The Trading Truth

Intraday trading, leverage, and opportunity

2009-10-09T21:48:00.001-07:00

When analyzing historical price action on securities and ETFs for my trading style, I have always classified the data in different time frames. Basically, you have full market cycle. The full market cycle is the extension and compensation of an entire cycle, regardless of time frame. If an issue starts to extend intraday and does not compensate by the close, an opening gap can further extend the issue. The issue then continues to extend until compensated. Those who fade these extensions are liquidity providers. This same market behavior happens intraday on a daily basis. The launches of large market cycles very often begin with gaps, where tradable price movement extends beyond a reasonable level to average down. This is a launch, and market cycle extensions can run 30%ish now on ETF primaries, and 80%ish on volatile securities. This can make for a rather long trade. Intraday launches are often compensated the same day, and this is the basis for this post. When evaluating information on a day to day basis gaps are discarded. Each day begins at 9:30 and ends at 4:00, this is the data chuck to be analyzed. Each day starts a new day and disregards any historic price movement before the present time. I have been, for quite some time, developing an intraday technique which mimics my normal trade types. The technique is taking advantage of much smaller increments of price movement. This typically rules out options as a vehicle of trade for this technique. When capturing a smaller increment of price movement the spread has a much larger impact on profit margins. This requires the use of stock with tight spreads. Of course, using stock totally removes the effect of all greeks also. Trading stock itself also allows for 4x intraday buying power with Think Or Swim and most brokers.

The intraday trading technique will be based off the same criteria as my normal way of trade. It will consist of fading the major intraday move by averaging into the position, thus providing short term liquidity. Each position will be flat at the end of the day. If the extension has not compensated by the close (not typical), I will exit at that point. The largest loss and profit range will remain consistent from day to day, the only thing which would vary this is changing of entry and cover parameters. For instance, if I am playing QQQQ entry at 0.5% extension and covering up to 2.0% extension, while utilizing a 20 tier entry with a 120% position multiplier, the max loss on the day would occur if stopped out at 2.01% for 0.34% loss on buying power used (4x that of actual cash (1.36%). Profit range would vary from 0.01% to 0.45% (4x that when compared to actual capital). The probability for a successful trade is up near the 90% range.

Anyone looking to work with me on this trade technique, let me know.

Set exits.

2009-10-03T08:52:00.001-07:00

56.95 IWM exit on secondary.
92.40 DIA exit on secondary.
53.80 AGN exit on primary.
46.00 CAT exit on primary.

Exit on A

2009-10-01T08:12:00.001-07:00

I set the exit on A to sell at bid if A at or below 25.70.

Extension Characteristics

2009-09-30T08:23:00.001-07:00

While I sit and do not much of anything, I'll attempt explaining some geometry, probabilities, and characteristics of market extensions and their counter parts.

First, let's identify the labeled areas. A. Is the launch of the extension, this is where the price of the underlying increases at a point where compensation can not keep up. B. Is the extension top, this changes each time a higher high is made in an upward extension, or a lower low in a downward extension. C. Is the counter-trend, or retracement target. There are two targets, or two stages of C. One is the deleveraging retracement, and the second is the compensatory retracement. D. is where we would extend to to make another demarkation of C (a higher high) if the C compensatory objective was not met (the extension did not fully compensate).

The AB segment rules the trade, everything that happens within the trade, or until compensation occurs, is dependent upon the maon extension (primary extension). The AB segment is somewhat dependent upon historical study, but not entirely. The historical max, average, and mean value of this percentage number can be a good gauge of basing your trade. You can always default to the general market numerical values when in question. Just calculate the loss at stop, and re-initialize the trade if you miscalculated. The AB segment has a few interesting characteristics. The smaller the percentage of extension, the greater the chance a deflection will occur from area C in the same direction as the primary extension. The larger the AB segment, the greater the probability a full reset, or compensation, will occur at area C. The market needs regulation, and this is the basis behind the rules followed. So, a quick conclusion, the smaller the percentage extension of the AB segment, the greater the probability a momentum play will work when area C1 (deleverage point) or area C2 (compensation point (or reset point)) is hit. The greater the percentage extension of the AB segment, the better the %ROI offered on a fade trade with averaging down concepts.

While I am at this point, let me mention something concerning averaging in a trade, and my number of tiers I use on posted trades. When averaging down a trade, the further the extension moves, the less impact your additions have to affecting your overall rolling average. You can compensate this effect by A. Increasing additions with smaller price movements of the underlying. B. Increase overall size of the addition (non-static lot sizes), or C. Use fewer tiers, stop out and re-initiate more frequently.

The third option has some very good merit. This is why... Let's look at the effect, or impact, on cost average using symetrical lot sizes. This example is entering at 50.00 covering a possible extension up to 60.00 using a constant lot size of 1. I am only listing the first six entries and calculated rolling averages:

Here are the entries:
50.00
51.30
52.43
53.41
54.27
55.02

Here are the calculated rolling cost averages:
50.00
50.65
51.24
51.79
52.28
52.74

You will see, in this example, the rolling cost average is impacted less as we accumulate more shares/contracts. The first addition has the most impact upon cost average. When adding one share at 51.30, we increased our cost average (which is a good thing, this is a short!) by 0.65. Adding another lot at 52.43 increase the ACB (average cost basis) by 0.59. This number increasingly gets smaller. Until, when you are very deep into a high tiered trade, it impacts your ACB very little. You have the option of stopping out, calculate the position size required to keep the deleverage point at break even, and use a tiered matrix with less numbers of tiers. This works fine, but, as I say.... there is ALWAYS a trade-off.

The trade-off, when using less tiers is there is less consistency to the calculated %ROI of utilized capital. The resulting gains of the trade become wider in their range of return. Let me attempt to explain. Averaging in frequently gives you a smoother curve to your ACB, resulting in a more consistent return percentage-wise throughout the duration of the trade. Using less entries makes the percentage gain a little more sporadic. An example would be as such: If you had a three tier set-up, and price of the underlying came up 0.01 short of the third entry trigger, your return would be much less than if that last cent where achieved before turning and heading to the reset price. More entries makes this increment smaller, thus having a more smoothing effect. Each tier has a worse and best exit point. If the trigger was hit and not exceeded by even 0.01, this is the best exit for that tier range. If you came up 0.01 short of the next tier entry, it is worse case exit for the current tier (which is still a positive return if you calculated correctly).

Ok, back to the extension geometry. The BC segment, or BC1/BC2 to break it down further, is the counter trend retracement depth. The point C is a compound target, first is the delevage, second the reset. The smaller the AB segment, the greater a continuation from C1, or a new extension beginning from C2 in the same direction of the last primary extension. C1, the deleverage point, allows the fade trader a point to re-calculate his/her trade matrix and adjust the position, for this is the "break-even" point, where the total P/L is a wash. C2, the reset point, is the point of exit, this is the profitable exit and will return your calculated ROI when the trade was initiated. C1, and C2, is a percentage related movement which corresponds with the AB segment. The market standard is the C1 level is about 23.6% and the C2 area is 38.2%. Different traders, depending on capital and agressiveness, may use values that are less than these percentages, but these are the deepest "guaranteed" areas of retracement. Bear in mind, you will find this rule is adhered to ONLY if you have calculated your launch point correctly. The launch is the key to the entire process!!!

The CD segment is actually a continuation of the AB segment if the extension has NOT reset, or starts a new AB segment if a new extension (a new launch) occurs. An extension, which remains within an issues frequent oscillation trade range is noise. It keeps resetting and no playable extension materializes. This "noise" area depicts that the issue is in a neutral state, and has no biases in any direction. Entering any type of trade within the confines of an issues neutral state is EXTREMELY dangerous. An issue can violently launch from a state of neutrality at any time and its lack of limitations at that point will crush many a trader. An issue may make hundreds, or thousands, of 3% extensions (just a number, each issue has its own value) and reset very quickly, not allowing us to exploit this movement. This is the threshold level which anything less is considered "noise".

Short AGN

2009-09-28T07:57:00.000-07:00

Entry QTY Stock Profile
57.82 1 Capital Required 134,542
59.74 1 Draw-down at tier 20 -8,576
61.41 1 Drawdown at tier 20 (%) -6.50%
62.87 1 Profit Range 357 - 10,609
64.14 1 Return on capital utilization (estimated) 7.88%
65.24 1 Stop Loss 8,958.33
66.19 1
67.03 1 Option Profile
67.75 1 Capital Required 49,926
68.38 1 Draw-down at tier 20 -9,404
68.93 1 Drawdown at tier 20 (%) -20%
69.41 1 Profit Range 357 - 9,947
69.83 1 Return on capital utilization (estimated) 19.92%
70.19 1 Stop Loss 8,958.33
70.50 1
70.78 1
71.01 1
71.22 1
71.40 1
71.56 1

Stop 71.75

Initializing longs (down extension fades)

2009-09-28T06:29:00.001-07:00

I will be looking to enter MHP, CVH, and ADBE at the following levels... 23.50, 19.30, and 31.90.

Over-simplicity.....

2009-09-27T12:59:00.001-07:00

I am going to post a very over-simplified explanation of my trading technique. This will point out a few generalized deductions you can decipher through market pricing action.

The chart above, a 2 year chart, displaying daily bars, on google is what I shall use for my generic sample. I have roughly outlined moves, in both directions. Up moves are displayed with a green line, down moves are displayed outlined in blue. These moves, whether up or down, are either extensions, compensatory (or corrective) moves, or both. What type of move is not outlines here.

A few generalized facts here. You can count, measure, etc, each and every move, but it will not prove too much usefulness, as mentioned, this is generic.

First, let's look at the upward impulses. These are the green lines. A basic fact is markets do not trade in one direction without compensation of some sort. The lines show this by their frequency and magnitude of their extensions. Smaller moves have a proportionatley larger frequency and larger moves have a decreasing amount of frequency within the chart. From this we can deduct the following statement: The higher the magnitude of the move, the greater the percentage chance of reversal becomes. To rephrase, eventually price action will correct, the more it moves in one direction, the closer the time comes to a meaningful correction.

These percentage moves, and their standard deviation of correction, can be applied to the broad market, or individual issues. Each traded issue has its own personality and degree of volatility concerning extension and correction. All individual issues fall within the guidlines of acceptable extensions and correction of the broad general market. For instance, if the broad market based rule is that no regulated issue can move greater than XX% without correcting XX%, each and every issue falls below this threshhold of extension and compensatory correction. The degree at which the indiviual issue falls below these tolerances are based on a volatility beta. Just a quick example, GS has a volatility beta 5 times greater than that of GOOG. This means, if GS can move XX% before correcting XX%, then GOOG can move (XX%/5) before correcting the same percentage amount as GS. Note: the extension is based on the volatility beta, not the percentage correction.

The downward moves, notated by blue lines behave in the same mannor. The difference between extensionary moves and compensatory moves is that extension build "obligation" in the counter direction. Compensatory moves due not build "obligation". In some rare instances, you will have a combination of a compensatory move which launches a new extension. This move compensates the prior move while building "obligation" once again in the direction of the first move. You may see this as a "dip" buying opportunity.

Let's take a look at a cycle a little closer.

As the cycle extends.... the percentage probabilty of retracement increases. As this percentage increases you can compile your position to increase leverage to exploit the due counter-move. Adding to a winning position increases leverage in the direction of the extension, when a counter, or corrective, move is obligatory. This is not what we want to do. Although, this is traditionally taught. When fading the trend, and the corrective move begins, we do nothing, except set our target exit.

