on the verge of turning around. While experienced traders follow the dictum of "the trend is your friend," they are accustomed to exiting trades when they get too crowded. New traders, however, may stay in a trade long after the smart money has moved out of it. Novice traders may also lack the confidence to take a contrarian approach when required. Shirking homework New traders are often guilty of not doing their homework or not conducting adequate research before initiating a trade. Doing homework is critical because beginner traders do not have the knowledge of seasonal trends, timing of data releases, and trading patterns that experienced traders possess. For a new trader, the urgency to put on a trade often overwhelms the need for undertaking some research, but this may ultimately result in an expensive lesson. Trading multiple markets Beginner traders may also flit from market to market, e.g., from stocks to options to currencies to commodity futures, to name a few. However, trading multiple markets can be a huge distraction and may prevent the novice trader from gaining the experience necessary to become a specialist and excel in one market. Overconfidence or hubris Trading is a very demanding occupation, but the "beginner's luck" experienced by some novice traders may lead them to believe that trading is the proverbial road to quick riches. Such overconfidence is dangerous as it breeds complacency and encourages excessive risk-taking that may culminate in a trading disaster. In Summary Trading can be a profitable endeavor, as long as the trading mistakes mentioned above can be avoided. While traders of all stripes are guilty of these mistakes from time to time, beginner traders should be especially wary of making them, as their capacity and capability to bounce back from a severe trading setback is likely to be much more restricted than with experienced traders.

The answer is, because “simple” works, but that’s not enough information to fill up an article. So, let’s take a look at some unrelated examples to really see if “simple” is the best approach to most of the things we do. Have you been to a gym lately where they offer personal training? I have been going to the gym for as long as I can remember and my routine has not really changed much over the years. These days, however, I see some interesting exercises going on during personal training sessions around me. I see people standing on one foot, on a big rubber ball, doing arm curls. The first time I saw something like that I thought of the circus. Just the other day I was bench pressing and to my left I saw this man walking toward me with his trainer right behind him, only this was no normal walk. The trainer had him taking huge steps and touching his knee to the ground while lifting a medicine ball over his head. I could have sworn I saw this before at a Cirque Du Solei show. Don’t get me wrong, I think the big push into personal training is great. At least it gets more people into the gym; who without personal training would still be eating chips on the couch. Make no mistake about it though, when you go to any gym and look around, who are the people in the best shape? It’s the people doing the same basic exercises people have been doing for decades. A stair machine or treadmill mixed with some basic weight training and I am all set. And, let’s not forget the even more important part of fitness, what you eat. There are so many diet fads going on these days that it’s easy to forget that the main issue is very simple, calories in vs. calories out. Is the problem really choosing between the thousands of diets available, or is it the simple answer that people eat too much food and lack self control? The answer, as always, is very simple. You don’t need the expensive gym and fancy workout routine, everything you need is at your local YMCA or your home for a small investment. Expensive diets are not the answer either, no matter how much hype. A well balanced, low calorie, and low fat diet is the simple solution. Just like gravity, you can’t ever get away from the calories in vs. calories out equation, it is what it is… I have had two multi-year stints coaching youth ice hockey. The important part of the story I am about to tell is that there was about a 7 year break in between. Hockey, like other sports is a simple game, strategy wise. It’s all about getting down the ice faster and smarter than the other team and scoring more than they do. All the team drills I have the kids do are very simple drills that have them getting the puck down the ice quickly. After taking a break from my first multi–year coaching experience, I decided to do it again. As the year began and we were a week away from our first practice I received a huge manual in the mail from the president of the hockey club. It was a new coaching manual created by USA Hockey and it was filled with all kinds of new drills that I had never seen before. As I turned the pages, I saw that the drills were getting more and more creative, each drill required more and more cones and arrows than the next. Something disturbed me about this new bible of hockey drills I was supposed to unleash on my young fresh hockey kids. The more I read, the more I noticed that kids were spending more time skating from side to side than they were skating up and down the ice to the other team’s goal. This is like a football player running with the ball, having nothing but space in front of him, and deciding to put on the breaks and start running from sideline to sideline. Very soon he is going to get caught and either lose the ball, get tackled or both! Why the need for the new fancy drills? Because people are never content sticking to basics and mastering them. There is always this desire to reinvent, make some kind of statement, get fancy and so on. I felt it was in the best interest of the kids to throw the book in the garbage and stick to the basics. Now that the competition was learning all these new drills that would slow them down, I figured my team had an advantage competing against that strategy. We ended up winning the Presidents Cup that year which means we were the top team that season. Our banner hangs in the rafters today from that season. We had a great team as well, but I think you get the point. I always tell the kids that the main difference between them and NHL players is doing all the basics faster. Look at some of the great basketball players like MJ and Kobe. They master the simple and basic jump shot better than anyone else. Now, let’s take a look at speculating in markets. Take a look at the chart on the left, above. Now be honest, have you ever known anyone who has made a consistent low risk living using a chart like that or any of the items below the chart? I could have made that list much bigger but I ran out of room. Some of those items are in every trading book ever written yet I don’t know anyone who has ever made a consistent living using any of that stuff. What I do know for a fact, however, is that Walmart is one of the most successful companies the world has ever seen because they have mastered one, and only one, simple skill. The buy low and sell a little bit higher. They repeat this thousands of times each day, maybe millions sometimes. This is where everyone gets it wrong in trading. They think how Walmart makes money is somehow different from how you make a consistent living trading the financial markets. The truth is, there is no difference. Walmart buys at wholesale prices and sells to us at retail prices. They are so good at it that they can sell things to us a little cheaper than their competition, which is why they are the top traders in their industry, if you will. Supply/Demand Income Trade. 2nd Feb 2015 Fig 2 Here is an example of a trade from last week that I took from our Supply / Demand grid. This is no different than Walmart selling at retail prices. Instead of me selling toilet paper at retail prices, I sold the DAX at retail prices (supply) to someone who was willing to pay retail prices. That buyer on the other side of my trade likely used one of the items in the first example as a buy signal. Unfortunately, that trader doesn’t realize that most of those tools that give a buy signal have you buying at retail prices and selling at wholesale prices. And by the way, it may not sound sexy but I love being Walmart when it comes to trading. Occam’s Razor, it is a scientific principle that suggests the simplest answer is typically the right answer. If you’re trading or investing results are not where you want them to be, take a look at every component of your plan and begin to question any part of it that seems complicated. Chances are, it is a small set of “simple” answers that will get you where you want to be.

