The primary extension trade exploits the move of the primary extension via averaging in a position based on a very large move in an index. The primary extension play has the potential to be a very lengthy trade in time requirement. This is more the investment type trade, with the use of stock purchases, not option contracts (see rolling delta trade for that opportunity). Options are not a primary vehicle in this type of trade due to the potential time factor involved. The largest enemy you face as an options trader is time. Theta, the time greek, is the leading cause of options traders deterioration of capital. It is a silent killer of accounts, it will cause you to lose leverage and require you to leverage up exponentionally in order to keep the profit range locked in the trade. This depletes capital quicker than the original trade set-up required. This problem would then snowball and compound the detrimental effects. It is possible to play with options, but the options need to be very deep "in the money".
The primary extension fade can be played in two simplistic ways (the third is the "Ad-Hoc" trade). There is a linear entry system, and a non-linear entry system. Our purpose here is simplicity within the trade, something you can follow, calculate capital requirement, and exploit the market with. For this reason, the linear trade will not be gone over in detail. The linear trade exponentially increases capital requirements and varies the quantity of shares purchased in even trade price movements. For example, 100 shares at 42.00, 110 shares at 42.50, 130 shares at 43.00, 160 shares at 43.50, etc. Since the lot size is increasing, it would be harder to calculate capital requirement to support the trade on a "per lot" basis. Since the newsletter is to help all traders/investors, regardless of capitalization, I need to keep things simplified.
This leaves the non-linear primary extension fade. This trade uses a constant lot size. If you lot size is 10 contracts, you would enter the initial position and every addition would be 10 contracts. The priceentry levels are not uniform though. They would not be every 0.50 for example, but would decrease as the trade matured. We may start at 0.50 and end up entering in at 0.05 increments, depending on extension.
The further along an extension is when entered with this technique, the higher the percentage return will be. Also, the greater the chance of successful execution. The further in the extension you enter also allows for the greater coverage of the extension with the given capital.
For example. If a primary extension fade was entered at a 10% extension, you may be able to keep that trade profitable, upon retracement, up to about 40% of an extension. Yet, if we did not enter until 40%, we can average in that trade and keep a 120% extension still profitable upon retracement with a larger percentage gain when the retracement does compensate the extension. Basically, the longer you wait the better. But, the longer you wait, the greater the chance you miss the opportunity alltogether (damn trade-offs!).
When listed within the newsletter, the (non-linear) primary extension fade trade will list the following information:
Entry
all levels of addition entries
Quantity of each entry (on a lot basis) (these will be uniform throughout the trade)
Total capital allocated for the trade
Profit range (this is a pretty consistant percentage based on "utilized" capital. For example, if the profit range is 200.00 to 3,000.00, the 200.00 end will actually utilize a small percentage of the allocated capital, the 3,000.00 end of the range would be utilizing 100% of the allocated capital)
Emergency stop price and maximum loss should this happen.
Any updates to the trade, ie, de-leveraging the position, and target exits will be updated in a timely manor via email/text.
additional information is located at "What you should know".