As probability increases, leverage increases, the percentage of movement required to compensate the move remains constant. Although the percentage requirement to correct the move remains constant, the absolute price movement required increases. This is due to the further movement of the extension we are fading. For instance, a 20% counter move of a 50.00 run is 10.00. If the extension went 60.00, the correction you have played (20%) is now 12.00. As long as you have played your capital allocation appropriately and can continue to fade the trend, the due correction will make the trade profitable, and typically by a pretty substantial percentage return on the capital utilized. The longer you wait to enter the extension, the higher the return on capital utilized and the less agressive you need to be to keep the correction profitable.

Hope this gives you some information to digest. Enjoy the remainder of the weekend!

CSX exited at 42.50

2009-09-25T10:04:00.000-07:00

About a 13% gain on utilized capital.

CSX target...

2009-09-24T09:57:00.000-07:00

The only target exit I am entering, at this point, is for CSX.I will be liquidating my puts contingent of CSX being at or below 42.50. The order will be executed at the bid price.

Yesterdays close, todays progress

2009-09-24T08:22:00.001-07:00

Yesterdays close found me up a little over 3% (of utilized capital) on the day. I will be posting some exits before long (have english paper to write first). Here is a look at yesterdays close:

Today, at this point, looks like this (about 2% off todays peek so far):

The name of the game is staying power, if you do not alot for it, you will not be present during the move. The possibility of traders being short during the turn is slim to none (unless you seen my Disqus comments yesterday along with some posted charts ;-)). Fading (averaging down) the trade has you present and participating in the turn. Are you profitable when it turns? No. By the time everyone attempts getting on the short bus (pun intended) you will be though. Those brainwashed into being long, adding long, and staying long, look at this down move as a smaller pullback within the upward thrust. By the time they realize different, it is too late.

Picked up another tier on QQQQ secondary

2009-09-23T06:33:00.000-07:00

This morning triggered another buy in on the secondary extension of QQQQ. The lot size is 4, so this position now holds 20 lots.

Expanding client base...

2009-09-20T10:59:00.001-07:00

I am offering up an introductory offer to new clients. I am willing to manage accounts at NO CHARGE until 10% of the account is accumulated in capital gains (minus commissions).

The prerequisites required are:
A. You will need to establish, or have an existing account, through Think or Swim.

B. You will need to fill out and submit a "Limited Trade Authorization Form" through Think or Swim. This paperwork needs to be forwarded to me, signed, and submitted.

C. You will need to determine the level of "drawdown" which is acceptable to you. This should be a percentage of the total account balance.

If you have any questions, email me.

Quick update

2009-09-17T09:28:00.001-07:00

As we post higher prices, most of my positions are still being added to. A few are...

CAT was added to the 11th, 15th, 16th and today.
Q's have been added to on the 14th, 15th, 16th, and 17th.
FAZ got added to on the 15th and 16th.
A got added to on the 15th and today.
IWM got added to on the 15th and 17th.

Still looking for a hedge....
Also looking for more short trades to add in.
I'll update you with any new trades as I put them on.

2009-09-14T06:28:00.001-07:00

Friday, after the close, I see I stopped out on the Q's secondary extension (2nd fade on this extension). Typically when stopped out I would have a contingent order to re-enter further "in the money" with a new matrix. I've been pretty tied up and did not get the order in. I will re-enter at 41.25 (hopefully this open).

My FSLR long hedge was stopped out 9/9 at target which swung my portfolio delta way negative. A few other short positions have stopped out at target to relieve some of that negative delta. The Q's being stopped out at a loss also relieved some negative delta. All positions currently held are delta negative and the new Q's matrix will swing that more negative pretty quickly with any upward movement.

Everything is balancing out. I would like to be more delta negative with a big fat hedge, but time constraints this AM will keep me from looking for more opportunities. If everything goes well, I may be back for the afternoon session. The details on the new QQQQ secondary fade are below.

Stopped out on QQQQ secondary extension fade
Loss of 2.44K
Utilized capital 21.13K
11.5% loss of utilized capital

New position matrix on QQQQ, lot size 4, Oct 50 Puts

Entry QTY Stock Profile
41.25 4 Capital Required 348,747
41.73 4 Draw-down at tier 20 -8,495
42.14 4 Drawdown at tier 20 (%) -2.48%
42.50 4 Profit Range 910 - 21,025
42.82 4 Return on capital utilization (estimated) 6.03%
43.09 4 Stop Loss 9,253.18
43.33 4
43.53 4 Option Profile
43.71 4 Capital Required 54,646
43.87 4 Draw-down at tier 20 -7,657
44.01 4 Drawdown at tier 20 (%) -15%
44.12 4 Profit Range 901 - 20,290
44.23 4 Return on capital utilization (estimated) 37.13%
44.32 4 Stop Loss 9,253.18
44.39 4
44.46 4
44.52 4
44.57 4
44.62 4
44.66 4

Stop 44.75

FSLR, long hedge...

2009-09-09T06:11:00.000-07:00

It looks as if FSLR will be stopped out at target this open. I have not reviewed if any adds will be triggered on other positions yet, if you have been following, all entries have been listed. Any additional positions I will add will be long positions to hedge my delta short bias. If any opportunities come up, I'll list them here or in the trade log.

Two adds, one ass kicking hedge.....

2009-09-08T06:56:00.001-07:00

AEM and GDX triggered an add this AM, a put was purchased on both issues. FSLR is balancing all my losses on the day at this point. The existing position total (all positions) is a net negative 90.00 at the moment, which is about -0.1% of the total capital utilization at this time. FSLR has a target exit of about 136.00, the deleverage point on FSLR was just hit, hence any quick upward and immediate price movement will most likely be thwarted here. If your hedge (fslr) was carrying too much delta, this would be the point to adjust the position and lay out a new matrix if required.

Setting up AEM

2009-09-04T07:07:00.000-07:00

Short play coming up, see the trade log for details momentarily...

All positions green on the day...

2009-09-02T07:01:00.001-07:00

Every position, long or short, is profitable at the moment (for the day at least). What are the odds of that? Actually, very good. You will notice, either A. all positions will be down at the same time, regardless of long or short. Or B. all positions will be profitable at the same time, regardless of biased direction. It is rare that I have a mixed bag on any given day.

Being long, or short, is not near as important as how you manage the trade.

Entered target exit orders....

2009-09-01T10:26:00.000-07:00

Some target exit orders have been entered, check them out here.

19% extension.....

2009-08-31T07:00:00.000-07:00

Since the implementation of "secondary extensions" in the multi-leveled market regulation (my theory of course (but backed by factual quantitative analysis)), we have just hit the 19% extension within the Q's. The primary extension maximum of old... 19% achieved by SPY. Coincidence? Hmmmm.... Secondary limitations are the primary limitations of old.... new primary extension limitations.... astronomical... (good friggin luck to the TA analyists out there!).

39.35.... secondary second entry....

2009-08-31T06:48:00.000-07:00

The secondary extension entry (second attempt) was 39.35.... here we are at 39.94 and the position could be exited for about 9-10% gain (already exceeding the loss on the first attempt also).

Exiting a short position at a higher price for profit??? How absurd!!!!

It is not a matter of if, it is a matter of when. If you have the buying power to stay the trade, you will be correct. The name of the game is managing the position to allow the staying power to run the course of the trade. The primary thing which runs against you in keeping staying power is delta errosion. Delta errosion is directly affected by theta, the time greek.... if you are pushing you buying power to buy time, of course, delta errosion due to time will be your largest enemy.

Update to Q's exit, new channel layout

2009-08-31T06:41:00.000-07:00

I am setting the secondary extension exit on QQQQ to 38.60. Taking off for the morning to get some errands done.

The paranoia of being long here is pretty high for me... long is a dangerous place to be....

See http://www.channellines.com/ for some updated channels. View the "trade log" link on http://www.thetradingtruth.blogspot.com/ for position updates.... here they are below...

Going forward

2009-08-23T10:01:00.000-07:00

"The Trading Truth" will remain an ongoing educational site, in an attempt to make the average trader and/or investor more aware of their trading environment. I am going to start logging my trades at a different location (see sidebar, the link will appear shortly).

Trading consistently for profit is not a time consuming activity. Typically, the more one is "rushed", or aggressively trading, the more loss they will sustain. Delving into my trading techniques and market theories will make this fact self-evident.

I will enter orders during "off" market hours, or when opportunity presents. All orders are contingent and entries are pre-established. The only item I need to be aware off throughout the market day is the proximity of the target exit. Using the "launch point" of each extension and accessing the high/low quote of said extension allows me to calculate the exit point without the need for charts etc. As long as I have quotes accessible (use of my Blackberry), orders for exit can be updated as required.

Information does not need to be plentiful to be useful. I will link new articles in the sidebar as they become available. If any individuals, or corporations, want to work with my techniques and are interested in an "agreement" of some type, email me at "The Trading Truth".

Advantages to a managed account

2009-08-19T07:11:00.000-07:00

I just wanted to point out some advantages to a managed account compared to just following the trades located within the newsletter.

First off, tracking the arbitraged pair trades, ad-hoc trades, and rolling delta trades is near impossible via any newsletter. Even following the fade trades is a little difficult, for you need to be on your toes when the exit price is hit.

The fade trades can be used in different combinations to further enhance gains, but there is no way I can list them in the newsletter in an accurate manor. For example, if we are fading an incline on AAPL, we would be purchasing Puts to create a synthetic stock short at reduced cost. When buying deep "in the money" puts we can set up a parralel matrix which simultaneously sells "at the money" puts. This effectively creates a fade matrix of bear put spreads. The deep ITM puts are not subjected to theta loss, while the ATM puts are subjected to theta loss. We are not net sellers of the option, since this is a debit spread, but we are net short theta. When the issue, in this case AAPL, does turn, the ATM short puts have a delta of 0.5 or less each, while the deep ITM puts have a delta approaching 1.0. The bear put spread, or bull call spread matrix lowers the cost of the trade (lowers capital allocation) and increase percentage return on the trade due to time errosion (theta). The deep ITM option needs to be rolled at times to further enhance the effects of theta throughout the trade. We can roll deeper ITM or further out in expiration effectively creating a diagonal calander spread.

Explaining and educating the average investor on the general principal of the fade trade with straight stock only is hard enough, let alone educating individuals on more complicated option plays which are compounding throughout the trade. Attempting to educate the general public is hard enough, let alone having them follow these techniques via a newsletter!

The advantages go on and on, but you should get the idea with this basic example.

George

Newsletter Pricing Adjustment, Format Change...

2009-08-19T03:58:00.000-07:00

Good morning everyone! A few things to post here this morning.

First off, a few contracts which I was under for training individuals and such has come to completion. This has lowered my bottom line as far as renewable income sources for market related activities. I am looking forward to establishing business relationships with some of you readers as we go forward in the markets.

As things stand at this moment, a few things have to come to light in order to continue my trading education and services at Channellines and The Trading Truth to continue.

If you are interested in establishing a direct working relationship, contact me
via email as soon as possible. You outline what you are looking for and I'll tell you what I can offer. I am discounting a few services in order to generate business with new clients. Managed trading via "limited authorization trade agreements" accounts are available at no cost to you for a short time duration. Basically, to esablish these new relationships, I will execute the trades through your account (where you control any movement of funds, not I) and net you a gain of 5% before any profit starts to be paid out for the service! You set the risk amount, if draw-down meets that value, you can cut the trade and walk away. In any event, it is a win/win scenario, you have the potential to increase gains and have a managed account.