Just like good boy scouts, traders need to be prepared for the unexpected. It is virtually inevitable that part of a trader's workstation will melt down at some point, and this can lead to a financial loss. Platforms can experience problems, including surprises in strategy automation, for which traders need to plan. And, although it (thankfully) doesn't happen very often, entire exchanges can even shut down. All traders need a well thought out plan - in writing - to deal with these types of eventualities. If traders are ready to deal with problems as they arise, they'll be back to trading sooner - and hopefully with a minimum of stress and financial loss. Think of this preparation as a form of risk control. Important Numbers At the very least, traders should have a handy list of service providers having to do with trading: brokers, essential trading and charting software, internet service providers, etc. The list should be easy to use and posted in an obvious location. The service name, telephone number(s) and pertinent username should be included along with the account number and password information. Fig 1 An example of a service provider list. Workstation Problems Let's take a look at some of the technology on which traders rely in their workstations: computers, phone lines and internet connections. These elements are important to traders, yet any of them can abruptly disappear from the trader's workstation. The first step in dealing with tech issues is to immediately recognize and acknowledge the problem, and then take action to fix it. Computers The best offense for computer related problems is a good defense. Traders can avoid many problems by following three rules: Keep virus protection up to date Use hardwired peripherals (keyboard, mouse, etc) Use hardwired internet Using virus protection and internet security protection can help keep a computer healthy and working. Avoiding any wireless connections for things like keyboards, mice and the internet can help minimize the risks of a computer component malfunctioning, as well as simplify the troubleshooting process. A separate computer, such as a laptop, with the trading platform loaded is a practical back-up. If the main computer is not functioning, trades can at least be monitored and/or placed. If a separate computer is not available and the main computer is down, a phone call to the broker can be made to place or close orders Phones If phone lines are out, the internet may be out as well, depending on the type of connection used. A good way to be prepared for losing a phone line connection is to have a charged cell phone handy. A cell phone can be used to call the broker, if necessary, and then to call the phone company to determine how to fix the problem. Internet If the internet connection is lost, a back-up internet service provider can be used if available (for instance, an air card or smartphone tether connection). Otherwise, a quick call to the broker can be made to ensure open trades have protective stop loss orders in the market, as well as profit target orders. After that, one can call the internet service provider's tech support to deal with the problem. Platform Problems Though traders would like to think their trading platforms are infallible, it is to a trader's advantage to plan for problems. The best way to be prepared for a problem is to create a troubleshooting guide specific to the platform. This should be an easy-to-find, easy-to-read page that provides an action plan to address each problem. Laminating the guide will help keep it in good shape, and will make it easier to find in normal workstation clutter. Keeping it in an obvious location at the workstation will ensure that it can be found during stressful times. The guide should state the difficulty, and list actionable steps towards resolving the problem. A troubleshooting guide like this is a work in progress. Every now and then some new quirk will emerge. Once the trader has identified the problem and figured out the best solution, both should be added to the troubleshooting guide. Figure 2 shows an example of the type of information a troubleshooting guide might contain. http://www.trade2win.com/system/images/4752/original/Fig2.jpg?1425474080]/IMG] Fig 2 A troubleshooting guide. Be Prepared Since traders rely so heavily on technology, it is inevitable that some component of the chain of technology will malfunction. It is bad enough to deal with a computer crash, but when money is at risk because of it, it becomes even worse. Here are some ways in which traders can be prepared to deal with these problems: Have a good battery back-up for your computer and other equipment such as modems. That way if there is a power outage, there is still some time to watch a position, and then call in any necessary orders to the broker. Keep a list handy of phone numbers, usernames, account numbers and passwords. Keep a back-up computer handy, with all trading applications loaded and ready to go. Remember to download new versions of platform software as they become available, and save your workspaces to the back-up computer. Make sure a cell phone is handy and has a full charge in case the LAN line is out. Have a backup internet connection ready to go. Know how to refresh the data feed if it is sporadic or doesn't match other time frames. Refer to the platform's help guide for assistance. Take quick, decisive action as soon as a problem is suspected, and follow the predetermined protocol for solving each problem. For new problems, document the steps taken to resolve them, and add the information to your troubleshooting guide. In Summary Each trader is different and will require varying degrees of preparedness. The casual buy-and-hold investor, for example, might not need a back-up computer and a back-up internet connection. An active trader, however, needs to be prepared to handle things like their broker losing access to the exchanges. This might come in the form of a back-up broker or a ready-to-fire hedge position that helps reduce financial risk in an open position in the market. Each market participant, whether a buy-and-hold investor or a scalper placing dozens of trades a day, should evaluate his or her needs, consider what could go wrong, and develop an actionable plan to fix any problems as soon as they arise.

