Trading Notes

The subject of the 5% bid/ask rule has come up a few times recently. I think probably the best way to calculate it is to take Ask-Bid/Mid. For example, an option is 1.00 Bid 1.05 ask. The calculation would be 1.05 - 1.00 / 1.025 = 4.9% spread

to trade options on Russell 200 use IWM

## Breakout Trade stops
I guess the main point with a breakout trade is that you go into it expecting there to be upward momentum. This is because, in theory at least, a resistance level that sellers had previously been lining up at, has been broken. So... you assume the selling pressure has been released and that buyers can take control. When that doesn't happen then I want to be back out fairly quickly. I would prefer a 10-15% trade size with a stop at 2% on a breakout trade, versus a 5% trade size with a 4.5% stop.

## Calculating what traders think will happen:

You Can figure out what traders are anticipating by looking at the options expiring that week. Add together the calls and the puts for the at-the-money strike and divide that total by the stock price.

## Option Stops
There's no hard and fast rule. I hate to see people bail out on their options trades too quickly because every year there tends to be a handful of 100-200% wins that can easily make your year for you if you managed to avoid bailing out the second it was up 20%. But... you also don't want nice wins to turn into losers.

One good way to manage option wins is to scale out with trailing stops (mental stops). Here's a rule of thumb I think is pretty reasonable.

At +20% move stop to break-even.
At +30% move stop to +10%.
At +40% move 1/2 position stop to +25%, the other 1/2 at maybe +10%.
Keep moving up like this every 10% or so.

This won't ever get you out of a trade at the top, but it will help you to let winners run, which is a big key to long-term success. It also protects you from hanging around too long and letting winners turn into losers. Remember, options need stops even more so than stock trades.

## Formula to determine if you should still join trade
Don’t know who else might appreciate this, but after missing the last couple Wanderer trades due to low cash or vacationing, I came up with the following inequality for determining if the trade still has a good reward/risk.

E < (T + 3S) / 4

E: entry price
T: target
S: stop

Plug in the given target and stop price from the WF trade details and as long as the current price is less than your result, you still have at least a 3:1 reward/risk ratio.

QCOM for example:
T = 161.80
S = 132.90

(161.80 + 3(132.90)) / 4 = 140.125

The current price is 142.26 so it needs to drop below 140.12 before you’d get a 3:1 ratio.

(Obviously, if the price has dropped back down to an acceptable reward/risk ratio you should probably check the chart to see if it’s still a good trade.)

## List of Indicators Pat uses to determine a trade in order of importance

Just some of the things that I quickly glance at when I pop up a chart. I can't say these are definitively in order of importance. I guess the best way to think of it is simply that you'd like to see as many positive indicators as possible. Every trade is going to be a little different. I'm probably forgetting some things as I quickly write this up. Good blog post idea, though! I'll give it deeper thought and try to get it down on paper.
Recent Wanderer Signal
Rising, or at least flat 20 and 50-DMAs
Rising 200-DMA, not too far stretched from the current price
Breakout
KISS-50
Double-B
Solid nearby support, either MAs or previous lows
Legitimate target at least 2-3x higher than support is below
Strong volume
Death Cross/Golden Cross
Fundamental news

## Div account

Pat: "My div account is in a SEP-IRA" https://www.fidelity.com/retirement-ira/small-business/sep-ira

## Treading Water is Okay

The cold reality is that trading consists of spending way too much time treading water trying to minimize losses so that you are in a position to profit when the market finally goes your way. Most years, my year is made by an ousized performance over a relatively short period of time. I might do well in Jan, then tread water or slowly fade for a month or two, before having another good month. In the end, approximately 20% of the time I spend ends up providing 80% of the performance I achieve on an annual basis.

## Sometimes less is more in the markets. 

Try waiting until more of your indicators align before making a trade. Zoom out a bit further on your charts. Be sure and look at the overall indexes charts before pulling the trigger on an individual stock. Some work on these things can often boost the win rate just enough to make even a messy week like this profitable. Or at least it'll help keep you out of the way of tallying a bunch of small losses.

## How to buy a swing low:
Notice on the 15 minute chart, each candle is making a lower low and a lower high. A swing low would be when the candle rallies above the previous candles high. If the next candle makes a higher low and a higher high, we will have a swing low.

## Pat's Bitcoin

I own BTC, ETH, LTC, Cardano, Chainlink, Uniswap, Enjin, Decentraland, Aave, Filecoin, and Doge. I'm certain there are many others that are worthwhile and will do well. Researching these things is exhausting, though. These are the handful that I've come across that I've found interesting enough. My favorites with regard to actual real world usage are ETH and ADA (Cardano) at the moment, but I'm sure more research would turn up others.


## To follow a climb with a stop when you have no specific target price in mind

The first thing you're going to look for are obvious levels of support. Previous lows. Trendlines. If those aren't available, then the second level would be recent lows. Sometimes you'll see that two or three days in a row the stock had a similar low for the day. And level three, if nothing else is available nearby, is to just pick a % that you are comfortable with. Maybe 3%. You can also consider only selling 1/2 at a close stop, and giving 1/2 a bit more leeway if there is another stop level that's just a bit further off. - Pat

## When faced with conflicting indicators, I will usually just stay away

but this morning, the oil stocks are mostly higher with oil down a little bit. So many of the stocks in the sector are testing their 50-DMA, that I can't help but test to see if the 50 will be successful in supporting the price.

## Selling Half to Lock in Profit 

In a choppy market, or when I want to pull some income from my account, I deploy versions of this strategy. Rather than an all or nothing approach, this one has you sell half as soon as you have some profit and have an itch to sell. The remaining balance though, becomes much more systematic. Here is how it works:

Let's say the position size is 20% and we buy where it shows on the chart. At that moment, 20% of our capital is at risk, and it could fall all the way down to the bottom red line before we would stop out. Our entry is the moment when our principal is at its greatest level of risk. That's when we could lose the most. If the trade immediately goes against you, you get stopped out of the full position for a predetermined loss.

But what if it goes your way, but not all the way to your target? When you are trying to catch some momentum, like the precious metals right now, I will sell half or 1/3 when the stock stops rallying and looks like it wants to fall again. At that moment, I move the stop on the remaining shares up to break even. Now I have a guaranteed winner already booked and a stop at break even.

After that, I try to systematically move my stops up each time there is a swing low. You can see how that works on the chart. It doesn't always work out, because the stock might not be trending higher or lower and is instead choppy. But creating a systematic approach that let's you harvest part of your gains early makes it a little easier to hold on to your remaining shares for a higher gain than you otherwise might.

## leveraged ETFs

Not sure exactly how they work, but I think I understand how to trade them. Look at the chart for the underlying asset to make you move. So for QQQT leveraged, use QQQ to make your chart. If it's a setup you like QQQT should theoretically move 3X to QQQ. But that's only over the short term. Long term the leveraged is nowhere near the actual asset. because of the math:

> If a $100 etf were to go up 10% one day, and then down 10% the next day, how much would it be worth? $100? No. It'd be worth $99. Now what if that etf had a 3x leveraged counterpart? That would mean it would go up 30% one day, and down 30% the next day, leaving it worth how much? Just $91. That means that in just two days the leveraged etf was down 9% versus the underlying etf's drop of just 1%. It worked on day one perfectly, but by day two the whole concept had fallen apart.