The cost, and content, of the newsletter is changing. The newsletter subscription price is now $5.00 per week. The trades offered within the newsletter are now tailored for the average middle guy with limited trading capital. In order to do this, a few things will change in the "trade profile" of each individual trade. The percentage loss if stopped out will be greater on a percentage basis of the capital utilized for the trade. The capital requirement for each trade will be considerably less. The odds of each and every trade terminating in profit has not changed, it remains in the high ninety percentile range. The percentage potential gain for each trade has also increased. To summarize, you will be allocating less, risking more, have greater potential of percentage return, but have the same percentage odds of ending the trade in profit. The trades in the newsletter will increase in quantity as we move along, the higher the demand for the service, the higher the frequency of trade matrices. This will allow you to "pick and choose" which trades are more in line with your analysis.

I am bringing these things to light for a few "trading entities" are seeking my services to fill a position within their organization. More than one position is on the table, either managing a group of "high frequency trade" individuals utilizing algorythmic trading systems, or an overall company risk management position where I will utilize "anti-algorythmic" trading techniques (my own techniques) in order to hedge risk. This route, will exploit the average Joe and have me working for an entity which will further their gains and my potential will be capped by a salaried position. Being capped and exploiting the average Joe to further corporate capital gains is not my preferred plan of action, but, until my own personal trading capital exceeds my pre-determined goal, it may be my only choice. This depends highly upon the response here at Channellines and The Trading Truth.

Existing newsletter subscribers will receive an email to cancel their subscription. A new link will be emailed to reflect the new subscription rate (5.00 weekly) of the newsletter (the newsletter is a private blog which is emailed to your inbox with each and every posted update and trade set-up). A post containing the new subscription link will be coming this AM sometime. Have a good morning!

New post

2009-08-18T10:14:00.000-07:00

There is a new post at Channellines please give me any feedback you have!

New document! Why NOT to compound gains!

New content, "utilizing" allocated capital.

2009-08-17T04:33:00.000-07:00

Click here to read the entry

Overall market bias and general scope

2009-08-06T09:44:00.001-07:00

The blog will be under development for some time to come. I have more information to jam into these pages than time allows for me to type it all out (my typing skills do not help much).

A quick summary look, from my point of view, of the markets lead me to expect a down-turn that couldbe of some significant proportions. My trading style and technique never rely on huge moves within the market, and huge moves can not be seen forthcoming with any degree of accuracy. A large decline within the market now would not be a corrective move, but a primary move. Primary moves are the randomness of the market, they do have some degree of projection due to historical studies, but in a nutshell, you need to be prepared for almost anything.

A decline of about 15% in the market now would be corrective, anything beyond that point turns the move into a primary move. The clues that I am picking up from the price action within most securities, ETFs, and indices do indicate a very large down move is definately possible in the near future.

Most securities, at this point are not extended to the upside. They are compensating as they move. Although, a hand selected few are extended beyond levels ever seen in the markets history. This is where the principal of "no stock is left behind" rule comes into play. All regulated stocks need to be just that, regulated. This is what had me long many securities when the March bottom posted.

The ETFs and indices are all extended, but most components of each are not extended. This actually means, upon general market correction, these securities have a high probability chance of posting lows that will exceed the March lows by a substantial margin.

All inverse ETFs point at this probability also. Bear in mind, I have steered everyone I can away from these speculative issues. I do not believe these 2x and 3x ETFs have a place within a regulated market, and the market needs to remain regulated. The 2x and 3x ETFs and their inverses where brought into the market with one major purpose... to bring new money to the market. If these ETFs were brought into a level of more strict regulation, or if that regulation is present, but very loose, we are going to see a severe snap back correction in the inverse ETFs.

The overall market bias remains negative. In my opinion, your overall portfolio delta should reflect this by favoring the downside. Of course, we will have the whiplash action here and there to take capital from the majority, but the only obligation within the market, at this current time, is to the downside.

The trading truth.

2009-07-17T14:11:00.000-07:00

People need to take a backward approach to the market to really understand it. The information out there to "teach", or "assist", traders is all deception. An act of confusing the masses to exploit that confusion. The markets do not define trading techniques, but the trading technique defines the market. I will show you how professional money can make money on every trade, every time. I will show you why you can not, due to under-capitalization. I will show you the merits and falsities behind technical analysis and fundamental analysis, why they work sometimes, and why they don't at other times. This is a long road, be patient.

After we examine how professional money screws the small guy, we'll go over some options that will tilt things in your favor. It is all dependent on buying power. The amount of buying power you have defines what you can and can not accomplish in the markets. Everything is a trade-off, you can not get something good without accepting something that is bad. We'll cover options and why they can and will kill your account if used improperly. We'll go over emotion, and why that destroys many accounts.

Market behavior is definable, but even knowing how it behaves does not mean you can exploit it. Without knowledge anyway. The markets now are very similar to when they were first traded. Nothing has changed, other than some slight modifications as of recent. In whole, they are the same. Options, 2x, 3x ETFs were introduced to bring in more participants. Pitfalls were concealed by the promises of riches and wild returns. Induction of confusion in the markets creates volatility, and volatility is profitability for the professional trader.

The technique of trading the markets, by professional money, defines how the market moves. Technial analysis, fundamental analysis, or whatever analysis you use is explained by this trading activity. Chart patterns are explained and so forth.

Every technique used to consistently profit from the markets is exactly what you are taught not to do. It is burnt into your mind, from the beginning of your learning process, to not do the things which the professionals do. The result of these trading techniques being known to the vast majority of people would result in decreased volatility and flat-lining markets.

The rules the market uses where discovered by myself accidentally. Thorough studying, exploring, back-testing, etc. all led to the same results... failure. Well, at least a success rate that was less than acceptable to me. So, I approached it with a different mindset. I lifted all constraints and started new. "What if?" was a constaint question which resounded in my mind. What if you had unlimited capital? That started me down the road to my discoveries.

It is a fact, given unlimited capital, you can trade every trade without loss. It is a matter of averaging in the trade. Try it, on paper of course, because there are gigantic pitfalls within this simplified technique that wil ruin an account that is limited in capital. Take a random stock, or ETF, or future, or whatever you like. Execute an initial trade of a single share/contract. Every 0.10 double the position. So, buy 1, buy another, buy 2, then 4, then 8, continue until you are 10% of the total capital utilized is in profit, then exit. It works, every time, I guarantee it. One better, buy a deep "in the money" put and a deep "in the money" call. Only add to the position that is showing loss by doubling the position. Exit when both sides are profitable.

Keep in mind, I am no professional writer. My thoughts may jump from here to there as I attempt putting them to text. I also have limited time to actually type out my thoughts, so please be patient.

Taking the above mentioned technique into account, I had to identify the limitations and pifalls of this type of trading. This opened up a whole new world. That world was revealled to me in parts. The more I delved into the matter, the numbers, the more things became self evident. The limitations were two primary factors. One was trading capital. No matter how much we wish it was not so, we all have limited capital to work with. Well.... most of us anyway (professional entities not included). The second limiting factor was market travel, or market depth. Market depth is identified by how much the market can move in one direction without retracing significantly to allow for a profitable exit. So began my studies, in depth to say the least.

Measuring one way market movement was a definite challenge indeed. I had to identify the time frame to use and a constant formula, or criteria, for measuring these moves. Once I nailed down the details, what I discovered really was interesting. I mean REALLY interesting.

Well, I wrote a whole crap load of information, my laptop died when I was pre-occupied and I lost it all. Oh well, let me try it again and hopefully I can word it as well as before.

My discovery was that every move within the market was compensated. Every move in every regulated index, stock, ETF, future, currency, etc. No move went uncompensated.

The magnitude of the primary uncompensated extension was difficult to predict every time. Historical information gave me the maximum historical extension. The maximum was reached very frequently without extending to new levels. The retracement of the extension was very predictable. There were two identified levels of extension, and I will get into them in more detail later.

As an extension moves, the level between the high/low of the extension and the level required to compensate the move becomes larger. This is the level of captured guaranteed return. For instance (numbers listed for example purpose only), a 20% extension requires a retracement to 12% of the level measured from the original launch point of the extension. Now, the 8% difference from the top/bottom to the retracement level is 8%, the percentage is actually larger when measured from the reference point of the current issues price quote. For simplicities sake, right now anyway, let's just say this is an 8% required move. So, an extension of 25% requires a move to the 14% level of the original extension launch point. This is a captured 11% guaranteed return.

So, the larger the extension, the larger the counter move required to compensate the move. Let's cover the basics here.

Before covering these basics, let me point something out. This chart is for example purpose only. You will gather nothing but incorrect information by studying this underlying chart. It is just something for me to draw on.

A. Is the launch. This is the beginning of the extension measurement. The criteria which needs met for this launch is very specific and detailed. It is almost never an obvious point of reference. It is exact in nature.

B. Is the current maximum of the run. The AB section is the extension. The extension remains in effect until compensated.

C. Is the deleveraging level. I'll cover this more in depth later, when I provide more information regarding how these levels (all of them) were confirmed by the number sequences present.

D. This is the level where the AB segment is compensated, thus neutralizing market bias and full-filling the guaranteed obligatory move.

The launch is the most vital point in this whole technique. A launch can be identified in real time with nothing but a calculator. If you know the launch, you see the high/low of the current extension, you know the current obligation of the market. This is very important when calculating what is required to remain even at the deleverage area and profitable at reset.

I use the word technique loosely, for this is not a technique, this is how and why the markets work how they do. Now, before you think I am a "know-it-all" smart ass, let me be very clear. I know how and why the markets do what they do, I know the probabilities of what will most likely happen, and even knowing this, it is not as easy to exploit this as it may appear. This will become more evident when I reveal the "why" behind this market behavior, and WHY it HAS to happen. There are many pieces of this puzzle which I have to explain, the big picture will not start becoming apparent until later down the road. Once I explain all these things, I need to cover what will work, what will not work, why they do and do not work, why patterns appear, why TA does and does not work, etc... etc... not to mention fielding questions that come in.

If traffic to this site becomes too large, too quick, I will wipe it all. I appologize in advance, but when the big picture becomes more apparent it will become extremely dangerous. If all this information became common knowledge it would actually destroy the trading markets. This would absolutely flat-line the markets, that is if every person knew this information. My advantage here is that people have come to question everything they hear regarding the trading markets. So the probability of this happening is slim to none, but it does exist.

So, what does this behavior tell us? How is it exploited, or how does it exploit us? There are many ways of both, but let's start off easy.

In the example mentioned earlier you have a simple excercise that shows the capability of averaging down. Does this have a similarity of many gambling techniques? Certainly. But it resembles these techniques in simplest forms only.

Market extensions and counter trend compensatory moves are created by the ratio required to average in a trade and always keep it profitable. This does not require a doubling of your position. Once an extension is established (identified), you keep a rolling count of the guaranteed return the markets are obligated to move to compensate the extension. Only the largest of market entities can average in a position from a 2% or lower extension. They have the buying "power" and capital required to power out of the position for profit, under any circumstance. When averaging in, the basic principal is to keep the de-leverage retracement at even, or slight profit. In the event capital utilization is pushed to extremes, upon a de-leveraging retracement, you can liquidate whatever size of the position required to free capital and support the potential of a larger extension.