Psychology: Most traders neglect one of the most important parts of trading: The psychology of the game. How mentally prepared are you for the trials and tribulations that are important in the trading activity? After a few trading experiences it becomes obvious how important your mental approach (psychology) is to the market. In fact, your trading success, the difference between winning and losing, depends upon your mental attitude. It is the main factor, before anything else, that determines whether you win or lose. It is obvious how much training is necessary to learn the technical aspects of trading. Hundreds of books and courses have been written on every tiny aspect of trading, each with something worthwhile. The internet barrages us daily with the latest and greatest method or system, the “Holy Grail,” we all seek. A review of pitches on the net reveal hundreds of technical offerings for every ONE emotional piece, mental preparedness, psychology studies, etc.! Fewer than ten offerings on how to prepare emotionally against thousands on how to prepare technically. Does that suggest the unimportance of mental fitness? No way! Rather, that points to the reasons fewer that 5% of all beginning traders find their way to a successful trading career. Mental fitness is easier to say than psychology, but the meaning is clear, how we feel about what we’re doing impacts how we do it. But what psychology, what emotions are we talking about that are so important? Consider the following short list: Anger Delight Fear Greed Resolve Remorse Indifference There is one paramount aspect to trading we all learn early in the game: Successful traders both win and lose, with losing trades coming as often as winners. How we handle the losses is a state of our mentality! How well prepared are we to lose in the market? Can’t we just find the perfect method or system that prevents losses? We will often even deal with more losing trades than winners. Those kind of returns will mess with our outlook, with our emotions! We needn’t go through all the mind-games that take place when we are in the heat of the battle. …the baby needs diapers, the car just blew a gasket, the rent is due, etc., etc. STOP! Specific conditions must be observed and obeyed if we are to create the Mental Attitude required to trade successfully! Steps must be taken to address this very important phase every day that we trade. It hinges upon one word: DISCIPLINE! There are dozens of very successful systems used to trade the market. Yet, most traders are losers who have traded these systems. Let’s try to see why. Two important rules in any book/course/system/plan on trading: “Buy low, Sell High” “Cut your losses short and let your winners run.” Easy enough to understand, but tough to handle when the time comes. The execution of any trading system or plan assumes the rules will be followed. The rules have been developed after countless hours of study and experience. But until the trader has many hours of experience executing the rules, many appear to be only suggestions. See where the one word, Discipline, comes in? The first adage, “Buy low, sell high,” is also easy to understand. But emotional baggage plays hay with the simple rule. We respond to the news, market letters, television gurus, etc., about market action. A respected financial figure touts a new Initial Public Offering with prospects going to the moon and everybody watches. The price starts up, the public greedily jumps in, buying on its rise, with volume up the kazoo. We think this is it, we gotta get on board, and buy at the top just as the market starts down. We hang on, waiting for the upturn which will surely come as promised, disregarding any stops since it WILL turn around. Finally, we get out, selling at the bottom, just before the price finally starts back up. Does that sound far-fetched? That is a very common scenario among beginners in the trading world. Look at Fig. 1 below which is the last few months of the S&P 500 index, the most popular indicator reference to the market. see Attachment Fig. 1 As price rises to the peak there is more danger of a pullback (meaning higher risk). But this is where buying pressure is highest, before it turns down. When price nears the bottom of the cycle more people are bailing out just at the time the risk is lowest. Selling pressure is highest here. What emotions are played out with the chart above? Fear got us in at the top of the wave, afraid we would miss the train which was pulling out of the station, with dollar signs in our eyes (Greed) about how high it would go. Greed kept us in as the expectation (hope) caused a delay we finally couldn’t abide while struggling with Fear. Quite an emotional tug of war going on within, impacting our action and/or our inaction. Thus, the two sides of fear are: Fear of losing, and Fear of missing out. This recurring pattern in a stock chart is a testimony to the psychology of trading. The second adage posted above, “Cut Your Losses Short and Let Your Winners Run,” is the salvation of our trading plans. Since we will both win and lose, big winners outshine small losses every time! Here’s a rule we can take to the bank: Whenever you identify HOPE as the primary reason for holding a position, CLOSE IT IMMEDIATLY! It is a big problem for beginning traders to not feel bad when a trade goes sour. But why shouldn’t they feel bad? It’s only natural. It is very natural and that’s the problem. When you can distance yourself emotionally from the action of the day you’ll keep the proper mental attitude for the next trade or trades. This means staying with, adhering to your system! One way of lowering unwanted clutter is to design your system so that buy and sell decisions are made only when the markets are closed. Just remember that no one can always succeed. Every trader goes through cycles including failure and success. The good traders realize this and will pull out of the market for a time after a series of wins, regaining an objective state of mind understanding the importance of psychology. Final takeaway: Replace the fear of losing with a fear of not following the plan!

When it comes to trading, most of it is done by making a directional bet. In other words, if the probabilities are high that the market will decline, we short it anticipating we will make money as it moves lower. Conversely, when the prevailing odds are that a given market will move higher, we buy it with the hope that we will sell at higher prices in order to garner a profit. In addition, to exercise sound risk management we will cut our losses swiftly if the market proves us wrong. This is conventional market speculation. There is however, a lower risk method to participate in the markets. This method is not as widely known, or practiced for that matter, but can be a viable method to making money in any market. What I’m referring to is what is commonly called spread trading. Spread trading involves buying one contract and concurrently selling another contract in order to profit from a relative change in price in both contracts. These can be done in the same market, known as Intra-market spreads, and they can also be done among two related markets, referred to as an Inter-market spread. Institutions are heavily involved in this type of trading in stocks, options, and the futures markets. One premise in spread trading is that a situation arises when markets become misaligned or are trading outside of the norm. Most of the time they will almost always revert back to alignment. This price movement between two markets can produce profits for the astute spread trader. The second premise in spread trading is to look at several related markets and then identify the strongest and weakest of those markets. The stronger market is to be bought and the weaker market should be shorted, assuming that strength begets strength and weakness begets weakness. The best example of this type of spread is to look at two competing companies, identify which one is the strongest and weakest competitor in the given space and apply this technique. Specifically, if you think about the chip maker AMD competing against Intel. The most obvious spread in this scenario is to buy shares of Intel, since they are the market leader, while simultaneously shorting shares of AMD. As we can see from the chart below (the orange line representing the closing price of AMD versus the blue line plotting shares of Intel) a trader in this particular pairs (spread) trade would have done very well. Although this is not a futures example I’m showing it to convey the point of this strategy. As I mentioned earlier, some futures contracts go out of alignment. So what does this mean specifically? Let’s take interest rates for instance. We know that in a normal yield curve interest rates in the shortest maturities are lower than longer maturities. For instance, the yield on a 3 month T-Bill is only a few basis points whereas the yield on a thirty year bond is about 2.6 %. In most commodities today’s price is usually lower than the price in the future. Below are two charts; one is displaying the April of 2015 Crude oil contract and the other is the December of 2015 contract. Notice the price on the April contract is $48.17 and the December is $57.06. Oil is in Contango, which is normal. A spread trader can sell the December and buy the April if he feels that the price differential will shrink. There are instances, however, where the front months are more expensive than the further out months. This phenomenon is called backwardation. Below we see this between the May (blue line) and November (orange line ) Soy bean contracts. This distortion in price, if corrected, can represent opportunity for the spread trader. Spread trading, in addition to having less risk than buying or selling the outright contracts, comes with an additional benefit, which is much lower margin requirements. The bottom line is that spread trading is not for everyone. Yes, there’s less risk but also there’s less potential reward. So, some food for thought, explore it and see if it’s for you.