The de-leveraging point within an extension is typically reached several times and launches a further upward move. It is destined to fail, at some period in time, due to the markets obligation to reset the entire extension and return to a state of neutrality. The de-leveraging point gives you the opportunity to re-size your position. You can calculate your return at reset in comparison to the capital required to support the further extension and define the position size accordingly. If the entire position is liquidated for even, you now can re-enter the fading trade at a larger extension percentage, thus guaranteeing a larger percentage return on the trade. The problem with liquidating the entire position and waiting for a further extension is this:

An extension retraces to the de-leveraging point. The market HAS an obligation to reset, it does NOT have an obligation to extend the primary extension. Liquidating the position at the de-leveraging point can leave you empty handed if it should break and fall straight to the reset point.

The principal of the rolling average trade is this... you never add to a position unless it improves your rolling cost average. This creates draw-down, which we will discuss in further detail later. If you shorted stock XXX at 31.00 on your last addition to the trade, the next short entry can not be less than 31.00, anything below 31.00 will actually increase capital utilization and decrease your power for averaging down should the extension move further. When first starting this fade trade technique, you can layout an entire matrix which defines how much to add, where to add, and what your cost average would be at any given level.

The only time where you would add to the above example below your last entry is to leverage up the position to keep the de-leverage point even. This will only happen when you use options that are effected by a decreasing delta/increasing theta. Simply put, the only time you will lose ground, without price movement, is when you use options that are not VERY deep "in the money".

Typically, the extension does not last very long. The compensating counter-move happens even more quickly. On occassion you may find an extension which takes more time than expected. This is where running front month options (trying to conserve capital and boost returns) gets sticky. An example is our current broad market extension. The launch for this extension happened in March, and it is a historical extension, never seen before. Running front month options would have required a calendar roll four times to bring you up to date. Each roll costs capital in the trade which does not increase profits upon reset of the extension. You are paying capital to reserve the delta you already have, you are not increasing delta to increase returns on profit. To make up for the increase in capital utilization and decrease in return upon reset of the extension you will then have to add more frequently or of a larger size than was originally allotted for. This will burn through capital, reduce buying and staying power, and get you into some serious trouble if the extension increases further and you are left with no capital to impove your cost average. Keep in mind, as the extension increases, the travel to reset is increasing also. Thus, your reset level may end up far above your break even level before the extension resides and you have to cut at losses.

Of course, stocks have no time factor, they do not lose value with time. There are two things that are always true regarding the markets.

1. Markets always trade in two directions

2. Time passes

Trading stock, or deep "in the money" options with lots of time left on them eliminates the second variable and exploits the first variable with fading the primary extension. Trading anything else with these variables has some detrimental risk factors involved.

Let's take a look at a trade matrix, and some basics regarding it.

This particular matrix is of QQQQ and its current trading state. First thing to note is the blue line. These are the entry levels. The entry levels are not in even increments. There are many ways to average in the trade and try to keep it uniform and simple. This is the non-linear entry system. It uses a constant lot size with decreasing increments between entry levels. So, each level listed on the blue line, if you bought 1 share of the Q's, the red line is tracking the average cost basis. The second major entry system is linear. You enter in even price increments with an increasing lot size. You either vary lot size or price entry increments, or when customizing "on the fly" you can adjust both. Adjusting on the fly is after some experience, following that, you do not even require a matrix. When you get experience behind you, you know your cost average, the profit/loss at de-leverage and the profit/loss at reset. You can adjust as needed at that point.

Notice when the Q's hit 37.18 on its top in mid June (you need to view an actual chart). Where did we retrace to before making a higher high within the extension? About 34.40 right? Does this coincide with the matrix's de-leverage point?

Looking at this behavior of the markets, there are quite a few ways in which you can benefit from this averaging down trend fade. It is similar in principle to what you may have heard before... the average down return to mean trade. There is one huge problem with the approach traders take to fading the mean. The "mean" is used in most oscillators and many indicators. They calibrate to a channel of price movement and calculate a mean. The problem with this is there is never an actual "static" point of reference, or a starting point of a run which does not change. Indicators and oscillators change their focal areas depending upon the time frames used. Even when using the most accurate time frame to match actual launch and reset points, they do not even come close. A launch does not need to be at a low or high of a range, in fact it is rarely there. Many launches can form within what appears to be an already established trend. You can not take any pre-existing oscillators or indicators and modify them to measure the launches and resets, I have tried them all. You can however, start from scratch, write the code, and make an accurate indicator which notifies you of a launch, its percentage run, calculated deleveraging point and reset points. Unfortunately, I do not write code.

As long as you can increase delta, control theta (time) loss, and allocate capital accordingly (remembering to not get greedy aand deleverage the position if required to support the further potential extension), you can reep profit from this type of trade. This includes being a net seller of options, whether naked or the use of spreads. A directional trade which capitalizes on time decay is a great way to exploit this behavior. Yoou do have to adjust tthe trade by rolling strikes to maximize returns though. This goes the same with using ATM/ITM options also. Eventually, if you are not very deep ITM on your options, the price movement will catch the strike. At that point, rolling deeper ITM increases delta, and that is the name of the game, to average in delta and be present within the market when the obligatory counter-move begins.

This markets behavior can be exploited in many many ways. Even directly corellated issues will sometimes be out of sync. Where one will actually extend to the downside and the other is extended upward. This is an opportunity for a free profitable trade. If you are fading an up extension in one, while fading a down extension in another, where is your allocated capital going to be utilized? In one trade only. Once the position is established during a period of arbitrage you will then fade the position which moves against you, leaving the gaining position to run to reset. This decreases over-all draw-down and maximized capital utilization.

I'll briefly mention a few other techniques to maximize on this type of market behavior and go over them in more depth at a later time. Let me start by touching on a way to trade that is familiar tto most, and most will be comfortable with. This is the momentum trade.

The momentum trade-

When markets extend, up or down, and the extension is being faded by professional entities (which is always, there is always someone on the other side of that trade, right?), the extensions need relief to allow ffor deleveraging along the way. They may require being reset to continue also. Just because a run is compensated by hitting its reset level, it does NOT mean a reversal of trend is at hand. It plainly means that the specific issue being watched is now neutral and free to establish another extension or wander aimlessly. When markets extend, no issue is left behind when resetting. They will all reset eventually (as long as regulation is present on that issue). So, with that established, the momentum trade trades IN the direction of the primary extension. To do this an initial position is established at the deleveraging area. For this example, lets say we have an upward extension. The upward extension pulls back to the deleveraging point. Professionals are now covering shorts against the primary extension to decrease the position size and allow for the POTENTIAL continuance of the extension. They are not buying to open, but buying to close partial positions. We, on the other hand, will buy to open. At this point note there is potential to the upside, but obligation to the downside (eventually it needs to reset). Here we establish the initial position. One of two things now happen. Either the extension is relieved and free to continue, or the deleverage area fails to support a bounce and we head to the reset area. If we continue the extension (keeping in mind, unless a higher high is made, the extension does not increase) we set a profit exit level at the current high of the extension. This profit move is typically about 1/4 of the total extension. If exited, nothing keeps you from re-entering once the deleverage point is hit again. If the opposite happens and the deleverage area fails, you will add to the position at the reset level. The add is the same size (or your preference) as the initial position. When the reset level is hit, the markets downward "obligation" is full-filled, this very often results in the establishment of a new upward extension. Once this position is added to, you have two ways the trade will end. Either you exit once the high of the "old" extension is surpassed, or stop out for a loss slightly below the reset level. Exiting, for profit, at the deleveage point is also an option. This point was where you established the initial position. As an example of this, say we went long 1 share of XXX at 30.00 (deleverage point), it broke and we added 1 share at 29.00 (reset level). Our current cost average would be 29.50 ((30.00+29.00)/2). Exiting at the deleverage area after we added at the reset would result in a 1.00 profit ((30.00-29.50)*2).

Before getting into the next trade type, the rolling delta trade, I am going to take a moment here to comment on the validity of technical analysis as a whole. Before I get started, let me assure you, I have gone my rounds and paid my dues in terms of technical analysis. At one point, technical analysis was my holy grail. In hindsite, as most technical analysis is, I discovered many mistakes which I had fallen victim to.

The markets need participants for the game to go 'round. New money needs brought in each and every day. If not, those who continue to exploit the masses would eventually have no individuals to exploit. A market particpant comes in, gets washed out, and then a replacement is required. Either entice in new money, or make that individual which washed out believe he really can make money in the market so he gives it another shot. This is where the introduction of options came into the markets, as well as 2x/3x ETFs, and the focus on technical analysis. Technical analysis gives you the perception that you have a trading edge within the markets. An edge, which you believe will outweight all the odds already stacked against you (limited capital, spreads, greeks, etc.). What is actually stacked against you is far beyond what you can possibly fathom. The markets and their regulating entities have had decades to decieve the masses, and they are damn good at it. The perceived "magic", or clairvoyancy, of technical analysis in any shape or form, will not overcome this. In the end, all odds return to mean, and for the average Joe, that is approximately 0%.

Advertently, or in-advertently, the vast majority of those who teach technical analysis, or utilize it to further their gains outside of the market do so deceavingly. Many are just attempting to be helpful, while others outright mislead individuals to get them into the markets. It is hard to tell which is which, in the end it doesn't really matter. It is common human behavior for people to want company. They will teach their methodology, this way, if they should fail, they will not fail alone. But, back to technical analysis and its validity.

Markets and their respective charts depict patterning processes. The bearish head and shoulders, flags, triangles (all forms), and so forth. These patterns are created by the interaction of channels, or diagonal trading ranges. Channels are present in every time frame and there are always multiple channels within every chart. These channels are created by the trading ratio's of large entity traders utilizing fade techniques to regulate the markets. As mentioned previously, there are key deleveraging and reset areas in every market extension. The rate of incline/decline in an extension when graphed out with its non-static deleverage area and reset points create channels. For instance (numbers given for exmple purpose only), if you were fading an incline, shorting at higher prices only, and the deleverage point comes around. You now cover whatever portion of the position is required for you to fade a potential further extension. This, of course, is buying shares to cover the short. This buying pressure will cause a bounce in the direction of the extension being faded. You freed up capital to support a larger move. A higher high comes around and you begin shorting again, selling to the enthusiatic masses. Now, the deleverage area has shifted. The higher the high, the higher the deleverage points and reset points become. You drop to the deleverage point and repeat the process until the deleverage point gives way and the reset area is hit. This price action creates channels. If the launch point is 30.00 on stock XXX, we travel up to 40.00, the deleverage point may now be 37.50.We deleverage, the crowd gets involved and now we jump to a 43.00 high. The deleverage point has now shifted to maybe 39.00. This, in time, creates the channel. There is also a channel that exists at the reset to high range. This whole process is why you will see "harmonic" lines within channels. These are lines parallel to the upper and lower channel levels but are defined between the upper and lower channel. To make channel analysis a bit more confusing, we have to take into two considerations. First off, different entities will be a little more aggressive than others. One may use a 15% deleverage and 30% reset while others may use 20% and 35%. This will cause a variation of sloping channels, typically one over-lapping the other (ascending/descending wedge anyone?). The second, is the presence of basket trading. Large entities like to do things without showing their full intention. It is kind of hard for them to hide billions of dollars within a single issue. To help conceal this volume, they can distribute out amongst issues within related sectors. For instance, they can utilize the DJI to follow the extension, utilizing it for buying and deleraging/exiting. When they actually sell the rising extension, they can balance a load of 30-40 stocks and distribute volume on a dollar basis ratio to each issue. This will create channels within these issues regardless of any other trading activity happening within that issue. This is where the "internal" definable channels come into play, yet, each individual issue has its own assigned regulators also, just to keep things in check.