Most traders who have even a passing acquaintance with technical analysis have heard about a classic chart pattern called the double bottom. It looks like a “W” on the chart. The standard trading methodology suggests buying when the stock breaks out past the middle peak of the W” and setting an initial target by adding the distance between the bottoms and the middle peak to the breakout price. (See figure 1). By buying the breakout a trader is hoping for a higher probability that the stock will reverse as opposed to going sideways. However, the temptation is always there to try and enter the trade earlier and capture some of the move up from the second bottom to the middle peak, which can sometimes be substantial, especially when the double bottom is quite tall. Fig 1 The Trade Setup If an earlier entry appeals to you, here are some possible clues you can look for: How the bottoms form in relationship to the Bollinger Bands® In order to use Bollinger Bands® to clarify bottoming formations we have to understand what they are really telling us. Bollinger Bands® are in essence showing us what are relative highs and lows given changes in volatility. For example, let’s say a stock runs up to a new high, then pulls back, and then moves back to a marginally higher high. That second high is obviously a higher high on an absolute basis. But is it really a higher high on a relative basis if market volatility picked up substantially when it was made? Bollinger Bands® can help answer this question. In my experience, buying into the second bottom is considered a better practice when it forms like this: • The first low is touching or outside the lower band • The second low is inside the lower band The second low can be higher or lower than the first low. The fact that the second low is within the lower band is telling us that it is a higher low on a relative basis. This fact allows us to consider buying the second low, even if it is lower than the first one with, for me, added confidence. How the RSI behaves when the bottoms form The RSI is a type of indicator called a momentum oscillator and is commonly used to detect overbought and oversold conditions. Welles Wilder, who developed the indicator in 1978, felt the most effective use of the RSI was looking for divergences to help identify potential changes in trend. For a double bottom we would like to see the second bottom form at the same or slightly lower price level than the first, with the RSI having a higher value at the second bottom than at the first. What all this is telling us it that the second low is being made with less momentum than the first. Where the bottoms form in relation to moving averages I have found that double bottoms tend to be more reliable if they form under a moving average of appropriate length. For shorter term bottoms I check to see if they are forming under the fifty day moving average. Longer term bottoms should form under the 200 day moving average. Volume Pattern Double bottoms tend to be more reliable if the volume as the second bottom forms is less than was seen on the first bottom. Also, it is better if volume is generally declining as the pattern progresses. Overall market environment Buying a stock near the second bottom is a bullish trade and bullish trades obviously work out more often if the overall market is bullish too. One simple method I use to assess the health of the market is to look at the slope of the 100 day simple moving average of an index that contains stocks similar to the one I want to trade. For example if I am attempting to pick a bottom in a large cap technology stock, I’ll look to see if the 100 day moving average of the NASDAQ 100 is sloped up. Figure 2 shows a typical set up. Once the second bottom is identified with the characteristics listed above, I typically wait for some type of confirmation. This could be a close near the high of the day with an increase in volume, or even better, seeing the stock trade above the high of the previous day. For the target, I will sell at the rally high (middle peak of the “W”) which often acts as a resistance level. If the stock moves against me I will consider exiting if it trades below the lower of the two lows. If the stock reaches my initial target of the rally high, I will sell and take a profit. However, I am not necessarily done with the trade. Remember that if the stock can clear the middle peak of the “W” the odds increase that that the stock is really reversing its previous trend. If that occurs, I will buy back into the stock with an initial profit objective based on the classic method of adding the distance between the bottoms and the middle peak to the breakout price. Naturally there are no guarantees that the stock will achieve this target price. If the stock doesn’t reach this objective and trades back below the middle peak I will exit the trade, hopefully for only a small loss. This two stage approach has several advantages. If the stock only makes it to the middle peak and then reverses, I should have a profit. If it does break out but then fails, I have a loss on the position I re-entered but the gain on my first trade generally still gives me an overall profit. Finally if the breakout succeeds and travels to the target, I will have captured almost the entire move from the very bottom of the formation. Happy trading!

Scalping, a subset of day trading, is a strategy that involves frequent entry and exit in a trade in order to realize small but multiple gains from the intra-day movement during the trading session. Traders who employ the scalping technique are called scalpers. Scalpers indulge in numerous trades during a day’s trading session with each position held for a very short span of time, ranging from few seconds to minutes. Scalping is not only used with stocks, but also with futures and forex. With low barriers to entry in the trading world, the number of people trying their hands at day trading and related strategies such as scalping has increased. Scalping is not the best trading strategy for rookies as it involves fast decision-making, constant monitoring of positions, and frequent turnover. However, if you are keen to try your skill set at scalping, here is what you need to know. Target The first thing a novice scalper needs to remember is that the aim of scalping is to pocket small profits over a short holding position. The target profit is usually very small. Say hypothetically, a scalper may buy a stock at $30.75 and sell at $30.90, and again pick it at 30.80, gaining around in few cents with every successful trade. Scalpers commonly look to take advantage of a stock’s bid-ask spread. Order Execution A novice needs to master the art of efficient order execution. This is because a delayed or bad order can wipe out what little profit was earned and even result in a loss. Since the profit margin per trade is limited, the order execution has to be accurate. This requires supporting systems such as the Direct Access Trading (DAT) and Level 2 quotations. Frequency & Costs A novice scalper has to make sure that he keeps costs in mind while making trades. Scalping involves numerous trades, as many as hundreds during a trading session. Frequent buying and selling is bound to cost in terms of commissions, which can shrink the profit. This makes the decision to choose the right online broker crucial. The broker should not only provide the requisites like direct access to markets but also competitive commissions. And remember, not all brokers allow scalping. Trading Spotting the trend and momentum comes in handy for a scalper, who can even enter and exit briefly to repeat a pattern. A novice needs to understand the market pulse and once the scalper has identified that, trend trading and momentum trading can help achieve more profitable trades. Another strategy used by scalpers is counter-trend. However, beginners should avoid using this strategy and stick to trading with the trend. Trading Sides Beginners usually are more comfortable with trading on the buy side and should stick to that before they gain sufficient confidence and expertise to handle the short side. However, scalpers eventually must balance long and short trades for the best results. Technical Analysis Novices should equip themselves with basics of technical analysis to combat increasing competition in the intra-day world. This is especially relevant in today’s markets dominated by high frequency trading, as well as the increasing use of dark pools Volume Scalping as a technique requires frequent entry and exit within a short timeframe. Such a strategy can only be successfully implemented when orders can be filled, and this depends on liquidity levels. High-volume trades offer much-needed liquidity. Discipline As a rule, its best to close all positions during a day’s trading session and not carry them to the next day. Scalping is based on small opportunities that exist in the market, and a scalper should not deviate from the basic principle of holding a position for a short time period. In Summary As a newcomer to scalping, make sure that this style suits your personality. It requires traders to follow a disciplined approach, make quick decisions, spot opportunities, and constantly monitor the screen. Traders who are impatient and feel gratified by picking small successful trades are perfect for scalping.