A recent example of a terribly failing pattern is the head and shoulders pattern which formed in all the major indices and failed to complete last week. The DOW deleveraged the March launch in the week of 6/22. The S&P deleveraged in the week of 6/22 also. The NASDAQ, on the other hand, had not had the opportunity to deleverage. The deleverage level was actually the neckline of the recent head and shoulders within the major indices. The week of 7/6 the NASDAQ finally had the opportunity to deleverage. Now, the delayed deleverage, and the intensity of the incling extension on the NASDAQ had some regulating players really pushing some capital limitations. They needed to position size for a possible upward continuation of the extension. This was some massive short covering by professional money. So, what where the odds the NASDAQ hits an extremely overdue deleverage point and falls through it to complete the breakout of a head and shoulders pattern? Slim to none. Yes, there is an obligation to the downside within the market, but falling straight through a deleverage area that was overdue is not all that probable. A bounce was expected, by me anyway, the intensity of that bounce is really unknown. A higher high has now been made, and the next deleverage point is now a little higher than the last, but its actual "need" is a little less.

Indicators and oscillators actually measure and calibrate to channels. You can draw channels of confinement on most indicators which coincide with a channel found on the chart. These indicators and/or oscillators also have no static points of reference (launches), which keeps them calibrating to newly created channels. Changing time frames within any oscillator or indicator will typically give you an entirely different picture. Regardless of the time frame your trading, another time frame may catch you blind-sided, not to mention the inaccuracies I already mentioned with indicators/oscillators.

An indicator can be built with the launch/extension/deleverage/reset information, but it would only consist of one time frame. That time frame would be "current". Every second traded would need analyzed. The indicator would look similar to the popular MACD. The line would deviate from the zero line in direction of the current extension. As the extension expands, so would the "momentum" line. There would be triggers similiar to the RSI indicator, a +80% or -20% may trigger trade entry based on historical extension data. The line would return to 0 quicker than it would rise, for only a fraction (in percentage terms) of the rise needs to be retraced to reset the market back to neutral.

So, does technical analysis has any value? Well, if it is the only thing you have, yes. Knowing what I know, would I use it? No.

It never ceases to amaze me new ways people come up with to examine the same data, as if a more complex data structure will increase the probablilites of a successful trade. The notion of technical analysis being explained from mass human emotion and reaction to the markets, come on now, little far fetched isn't it? If you look hard enough, you will see what you want to see, if someone tells you something enough, you will begin to see that also. You need to remove emotion and decision from the trade, the markets are what they are, regardless of how you feel about them. Decisions cause stress and second guessing, which causes emotion. The more you second guess, or give in to emotion, the more you will be exploited in the market environment. You need to identify the way markets behave, under any circumstances. Find the constant and exploit that constant, without emotion, without decision.

Ok, enough of that. Concerning fundamental analysis... well, basically the same thing. It impacts the primary extension to some degree, but the reset is always required, the fundamentals are not going to fill you in on when that will happen.

Sometimes I need to step back and realize, the vast majority of people who have money in the markets have no clue to most of my terminology. Most people do not even know what an option is, let alone their greeks. If you have questions, no matter how simple you think they may be, email me at thetradingtruth@gmail.com . I have been to many blogs and such where the volume of traffic to such blog is well known. Even the largest of these blog sites are less than 20-30K visitors per day. That is not much in the whole big picture. Keep in mind, the majority of this traffic is repeat visitors also. So, if you feel "in the dark", you are not alone.

Let's touch briefly on another trade technique, the rolling delta trade...

Stocks which are extended 60-70% and beyond work best with this method. This is also why ETFs are not a preffered play with the rolling delta trade. Ask away with questions, I am sure I am leaving out quite a bit, but it is Friday! I will attempt to get some written this weekend and touch on arbitrage pair trades, people really like them, for they are 100% hedged. I will also be touching more on averaging down and the advantages of doing such. Why "staying power" and "buying power" are crucial. Until then, enjoy the weekend.

Quickly, don't know if I have enough time to address the issue, but, here goes. I have received a few emails regarding releasing information such as this. Let me explain a few things.

First off, there is some key information I leave out, and will continue to leave out. This is where to start measuring these extensions from, where the rolling average starts. There is a reason you do not find information like this on the web, it is not to be shared to the public. Go ahead, try googling it, you won't find ANYTHING pertaining to it. Kind of interesting, huh? Let's think about the repercussions if this information was out there for all to absorb. If I gave detailed information for identifying these points of measurement, how to fade them, and how to profit under any circumstance given propper capitalization. What if every rise was sold, and every drop bought by the masses? The markets would flat-line.... it very well could disrupt the entire market beyond repair.

Look at it in a larger scale... who backs these larger entities that exploit the masses? Who regulates the market so nothing catastrophic would ever happen? Say one of these major regulating entites got in trouble, they were fading a move and some other regulating entities were forced to cover for huge losses, thus putting the pressure upon the remaining regulators to absorb that move. It snowballs. Say you and I were fading a huge down move, the move extended beyond your capability of cost averaging with the available capital on hand. You are forced to sell at huge losses. Either I then have to absord that selling pressure, or throttle back to buy at much lower prices. This increases my draw-down and someone needs to absorb what you sold! Now, if this were to happen on a grand scale, who is the backstop? Say Morgan Stanley fails to support the markets and GS has to step in and absorb where MS failled. But, GS just don't have that amount of coin to support that type of failure, and they know it! So, Mr. Fed, either you have our back and we regulate the market with your assistance, or the entire financial system goes down in flames.....

This makes GS, and others, look like the bad guys in the eyes of the public, when in actuallity, they saved your bacon! What if the Fed had to be a little more discrete upon backing those that look like criminals in the eyes of the public? Hmmmm..... how could they hand over billions in capital to regulating entities to support the market from further collapse? Not further collapse, but a more contolled decline, to avoid the outright failure of the system. Here's an idea! As the Fed, let's buy everything they have to sell, let them average down the incline and take the money through the market! As these entities distribute everything with a ticker symbol, the Fed and the public it pumped can buy it all, this will give these entities the capital required to keep the coming decline under control, prevent disaster, and make the coin to pay us back! Straight from the pockets of Joe Lunchbucket!

Ok, theories, theories, right? In this market, there are not bulls and bears. There is "you" and "them", they show no mercy, and they will rip your head off without disturbing their lunch. You need to get your head screwed on straight and play their game. It is just how the system is, how markets work, I did not make the system, nor did I define the parameters of how it works. That is just purely numerical in nature. Your either with them, or your lunch meat, plain and simple.

The "golden ratio", Fibonacci sequences, infinite number sequences, are there for a reason, they all define ratios. 10:3, 20:6, 40:12 are all the same damn ratio. That does not mean that first number will never get larger, it just defines the parameter of the number that has to follow. Nothing really defines the length or magnitude of the extension, but the magnitude of the extension surely defines what needs to eventually come next.

Let's jump into the "paired arbitrage trade". This trade type exploits the imbalances created amongst different trading issues. Each side of the trade directly hedges the other and is executed as a perfectly balanced delta trade. I prefer to utilize this technique on highly regulated ETFs, but the general principal will work with other issues as well.

First, again, these numbers are for example.

What we are comparing is not the extension itself, line AB, but the distance of travel to reset/deleverage, line BC. The percentage to reset (or deleverage) is measured from point B to the current reset level. If two remotely correlated issues (not directly opposite like an ETF and its inverse) vary in percentage move to reset it will eventually close this gap. This is due to the tendency for ETFs and/or indices to reset at about the same time period. If DIA had an 8% travel to reset, and QQQQ had 10% travel to reset, there is an imbalance present. The markets tend to correct the difference amongst ETFs.Indices, then proceed to correct the overall market imbalance (run to reset). In either event, whichever happens first (correct the imbalance, or correct the general market), these variences will close their gap. They may seperate farther before closing, but they will close. The DIA/QQQQ example listed here would indicate on a strong upward market day DIA should run stronger than QQQQ, on a weak market day, QQQQ should be more weak than DIA. A delta balanced arbitrage pair trade could be executed to go long DIA and short QQQQ. These imbalances close quickly, typically on overnight gaps. I like to initiate these trades at the close and add at the next open if the difference increase, or close the position if the difference corrects. Delta balancing the pair and such will be covered later. I want to get back to the overall principal of averaging a position. I seen hundreds of people getting stopped out within the last day or two at losses which could have been prevented, so I will prioritize that subject first.

Ok, back to averaging down. Why do it? To make money. Period. It takes staying power to stay the course of the trade. Averaging in gives you staying power. How many times has your stop been tripped to just find you were right anyway? More times than not I am sure. Markets trade in two directions, always. Most traders look at trading in this light... Control losses, keep stops, lose many, win few, but have winners be larger than losers. Weigh risk:reward, have few large winning trades and many small losers. Well, you can manage risk:reward with averaging, it is just a little more complex of a calculation. Also, most traders do not take into account a third equation... the percentage chance of exiting the trade at profit! Everything in trading has a trade off. A trade which is high risk, high reward, has a low % chance of success. A trade with low risk, low reward, has a high % chance of success. A simple example, an option which is 40% "in the money", expires this week. What are the chances this option expires with 0.00 value? Slim. Chance of it gaining huge (in camparison to capital utilized)? Slim. Low risk, low reward. Now, an option that is "out of the money", same expiration. Chances of expiry with 0.00 value? Great, potential of large gain? Sure... High risk, high reward, slim chance of that great gain.

When averaging in a position, you have to be more wrong than a traditional stop gain: stop loss trade. When averaging in, if you are correct after your first entry, your gains are smaller, after a second entry, reward expands. This gives you more room to let the trade move before pulling the plug, or it gives you "staying power". For instance, say we buy 3 shares of XXX at 50.00, stop at 49.50 target of 52.00. 1:4 risk reward, low chance of success (a 1:1 risk reward is about 49% depending on spread, considering options, a 1:1 has about 35-45% (or lower even)depending on delta).

We have an cost basis of 50.00, we stop out we lose 1.50 (0.50*3), we hit target, 6.00 gain (woohoo!)

Ok, second, let's average in, same stop/target. First buy 50.00... now we run to target for a gain of 2.00, or drop to 49.83 and add a second share. Ok, we dropped to 49.83 and added, our cost average is now 49.915 (50.00+49.83/2). We run to target for a gain of 4.17, or drop to 49.66 where we buy our third and final share. Our cost average is 49.83. We now run to target for a gain of 6.51, or stop out for a loss of 0.99. Now, compare the trades.... Just for the sake of saying both trades had even odds of successful completion. Trade A had a lower best case reward and a larger potential loss. Trade B had a larger potential gain (6.51 compared to 6.00) and a lower loss if you were completely wrong (0.99 compared to 1.50).

Trade A had these potential outcomes:

Gain 6.00

Lose 1.50

Trade B had these potential outcomes:

Gain 2.00

Gain 4.17

Gain 6.51

Lose 0.99

The advantages of averaging in are great. This comparison was an equal stop:target comparison.

If we were going to risk 1.50 total we could have let the price drop lower and average in at that level, thus giving more "room" for the trade to work out, or give us "staying power" to stay the course.

That was a very simplistic look, let's take things a bit more into the mind boggling realm. How does averaging affect the markets, or decide what the market can and can't do?

Depending on the extension entry (% extended before intitial entry) and your way of compounding the position, decides how much of a move you can cover and always keep within a profit zone upon retracement. To show how the professionals do this, on this large of a move (example below), I would need a matrix with 100 or more tiers, but this should get the point across.

The matrix above starts with roughly a 30% extension entry. If entered at this level, using the additions listed (size and price), you can average in all the way up to 130% of an extension while always keeping the deleverage level even or better and the reset at a substantial profit. When you get to larger levels of extension, and come down to the deleverage area, you can resize the position and build a new matrix with lower risk and higher reward because, eventually, the market will compensate.

For instance, say GS climbed to 130.00, then came down to the deleverage area (which it did). At that point in the matrix, we have 900 shares at an average cost basis of 117.15 (my matrix spits all this out for me, that part is not posted). If we dropped 400 shares for even, we now have 500 shares at even, which means we are at 117.15 on GS. Lets plug this in to the matrix now, and extend our reach of coverage.

Now we are covering up to a 160% increase (as compared to 130% in the first matrix). We dropped our capital utilization and locked in a higher % return per dollar utilized. The capital allocation has also dropped, which can free capital for other purposes.

The profile of the first trade was:

Capital allocation 900, 693 (tier size in matrix is x100)

Profit range 254.00 to 100,657

Draw-down at 20th tier 11.59%

The second profile how has these characteristics:

Capital allocation 564,654

Profit range 4,200.00 to 59,572.00

Draw-down at 20th tier 15.74%

On a per dollar basis of utilization, we are now guaranteed a higher percentage of return when a retracement commences. We are locking in profit on something that has not happened yet! But, IT WILL happen... eventually. This is staying power.

The basic principal, the earlier you enter the extension, the more buying power is required at higher levels to average down the trade. Waiting until the extension matures more before entering allows you to maintain the average and keep the deleverage and reset levels profitable with less capital and yielding a higher percentage return on capital utilized. Keep in mind, the first matrix had an allocation of almost 1 million, yet, only 105K was "in utilization" at the time of deleveraging.

The capital that was allocated, yet not "in utilization" can be used to hedge, or place arbitrage trades where the position can be liquidated quickly to support the primary trade. The balance of the professional trade is "allocation" vs. "utilization". Capital allocated, but not in current "utilization" is wasting buying power. You need it there, on demand, but can make profit off it in other ways. So, the phrase "a lot of money on the sidelines" is money reserved to fade a further move IN THE SAME direction which we are already headed!!! Not capital in reserve to pump the market. You see what they want you to see.

The above example is the most extreme, in fact, an extension of 130-150% has never been seen in any regulated issue. I am just blowing it out of proportion to show you the jist of the technique.

I should take the opportunity to state that not every stock is regulated. Penny stocks, low capitalization stocks, and low volume stocks are not held to the rules of the market as strictly as regulated stocks. They do adhere to the same general principal, but are subjective to much greater volatility and can bend some of the rules. In historical study of hundreds and hundreds of traded issues, these are the types of things you may want to avoid:

Stocks trading under 15.00
Volume less than 2 million average daily
Any stock that launches with a 10% gap or more (there have been 3 issues out of hundreds which have violated general market rules, all three issues launched the extension with a greater than 10% gap in pricing. This phenominon I can only contribute to "true" insider trading information. Where the outcome of an event was truly known by a large entity and they risked not being investigated by the behavior presented within the pricing action).

Added info 9/30/09:

Expected Returns on Capital

2009-01-01T12:09:00.000-08:00

Newsletters and trading services are notorious for promising things they can not deliver. I am not here to decieve you or anyone else. These claims are absolutely absurd. Can I promise a 100K return in an hour? Sure, but the fineprint would read something to this effect:

Based on an houry average profit when capital utilization is maxed and that utilization level exceeds 10 million dollars in trade capital. Also, the return is subject to adjustment due to abnormal market behavior and market volatility.
not
The markets define almost every aspect and return of a trade. Entry, averaging, exiting, deleveraging, returns, etc etc. The market, and its opportunities and returns fluctuate under varying conditions. This makes it extremely hard to nail down an absolute level of return you should expect. Averaging this return over multiple years does absolutely no justice either, for the variances can fluctuate radically.

You will not make 1000% on your capital in a year, not here, not anywhere, not consistently. If you double, triple, or make huge gains in your account utilizing most trading techniques, you have actually increased your odds of giving all these profits back into the market, plus some. The gains did nothing but reinforce bad trading habits. You may not see them as "bad" habits yet, but you will, eventually.

My objective is to keep you from destroying your trade capital and to make you a reasonable profit consistently within the market. Every quoted percentage, ratio, return, etc at various trade services can be altered to appear favorable to the prospective client. They will not be outright lies, but the fineprint always holds the catch phrase.

Percentage win to loss ratio...
If I execute a trade, average in 10 times, and eventually exit at profit, is this 1 trade? 11 trades? I returned a profit on the overall cost average, but 5 of the contracts actually lost value. Is this a 50:50 win/loss ratio? How do you want to percieve it? Looking at this as one "position", it was a gain. When looking at it in this perspective, can one trade 100% of their positions for a gain? Absolutely. Professional money always have, at least, a portion of the position open. Do we consider the trade closed when all shares are liquidated or covered? If so, they never have a winning trade to losing trade ratio, for they never fully close a trade!

Point is: I can dance around numbers, ratios, percentages and returns all day long. In the end, it would leave you confused, and I could pronunciate the points I want you to remember.

The market controls what it gives out, you control how you manage your capital to exploit it. Two entirely different entities, most often blurred into one with the confusion present in market educational material.

complete introduction...

2009-01-01T00:17:00.000-08:00

(introduction continued) ...find, upon reading this blog and its linked articles (authored by myself), that in the financial markets, it takes capital to make money. Whether you have this type of capital, or not, you should further your education of the market by leaps and bounds here. The first, and most important objective, is to at least slow your rate of losses within the market. It is a learning curve, one which most never catch on to, even self-proclaimed professionals will inadvertantly lead you down the road to loss. The available newsletter may, or may not, assist you in monetary gain. As I said, it takes capital to make consistant profits. Regardless, the newsletter should assist you in the mechanics of trading the market. An education in market mechanics is vital, realizing most people are under-capitalized is more vital. Even more important... what can you do about it?

Below, is the daily blog. This may, or may not, be up to date (I do not post here daily). The right sidebar has links to educational and informative articles I have written, this will be an ongoing and never ending process. You will also find information regarding the newsletter and such there. If you find any links which deny access, it is for newsletter, or other service subscribers. I recommend starting your education at "The trading truth: Things you should know".

Managed Account / Advantages

2009-01-01T00:16:00.003-08:00

Trading and compounding gains

2009-01-01T00:16:00.002-08:00

Every broker, 401K provider, etc, gives the same pitch of compounding gains and how beneficial it is. How you can grow an account exponentially in a very short time period. This is very true, if you never suffer losses of any type. For instance, say you have a winning strategy (at least you think it is!) that trends as follows:

a 10% loss
a 10% loss
a 10% loss
a 40% gain (yeah!)

This cycle repeats over and over. You keep your losses tighter, let the gains run a little (sure you heard this one before ).

With this cycle, if we were to start with a $10,000.00 trading account, we would see something like this after 20 trades:

$10,000.00
$9,000.00
$8,100.00
$7,290.00
$10,206.00
$9,185.40
$8,266.86
$7,440.17
$10,416.24
$9,374.62
$8,437.16
$7,593.44
$10,630.82
$9,567.74
$8,610.96
$7,749.87
$10,849.81
$9,764.83
$8,788.35
$7,909.51
$11,073.32

Cool, we got our 10% gain on the account, but, what happened to that compounding effect?

Compounding compounds losses more than gains. Every gain made after a loss is a gain on a smaller capital amount, every loss made after a gain is made on a larger capital amount. Hmmmm..... somebody is gettin screwed here!

Ok, now, a suggestion. Start each day with the same buying power, regardless of profit or loss of the previous day. Say we have the same 10K account, but this time we have a "draw-down" account to go hand in hand with the main account. The draw-down account is a portion of capital set aside to replenish or accumulate the past losses or profits of previous days. For example, we have a 5K draw down account. If the 10K takes a 10% loss, we take the 1K we lost, borrowing it from the draw-down account, and begin the next day back at 10K in buying power. Now, you say "Well, now it is really a 15K account!". Well let's put the same win/loss ratio to work here, each day we bring the account back to 10K.

at the end of each trading day, for 20 days, we end up with these values:
$9,000.00
$9,000.00
$9,000.00
$14,000.00
$9,000.00
$9,000.00
$9,000.00
$14,000.00
$9,000.00
$9,000.00
$9,000.00
$14,000.00
$9,000.00
$9,000.00
$9,000.00
$14,000.00
$9,000.00
$9,000.00
$9,000.00
$14,000.00

Every time we went down 1K, we took it from the draw down account, each day we were up 4K we deposited to the draw down account, so the draw down account had this rolling sum.

$4,000.00
$3,000.00
$2,000.00
$6,000.00
$5,000.00
$4,000.00
$3,000.00
$7,000.00
$6,000.00
$5,000.00
$4,000.00
$8,000.00
$7,000.00
$6,000.00
$5,000.00
$9,000.00
$8,000.00
$7,000.00
$6,000.00
$10,000.00

At the end of 20 trades, we brought back our buying power to 10K and have 10K in the draw-down account for a net gain of 5K on 15K of capital. This is a 33% return as compared to our previous 10-11% return using the same technique.

I suggest using a draw-down account (can be in the same account, just capital provisioned for replenishing buying power.)

Good luck!

Authorized trade account

2009-01-01T00:16:00.001-08:00

Through the use of a "limited trade authorization" form, I can trade capital within your account. Profits are distributed and the working partnership continues until either party is satisfied, or one party is not satisfied!

Keep it simple!

Email me if you may be interested.

Please, this is time consuming (of sorts anyway), do not email if you do not have capital that can trade the techniques which I discuss!

Multi-party agreement

2009-01-01T00:16:00.000-08:00

I have individuals who are always looking for opportunity. This is where I match up potential clients.

The multi-party agreement works like such:

An individual acts as the margining entity. They have capital to back positions and want a percentage return at minimal risk.

Another individual acts as the investing party who wants more buying power for theor limited capital available.

The account is controlled via a "limited trade authorization" through the broken and granted permission to be traded by myself.

The margining party is the primary account holder, or a joint account can be set up between parties, or however they deem appropriate.

An example would be as such:

The investor has 5K of capital to place at risk. This party is fully aware the capital will be margined and will be 100% at risk of loss.

The margining entity backs the account with 50K of trading capital. A combined total of 55K is now available to trade. In the event the account suffers a 10% draw-down (net account liquidity reaches the 50K) all positions are liquidated and the contract is closed. All monetary gains collected during the period the account remains above 50K in net liquidity are distributed between the parties involved (the margining entity, the investor, and myself).

If you may be interested, email me with your capital allotment and the roll in which you would like to participate.

How is it done?

2009-01-01T00:15:00.000-08:00

Get personal training with "Winace"!

One month of in depth trading education, everything you need to get you on the road to consistently take gains from the market.

The education starts off at your level of current knowledge regarding options, leverage, greeks, etc. Advancing to calculation of the rolling cost average, deleverage, and compensatory targets.

$20K per month

Sign up here!

What would I do?

2009-01-01T00:14:00.000-08:00

Find out!

If you like to direct your own investments and/or trading activity, and need some outside opinions, you can contact me between 9AM and 4PM Eastern time.

If I were in a similiar position, you can get my opinion on how I'd handle the situation.

Purely for educational purposes and all disclaimers apply!

Cost of this service is $200.00 per month.

This is not hand holding and only for some general direction!

Subscribe here!