The Fibonacci studies are popular trading tools. Understanding how they are used and to what extent they can be trusted is important to any trader who wants to benefit from the ancient mathematician's scientific legacy. While it's no secret that some traders unquestionably rely on Fibonacci tools to make major trading decisions, others see the Fibonacci studies as exotic scientific baubles, toyed with by so many traders that they may even influence the market. In this article we'll examine how the Fibonacci studies may influence the market situation by winning the hearts and minds of traders. The Famous Italian It was during his travels with his father that the Italian Leonardo Pisano Fibonnacci picked up the ancient Indian system of nine symbols and some other mathematical skills that would lead to the development of Fibonacci numbers and lines. One of the Italian's works, "Libre Abaci" (1202), contained some practical tasks that were related to merchant trade, price calculations and other problems that needed to be solved as a matter of their everyday activities. An attempt to solve a sum about the propagation ability of rabbits gave birth to the system of numbers that Fibonacci is known for today. A sequence in which each number is the sum of the two numbers that precede it seems to be nature's underlying principle behind life's many events and phenomena. Leonardo Fibonacci also applied his life-inspired theory in conjunction with geometrical constructions. It is this marriage of concepts that continues to be used by traders to help them cash in on their investments The Enigmatic Legacy Let us first look more closely at what the Fibonacci numbers are. The Fibonacci sequence is as follows: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, … This sequence moves toward a certain constant, irrational ratio. In other words, it represents a number with an endless, unpredictable sequence of decimal numbers, which cannot be expressed precisely. For the sake of brevity, let's quote it as 1.618. At present, the sequence is often referred to as the golden section, or golden average. In algebra, it is commonly indicated by the Greek letter Phi (Phi = 1.618). The asymptotic behavior of the sequence and the fading fluctuations of its ratio around the irrational Phi number can be better understood if the relations between several first members of the sequence are shown. The following example illustrates the relationship of the second member toward the first one, the relationship of the third member toward the second one, and so on: 1:1 = 1.0000, which is less than phi for 0.6180 2:1 = 2.0000, which is more than phi for 0.3820 3:2 = 1.5000, which is less than phi for 0.1180 5:3 = 1.6667, which is more than phi for 0.0486 8:5 = 1.6000, which is less than phi 0.0180 As the Fibonacci sequence moves on, each new member will divide the next one, coming closer and closer to the unreachable phi. Fluctuations of the ratio around the value 1.618 for a lesser or greater value can also be seen when using the Elliott wave theory In many cases, it is believed that humans subconsciously seek out the golden ratio. For example, traders aren't psychologically comfortable with excessively long trends. Chart analysis has a lot in common with nature, where things that are based on the golden section are beautiful and shapely and things that don't contain it look ugly and seem suspicious and unnatural. This, in small part, helps to explain why, when the distance from the golden section becomes excessively long, the feeling of an improperly long trend arises. Fibonacci Trading Tools There are five types of trading tools that are based on Fibonacci's discovery: arcs, fans, retracements, extensions and time zones. The lines created by these Fibonacci studies are believed to signal changes in trends as the prices draw near them. Figure 1: Fibonacci times zones provide general changes in the trend areas in relation to time. Time zones are most appropriate to a long-dated analysis of price variation and are very likely to be of limited value while studying short-dated charts. How It Works It is a popular opinion that when correctly applied, the Fibonacci tools can successfully predict market behavior in 70% of cases, especially when a specific price is predicted. Others reckon that computations for multiple retracements are too time-consuming and difficult to use. Perhaps the greatest disadvantage of the Fibonacci method is the complexity of the results for reading and the ensuing inability of many traders to really understand them. In other words, traders should not rely on the Fibonacci levels as compulsory support and resistance levels. In fact, they may actually be levels of psychological comfort as well as another way to look at a chart. The Fibonacci levels, therefore, are a sort of a frame through which traders look at their charts. This frame neither predicts nor contributes anything, but it does influence the trading decisions of thousands of traders. However, the Fibonacci studies do not provide a magic solution for traders. Rather, they were created by the human mind in an attempt to dispel uncertainty. Therefore, they shouldn't serve as the basis for one's trading decisions. Most often, Fibonacci studies work when no real market-driving forces are present in the market. It is obvious that the levels of psychological comfort and the "frame" which they make up and through which the majority of traders look at their charts, are by no means the determining factors in those situations, when more important reasons for the prices' growth or reduction exist. http://www.trade2win.com/system/images/4778/original/xfig2.jpg,q1428506829.pagespeed.ic.G7zWBBY2P2.jpg[/img/ Figure 2: The Fibonacci fan is a three-line guide originating from the Fibonacci number series. It can assist in identifying the next areas of support and resistance. The zones, indicated by the fan, can forecast areas of retraction in market trends. Of course, golden ratio discovered does hold true in many instances. However, when used by a vast number of traders, the Fibonacci studies themselves may become a very major factor in influencing the market. Most of the time, the Fibonacci studies work due to the cascade effect, which arises because of the huge number of traders artificially creating support and resistance levels. The market is a complex system and the realization of the true nature of Fibonacci studies as a self-fulfilling prophecy will help you use the tools more efficiently. How? Very simple - it will help you avoid any perilous over-reliance on them. In Summary The Fibonacci method should only be used in a combination with other methods, and the results derived should be considered just another point in favor of a decision if they coincide with the results produced by the other methods in the combination.