Utilizing "Allocated" Capital

2009-01-01T00:13:00.000-08:00

Trading fade trades againt the trend and against the momentum speculators involves "tiering" into positions. This type of trading often involves commitment of excess capital to support the trade and give you the "staying power" to stay the trade until profitable. There are numerous ways to "utilize" this reserve capital, which is allocated to the larger trade, to collect additional gains.

Utilizing the capital which is allocated to the larger trade requires this capital to be "liquid" at all times. This means, if required, you can pull this capital out of any existing positions with little, or no loss, to support the fade trade when, and if, it is required.

For illustration purposes, let us say we have an incline fade trade against GOOG. The option trade profile has a capital allocation requirement of 50,000.00. The first entry in the fade matrix is a $5,000.00 entry. The entry price of GOOG, in this example, was 200.00, the next entry is to purchase a similiar lot size at 210.00.

In this example, we need a 10.00 move in GOOG before we utilize any further capital whichis already allocated to the trade. This is leaving $45,000.00 of capital idle awaiting utilization.

Since this is an incline fade we are either a. shorting shares, or b. going long puts on GOOG. We need a general increase in the overall market of 5% before even entering tier 2 of the trade matrix. At this point, we have the opportunity to utilize a portion of this un-utilized (allocated) capital to set up a trade against the original fade. This is a hedge of sorts.

A hedge is typically designed to decrease leverage, or exposure, to the markets should we suffer a dramatic move against our overall portfolio delta. In this scenario, the counter-fade trade is hedging the original position, but both positions have an end goal of exiting profitable in each respective issue.

To find this "free profit" opportunity, we can set up several different types of trades. A momentum trade, a primary fade, a secondary fade, or an arbitraged pair trade. In this example, and for ease of illustration, let us suppose we identified a decline fade on CAT.

CAT and GOOG have no direct correlation, yet they typically move, or trend, with the overall market. They are not directly inverse to one another, so for our purposes, this will qualify. We have now identified a downward extension on CAT and set up a decline fade matrix to go long calls and tier into the position on CAT.

It is very common for issues within the same market to become inversly extended, such as CAT and GOOG in our example. Let us take a look at the methodology here.

If the broad market continues to trend upward, capital will be utilized on the GOOG trade, if the market declines, capital will be utilized on the CAT trade. In very rare cases, will both issues need addidional capital simultaneously (but when they do, it is a great opportunity!). A downward move will have CAT compounding its position and eventually trigger out GOOG for profit. An upward move will have GOOG utilizing capital and triggering CAT to exit for profit.

In either case, the initial fade play remains in tact once the other issue is triggered out for profit. At this point, you can set up another hedge for fading your fade play! As the market fluctuates (typically referred to as "whip-sawing") you positions are triggered out for profit, not stopped out for loss. You are increasing your staying power within the trade initially by averaging into the position, and further increasing the staying power by hedging the position.

If the market is going to move against your initial fade trade and "utilize" more of your allocated capital, well, at least it has to pay you to do so!

My end goal.

2009-01-01T00:12:00.000-08:00

Time and time again, I have stated, you need capital to make capital. That is a given. Impropperly capitalized, you chances of getting crushed within the markets is great.

The bottom line, I am here for the money. Cruel and heartless as it may be, the market will exploit you for the same thing. There are secrets which I will keep to myself and pass down through my family, no one will give you all their information to make you successful. There is nothing in it for them, it is actually detrimental to them. If you make money via the same way myself and other professionals make money, that cuts into our profit potential. Basically, I am educating the general public until my objectives are achieved.

My obejective is to secure capital that has enough sustainance to be self sustaining within the markets. I may trade this amount on a daily basis, but these are not my accounts, but client accounts. If the opportunity arises, whether through one heavily capitalized individual, a group, or so forth, this site will close its doors. If someone is interested in purchasing book rights, the same end result will occur. Trading, when done correctly, is not time consuming whatsoever. Writing newsletters, publishing trades, authoring blogs, talking via phone, messenger, etc is. More free time with my family is the end goal, whatever steps need taken to achieve that goal will be taken.

If you are the individual that believes he/she can make this happen, get in touch, I always have an open mind.

Frequently Asked Questions

2009-01-01T00:11:00.000-08:00

If you have questions, email me. If I get enough on the same topic, they will be listed here.

2009-01-01T00:08:00.000-08:00

The newsletter is scheduled to launch on Monday, August 10th. The newsletter will give some trade ideas based on the trade types listed in the sidebar of The Trading Truth (if the information for each trade type is not yet listed, refer to this post for some general information regarding these trades). Each trade will list the capital required to follow through with the trade, the range of profit expected, and the loss potential if the trade is stopped out. All entries and addition prices will be listed, and exits will be updated on a seperate blog area (these will be emailed or texted to you also). The exits are not static and move when new highs/lows of the extension are made, so this is the most timely technique of keeping you up to date. The newsletter is not too much of a newsletter, I may list a few lines on ever-all market conditions, but that will be on the blog also. The newsletter will just be hard numbers, entries, additions, and exits when applicable. There will be no fancy and colorful charts, unless they are to highlight entry/addition/exit prices. The newsletter may not be out the same time every day, but when opportunity presents. There will be at least one per weekday regardless.

The cost of newsletter subscription is 10.00 weekly, and will be set-up through Paypal to auto-renew each week. You can sign up monthly at a rate of 40.00/month with the same auto-renew process. You can cancel at anytime.

You can email me at thetradingtruth@gmail.com and I will get you set up. When everything is finalized, there will be a subscription area on this page.

Keep in mind, this is for educational purposes, and you are resposible for your trading decisions. I will not and can not be held liable for your actions. These trades are trades that I would enter under the given circumstances. As always, you need to weigh your own risks with your current financial situation.

Click here to subscribe via Paypal (weekly billing)

Click here to subscribe via Paypal (monthly billing)

Ad-Hoc Trade

2009-01-01T00:07:00.000-08:00

The "Ad-Hoc" trade is more of a professional technique. It requires a little more time dedication than the other trade techniques. It involves real time tracking of your cost average, reset level, and deleveraging level. The trade, when initialized into an extension, is not added to until the deleverage price level is at "break even" for the trade. Upon a large extension, this allows for a huge amount of price range the underlying needs to move before adding the first addition to the trade. It is designed for actual stock shares or very deep "in the money" contracts. Due to the time and update requirements for the trade, we will probably very rearely, if ever, utilize this trade type within the newsletter.

About "The Trading Truth"

2009-01-01T00:06:00.000-08:00

"The Trading Truth" has evolved from my learnings within the financial markets. As each piece of the puzzle fell together I was even more astonished by the measures in place to keep the average person from prospering financially.

Even with the best education possible, free, or paid, you are up against some pretty extreme competition.

My market education came solely from my self discovery. I did read hundreds of books, articles, etc. In the end, I found I wasted my time and efforts, and a few dollars to boot.

After realizing, the more you learn of others assumptions, the more you find your odds are truly less than 50/50 in any given scenario. You might say "bullshit", but, give it time.

Do not believe everything you read, question everything, this was my approach. Just because someone wrote it and published it, does not mean it is accurate. It is easier to accept something as truth than to take the time to disprove it. As a collective whole, people are lazy.

Any technique you have been told that works, I have already disproven. My findings while disproving these theories and techniques led me to realize, the markets are truly random, as long as certain parameters are adhered to. To calrify, the market is truly random... within ranges.

I am also the author of www.channellines.com, known to many as "Winace". At one point within my own learning curve, I realized channels were the best shot, when used correctly, of forcasting future pricing movement. I became well known for my channel analysis, yet, upon furthering my own education, found I was misleading many.

I discovered, in order, these valuable lessons. First off, fundamental analysis has its place, long term, many companies actually are affected by the underlying fundamentals. Yet, as the market "breathes", fundamentals will serve you no purpose. Technical analysis does not give you the edge most books and individuals might have you believe. Channels are the basis of any given chart pattern, oscillators and indicators calibrate to these channels. Channels are made by a ratio of inclining/declining extensions and their corresponding compensatory counter move corrections. These inclines/declines and corrective moves are held to market rules which are based primarily on one very specific principal. That principal is averaging down the trade.

So, there it is, years upon years of questioning everything, disproving everything, and believing nothing in a nutshell. The bottom line... in the market, if you are not fully aware of your environment, you're fish food. If anyone tells you no one can trade 100% of their trades for profit, don't believe it either. With enough capital, anything is possible!

Hedged Rolling Delta Trade

2009-01-01T00:05:00.000-08:00

The hedged rolling delta trade is identical to the rolling delta trade with one exception. Upon initialization of the trade, a position, further "out of the money" is initialized in the direction of the primary extension.

For instance, as the example mentioned in the description of the rolling delta trade, we buy (5) 115 Put contracts when stock XXX is trading at 125.00 to start the position. At this same time, we purchase (5) 145.00 (or 150's) call contracts of the same month expiry. This allows the calls to gain in value, thus covering the cost of the vertical rolling of the put contracts. The hedge is exited up completion of the compensating retracement along with the put contracts. Upon completion of the retracement, the calls may of lost some value compared to the entry, but it is a sacrifice for the greater gain. If the extension runs far enough, both sides of the position can be exited profitably (Thanks to Dave for assistance with this trade set-up). I used this hedge with a primary fade before, but did not apply it to the delta roll trade until not too long ago.

The newsletter will include the following when a hedged delta fade trade is exhibited:

Entry of both sides of the postion
Strike prices selected
estimated cost per roll
roll increments (and calculation of larger lot roll increments)
projected profit as the trade matures (also updated via email/text)
Stop loss level.

Rolling Delta Trade

2009-01-01T00:04:00.000-08:00

The rolling delta trade fades the primary trend. It is used as a low cost high percentage return trade for stock (not ETFs typically) which have huge extensions. Using the primary and/or secondary extension involves constantly increasing, or maintaining, delta against the trend. Delta management can be used via purchase of shares or options, but the rolling delta trade utilizes options only. It utilizes "out of the money" options with a consistent position size. In place of increasing the position size, by adding larger lots, or smaller increments of entry, it increases or maintains delta by vertically rolling your options. The options are purchased "out of the money" with plenty of time on them. The moves we are looking for on these plays are typically fairly large, hence they may take some time to deliver. The options are purchased with a strike price near the deleverage area. As the extension continues and price moves against you, you roll the strikes up to the next strike level at a decreased cost. Rolling the contract means you sell the currently held contract while simultaneously buying another strike. A vertical roll is in the same month, a calendar roll is the same strike with different expiry months. A diagonal roll is a combination of both, change in strike and in month of expiry. The rate at which you roll the strikes is dollar for dollar of the underlying, thus the more you are required to "roll up" the options, the more distance from top to reset you will capture. For instance, if you were to initialize a position (say shorting an incline) of 5 115.00 put contracts of XXX at 125.00, the next strike up to roll is to 120.00. The delta adjustment comes incrementally as the underlying rises in price. Rolling evenly keeps the profit area upon retracement even throughout the trade. If we entered at 125.00, and bought (5) 115.00 puts, we would roll one option to a 120.00 when the underlying reached 126.00, the next at 127.00, and so forth. Once the underlying reaches 130.00 all 5 contracts are now rolled to 120.00 puts. You will see that the pricing difference between the current trade price and the option strike has not changed (being 10.00), but, on the other hand, the price range from the top of the extension to the reset point has increased. Upon reversal of the underlying, the delta will throttle forward and gamma will assist in accelerating the positive effects ofdelta on the trade. During the entire trade, theta needs to be kept minimal by keeping our options out a few months. When calculating estimated returns on the trade, I like to calculate for pure intrinsic value only at reset. If the rolling delta trade goes on for quite some time, you may have to roll out in time also. Eventually, if the run is taking an extreme amount of time, and moves against you in a big way, you may have to add a few contracts to keep the reset level in profit.
Stocks which are extended 60-70% and beyond work best with this method. This is also why ETFs are not a preferred play with the rolling delta trade.

Momentum Trade

2009-01-01T00:03:00.000-08:00

The momentum trade will be something a little more familiar with already "experienced" traders. The trade consist of going long/short an issue, adding to the position one time, and setting a defined stop loss and stop target. The trade, as all trade technique I use, is derived from utilizing and exploiting the deleverage and reset (compensation) levels of an extension. The deleverage and reset levels are covered more thoroughly here. The trade enters an initial position, in the direction of the primary extension, at the deleverage area of the extension. The trade then goes in your favor, which you exit when the existing high/low of the extension is matched, or moves against you to the reset level. The reset level is where the second lot is added (same size as the intitial entry), for an issue that compensates the extension is now free to launch once again in the direction of the primary trend/extension. After the addition at the reset level, the trade moves in your favor, which you exit when the high/low of the extension is matched, or exit at a loss if the reset area is decisively broken.

The momentum trade is a great tool to hedge existing fade positions. Theoretically, they are the same design, or have the same end objective, to limit market exposure when capital allocation limits are being threatened. When trading an extension with a fade technique, see primary extension trade and/or secondary extension trade, the trade is deleveraged if the current capital "utilization" approaches the capital "allocation" limits set within the trade. This is done at the deleverage area, which would be "break even" level of the trade. At this point you can position size to allow for further extension with more buying power backing the trade, thus reducing risk and locking in more travel from deleverage to reset. If fading an upward extension you are shorting, thus you would cover a portion of these shorts at the deleverage area if the trade scenario required it. Hence, you are limiting your short exposure. The momentum trade limits short exposure by offsetting delta by going long at this area. You are thus adjusting overall portfolio exposure, thus hedging utilizing this technique against your fade trades. This trade can be executed without the existence of an initial fade trade however.

Where this trade differs from all other techniques listed is the fact that it does not exploit the markets obligatory bias. It attempts exploiting the markets "potential", thus, there is no obligation and the use of a hard defined stop is an absolute must.

The information listed in the newsletter regarding this trade will include:

Entry price
add/exit level
exit/exit level
profit at successful exit (1 and 2)
Loss at stop

Paired Arbitrage Trade

2009-01-01T00:02:00.000-08:00

Markets "breathe", or move as a collective whole. Some issues run stronger at times than others, and some run weaker than others at given times. The strength of the extension, or one way uncompensated movement, within an issue as compared to another issue really does not have any direct correlation. It does have "potential" to correct an imbalance there, but those imbalances go uncorrected more often than not. The imbalance I am interested to exploit is the direct ratio of one issues extension high/low to reset compared to anothers extension high/low to reset. Since all extensions reset/compensate eventually, an issue that has more travel to reset will run relatively strong/weaker (depending on extension direction) than an issue with a smaller area to cover to reset.

The paired arbitrage trade is initiated as a delta neutral trade. This means, the delta is 0.00, you are long one issue while simultaneously shorting (long puts) the second issue. If the pair, let's use QQQQ and SPY for example, move together, up say 5%, the trade does not lose or gain anything. If they both drop 5%, again the trade does not gain, nor lose. If the two issues seperate further, the trade will experience draw-down, this is typically a great opportunity to add to the trade, for they will correct the imbalance (due to the fact every extension will reset eventually). The trade is exited when either of the two issues actually compensate their extension, or when the gap that existed is closed. The pair typically will be directly correlated to each other, hence not an issue paired with it's inverse. Since the pair will generally drift in tandom, defining hard addition targets and exit targets, in advance, is extremely difficult. The trade will be controlled more by the gain/draw-down percentage to the overall utilized capital. For instance, if the trade is executed in a 3:1 ratio (QQQQ:SPY) with 10K of trading capital, the addition level may be when you have a 5% draw-down. Hence, when the 10K trade has a net liquidity of 9.5K, you will add XX lots to take further advantage of the pricing discrepency. When the trade is added to, you want to re-balance delta. If both issues rose in absolute price value, the long position (if options, of course) will gain delta, the short position (long puts) will lose delta. If you add 1 lot (recall 3:1 ratio above) you may have to add one additional contract to the short position to assist in balancing delta.

The paired arbitrage trade is typically of very short nature and played on the major ETFs, for they run in tighter correlation. WHen these opportunities come up, the following information will be listed in the newsletter, and updates to the trade will be via email/text.

Entry time (not price, due to the trade pair)
expected percentage to close the gap (ie, the percentage which seperates the two issue from being "in balance")
percent draw-down of addition
Exits and any specific delta balancing will be addressed via text/email

Secondary Extension Trade

2009-01-01T00:01:00.000-08:00

The secondary extention trade is very much similiar to the primary extension trade. The secondary extension exists within the primary extension and extends in the same direction of the primary extension. This is an averaging in fade trade just like the parent trade. The secondary extension fade is of a lower time duration trade and covers a smaller range of pricing of the underlying. Due to the smaller range of price movement, the secondary extension can be exploited with the use of "in the money" options more readily. The information provided in the newsletter regarding these trade set-up are the same as the primary extension trade. That information is as follows:

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".

Primary Extension Trade

2009-01-01T00:00:00.000-08:00

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".

PV

2001-01-01T22:50:00.000-08:00

I never quite experimenting and designing. Over my time spent modding carts and such I have come to a few definitive facts regarding cart mods. They all have drawbacks, you just need to know which fits you best.

I am going to start with a basic principal of fluidics, surface tension.

Surface tension and vacuum are primary reasons you can put a straw in a liquid, cover the exposed end of the straw, and lift the straw out of the liquid while keeping it full. When you remove your finger, you lose vacuum, thus the liquid falls back out of the straw.

Creating a sealing area of the liquid within a cart is key to maximize fluid delivery. We use absorptive materials within a cart to hold fluid. The more absorptive they are, typically, they have a higher retention coefficient. This means the more the soak in, the less they will let go.

To make a good cart, we have to look at surface tension. Inserting any of these materials does two things. They help support the weight of the fluid, and they reduce surface area exposed which strengthens retention.

Lets take a 2 liter bottle, fill it with water, then submerse it in water. Flip it over (top down) and lift it out. The bottle stays full until the top comes out of the water, it then chugs and comes out. As water comes out, air needs to enter to negate the vacuum.

A straw will hold the water, but the bottle will not. This is due to the ratio of weight to surface area of exposed liquid which effects surface tension.

Due to this principal, we only need to increase surface tension so a full cart (liquid, no filler) so it does not dump the fluid freely. A thin piece of foam material at the opening of the cart will help hold weight of the fluid and reduce surface volume, thus increasing surface tension. The less absorptive the material, the more it will release. Under the best circumstances, this is what we want.

When using the blue foam plug method (see ehiem filter mod) and no spring (just a plug), you can fill your cart with juice and cap it with this plug. Turning it over results in no loss of fluid.

When you push this cart onto the atomizer, the bridge enters the cart. The bridge is a low absorbing material, much life the blue foam, the blue foam is just more conforming to shape. The blue foam and bridge effectively become one unit, the liquid disperses through it until an equilibrium in saturation is met. Since a solid area of fluid across the mouth of the cart has never been broken (fluid in the cart replenishes the fluid which move to absorb into the bridge) a vacuum within the cart is kept. The surface tension of the fluid allows the bridging material (metal mesh and foam) to fully saturate without leaking (with assistance of the vacuum).

When fluid consumption gets to the point where this continuous fluid area across the mouth of the cart is broken you will inhale straight liquid fumes for a hit or two. This is easily identified by a hit which is very strong in flavor and kind of hits you in the sinus area. The vacuum in the cart got stronger and stronger. Air could not replace the fluid draining from the cart, but fumes from the liquid were leaching into that vacuum void space. This is what you inhale as soon as liquid continuity is lost across the cart mouth. It may reseal and break again for a hit or two, this is why you may get a few hits like this. When you first notice this happening, tilt the PV up and blow into it lightly. This will help evacuate fumes from the cart.

The PTB (lipton pyramid tea bag) mod works on this same principal, but is less reliable because the blue foam is more willing to shape fit the opening across the cart when the bridge is inserted. Cutting the PTB material too short, you are just extending the size of the bridge. Depending on how saturated the metal mesh bridge is upon insertion, it may flood. Cutting the PTB material too long and it wedges between the metal bridge and cart wall, filling the void and working like the blue foam plug. Even when the PTB work like the blue foam plug, it is displacing more space in the cart which could be used by fluid. Inserting a straw is very similar when doing it with PTB and the blue foam. Too long it seals, but slightly reduces surface tension allowing easier flooding, too short with a good seal it does nothing, too short with a non-existent seal it will contribute to flooding.

The straw mod will only assist with a high absorbing material which does not rely as much on this seal, but distribution properties of the material itself. Materials like wool, or polyfill, are more effective when air can displace behind it and assist in relieving any potential vacuum. These materials have a much higher absorptive coefficient than the metal mesh bridge, which means they will always retain higher concentrations of liquids than the mesh bridge. This is why you have to top it off repeatedly.

The blue foam plug mod works the most efficient. Variations have drawbacks and advantages. The spring (horizontal or vertical) increases pressure placed on the metal mesh bridge. This bridge inserts much further into the cart than most may realize. Increasing pressure against this bridge will compress the openings and decrease a usable porous surface area of the bridge. Although, the spring holds the blue foam higher in the cart and allows for more liquid capacity (this is offset by the spring itself though to some degree).

The blue foam plug has some disadvantages also. It increases nicotine delivery, increases throat hit, and effects vapor (sometimes more, sometimes less, depending on the liquid itself) at a cost. The blue foam plug mod will use a significant amount more fluid. The mesh bridge remains at 100% saturation while fluid remains in the cart cavity (same with the wicking material in some 510 atomizers). This allows the coil to burn as much fluid as it is capable while actuated (turned on). This does allow for shorter hits and longer battery life also though. If you vape because you just love to vape, you will use more juice (although delivery of nic is higher and you can drop to lower concentrations). If you vape for the pure nicotine, this will due it more efficiently and you will most likely vape less.

The best tips on using the blue foam plug is:
When inserting the full cart, push it straight on.
Do NOT turn the cart once it is pushed on. Doing so will twist the foam/filter material and break that liquid seal causing the entire contents of the cart to dump into the atomizer.
When you get the first fume hit, refill your cart. Do not overfill, the blue foam material should not be completely saturated when you re-install the cart.
If you wait until the cart is dry, and the bridge is dry, a lot of liquid will be pulled from a fresh cart immediately to saturate the bridge. Also, running the coil dry will accelerate deposit of junk burnt to the coil (then you got nasty taste which will require cleaning).

The blue filter material I use is found in the aquarium section of most pet stores. It is made by Marineland. I use the filter sleeves size "U" for the H.O.T. magnum pump.

When cutting a plug, use the standard (stock thickness) depth and cut 1.5 times the width and length of the cart opening. Pinch it across the narrow section, insert one side, bow it over and insert second side, then push it down flush (the atomizer bridge will push it to its final resting position).

Now that I use more juice (and just ran out again!), I am constructing carts that hold more juice. Any 510 materials (batteries, atomizers, carts)and juice that can be contributed for experimentation purposes are welcome. I am currently working on a 510 which uses direct poly to the coil and a liquid reservoir, basically a KR808D cartomizer design with a more robust coil.