There is more to the world of Fibonacci than retracements, arcs, fans and timezones! Every year new methods are developed for traders to take advantage of the uncanny tendencies of the market towards derivatives of the golden ratio. Here we will discuss some of the more popular alternative uses of Fibonacci, including extensions, clusters and Gartleys, and we'll take a look at how to use them in conjunction with other patterns and indicators. Fibonacci Extensions Fibonacci extensions are simply ratio-derived extensions beyond the standard 100% Fibonacci retracement level. They are extremely popular as forecasting tools, and they are often used in conjunction with other chart patterns. The chart in Figure 1 shows what a Fibonacci extension forecast looks like. Fig 1 The above is an example of how the Fibonacci extension levels of 161.8% and 261.8% act as future areas of support and resistance. Here we can see that the original points (0-100%) were used to forecast extensions at 161.8% and 261.8%, which served as support and resistance levels in the future. Many traders use this in conjunction with wave-based studies - such as the Elliott Wave or Wolfe Wave - to forecast the height of each wave and more clearly define the different waves. Fibonacci extensions are also commonly used with other chart patterns such as the ascending triangle. Once the pattern is found, a forecast can be created by adding 61.8% of the distance between the upper resistance and the base of the triangle to the entry price. As you can see in Figure 2 below, these levels are generally deemed to be strategic places for traders to consider taking profits. Fig 2 Many traders use the 161.8% Fibonacci extension level as a price target for when a security breaks out of an identified chart pattern. Fibonacci Clusters The Fibonacci cluster is a culmination of Fibonacci retracements from various significant highs and lows during a given time period. Each of these Fibonacci levels is then plotted on the "Y" axis (price). Each overlapping price level makes a darker imprint on the cluster, enabling you to see where the most significant Fibonacci support and resistance levels lie. Fig 3 An example of Fibonacci clusters is shown on the right side of the chart. Dark stripes are considered to be more influential levels of support and resistance than light ones. Notice the strong resistance just above the $20 level. Most traders use clusters as a way to gauge support and resistance levels. One popular technique is to combine a "volume by price" graph on the left side, with a cluster on the right side. This allows you to see which specific Fibonacci areas represent intense support and/or resistance - high-volume, dense areas are key support and resistance levels. This technique can be used in conjunction with other Fibonacci techniques or chart patterns to confirm support and resistance levels. The Gartley Pattern The Gartley pattern is a lesser-known pattern combining the "M" and "W" tops and bottoms with various Fibonacci levels. The result is a reliable indicator of future price movements. Figure 4 shows what the Gartley formation looks like. Fig 4 An example of what bullish and bearish Gartley Patterns look like. Gartley patterns are formed using several rules regarding the distances between points: X to D - Must be 78.6% of the segment range XA. X to B - Must be near 61.8% of the XA segment. B to D - Must be between 127% and 161.8% of the range BC. A to C - Must be 38.2% of segment XA or 88.6% of segment AB. How can you measure these distances? Well, one way is to use Fibonacci retracements and extensions to estimate the points. You can also download a free Excel-based spreadsheet from ChartSetups.com to calculate the numbers. Many traders also use custom software, which often includes tools developed specifically to identify and trade the Gartley pattern. Fibonacci Channels The Fibonacci pattern can be applied to channels not only vertically, but also diagonally, as seen in Figure 5. Fig 5 Fibonacci retracement when used in combination with Fibonacci channels can give a trader extra confirmation that a certain price level will act as support or resistance. Again, the same principles and rules that apply to vertical retracements apply to these channels. One common technique employed by traders is the combination of diagonal and vertical Fibonacci studies to find areas where both indicate significant resistance. This can indicate a continuation of the prevailing trend. In Summary Fibonacci patterns are best used in conjunction with other patterns and indicators. Often, they give a precise point to a more general move. A Fibonacci extension will give you a specific price target, but it is useless if you don't know that a breakout is likely to occur. It takes the triangle pattern, volume confirmations and an overall trend assessment to validate the Fibonacci price target. By combining indicators and chart patterns with the many Fibonacci tools available, you can increase the probability of a successful trade. Remember, there is no one indicator that predicts everything perfectly (if there were, we'd all be rich). However, when many indicators are pointing in the same direction, you can get a pretty good idea of where the price is going.

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the ring-the hills have eyes and wrong turn.

I love his old action movies like die hard series.

the walking dead-resident evil and plamt vs zombies.

console because of exclusive games like halo,gears of war or uncharted.

asphalt series

half-life 2-the walking dead the episodic series-fifa 08

I played both and i liked cod:g better. I don`t know why,i just do.

CARELESS WHISPER from George Michael.It`s peaceful and beautiful.