Divergence Trading Workshop

Day One

presented by

Thomas Wood | MicroQuantSM

- My 4 Favorite Trades - Essential Trades of a Professional Trader

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About Me… Dave Aquino

• 1995 Graduate of Vanderbilt

University

• Full Broker at Age 23 with Merrill Lynch

• 12 Year Senior Advisor Vanguard Asset Management Service

• 31 months in Stocks & Options Live Trading Room

- My 4 Favorite Trades -

Essential Trades of a Professional Trader

4 Essential Trades of a Professional Trader

• The Consistency Trade

• The Explosive Trade

• The Continuation “Trend Surfing” Trade

• Do It Everyday Trade

The Consistency Trade

4 Essential Trades of a Professional Trader

Weekly Credit Spread

• Routine, consistently performing weekly income trade.

• Sell Credit Spreads based on 60 min & Daily timeframe

• Selling Option Premium : Theta (time) Decay

4 Essential Trades of a Professional Trader

Weekly Credit Spread

• Trades on Mon, Tues or possibly Wed

• Selection based on Daily chart

– Momentum trend

– Protected by at least one, better two: price

action setup, significant daily EMA level, daily

high/low

4 Essential Trades of a Professional Trader

Weekly Credit Spread • Trades on Thurs or possibly Wed

• Selection based on 60 minute chart

– Momentum trend

– Protected by at least one price action setup, significant daily EMA level, daily high/low

– Bonus : Daily chart’s momentum trend is in agreement with 60min

Weekly Credit Spread

• Selling Spreads requires looking at charts from a different point of view.

• Focus on selling (short strikes) “Away” from projected price direction – Where will prices most likely NOT be at expiration.

4 Essential Trades of a Professional Trader

Weekly Credit Spread

4 Essential Trades of a Professional Trader

STEP 1 :

• Look at 60 min Chart / Daily Chart

• Check for Momentum Direction & Strength – MQ Momentum or MACD

– Squeeze histogram direction

• Bonus : for 60 min Charts, Same direction as daily – Determine if the daily chart is also in same direction

Weekly Credit Spread

STEP 2:

• Review last 20-30 bars of stock’s Price Action

• Look for obvious setups – Divergences,

– Double Top/Bottom,

– Channel breakouts

• Change in momentum : MQM or MACD

Weekly Credit Spread

STEP 3 :

Look for Active Protection

• Did Price Action setup create obvious support & resistance levels

• Plot Daily EMA levels on 60 minute chart

• Daily highs & lows – create high & lows

Weekly Credit Spread

Step 4 : Does it pay a decent credit ? • Historical average, $0.40 - $0.70

• Conservative Sweet spot : 0.23 - .40

• Don’t be too aggressive • Bigger credit = bigger risk

• Less credit = extra distance & extra protection

Weekly Credit Spread

STEP 5 : Risk management / Long Term success

• Once you sell the credit spread, determine risk

• Recommend 2x – 3x max gain, stoploss

• Active Traders : Mental stops (b/c Fri opening gaps)

• Set&Forget Traders : Put stops in now

Weekly Credit Spread

STEP 6 : Friday AM

• Watch for reversal gaps

• If gap against – watch momentum strength & possible gap fill

• If positive or neutral open, maintain position – time decay will very likely generate jump in profits at

open

Weekly Credit Spread

STEP 7 : Exit Phase – Friday Afternoon

• Optimum exit = Spreads expire worthless – Keep 100% of Premium

– No exit commissions

• If you can’t watch, partial profits are OK

• Try to get commission free – close out of positions

Weekly Credit Spread

“Set & Forget” Traders : Extra notes

• Be selective on candidate – OK to have more requirements : clear momentum, clear

setups, daily high/low – support & resistance levels

• Decide on Risk Control / Stop Loss levels – Too narrow : stopped out early

– Too wide : too expensive losses

– In both cases, reduce # contracts

• What we can control : Being Selective

Weekly Credit Spread

Questions on the Consistency Trade

- Hourly Credit Spreads -

The Explosive Trade

4 Essential Trades of a Professional Trader

The Explosive Trade

• Directional Breakout Squeeze Trade

• Situational Trade : Compression -> Breakout

• These trades, especially in hourly & daily timeframes, can be start of major moves

4 Essential Trades of a Professional Trader

The Explosive Trade

• Any Trading Day, Any Timeframe

• Trade Based on breakout of a Momentum

trend

STEP 1 :

• Look at Chart, any Timeframe (5 min, 60 min, Daily)

• Check for YELLOW VBT Squeeze Signal dots

The Explosive Trade

4 Essential Trades of a Professional Trader

STEP 2:

• Look for obvious “quiet” consolidation

– Horizontal Channel Pattern

– Pennant formation

• Review last 20-30 bars of stock’s Price Action

• Change in momentum : MQ Momentum or MACD

The Explosive Trade

4 Essential Trades of a Professional Trader

STEP 3:

• You can enter once MQ Momentum or MACD signal lines are favoring a bullish/bearish side.

• Or you can wait until breakout occurs across support/ resistance level

The Explosive Trade

STEP 4:

• Monitor Momentum Signal Line slope, look for building momentum strength

• Verify Heavy Volume (dark blue) in VBT on Squeeze “fire”, watch for increasing VBT histogram

The Explosive Trade

4 Essential Trades of a Professional Trader

STEP 5:

• Hold Trade until …

– Momentum Signal Line slope, goes “flat”

– VBT Histogram Bars “switch” or start moving back to mid-line

– Get reversal setup in opposite direction

The Explosive Trade

4 Essential Trades of a Professional Trader

Questions on the Explosive Trade

- Directional Squeeze Breakout -

The Bull & Bear Flag Trade

4 Essential Trades of a Professional Trader

Bull Flag & Bear Flag Trade

• Ever feel disappointed that you “missed” a trade? Still want to jump on, but didn’t know how?

• The continuation trades : Bull Flag & Bear Flag can get you in on the price action, and help you more safely enter a trade.

Bull Flag

4 Essential Trades of a Professional Trader

Bull Flag & Bear Flag

Option Trading Ninja

Bear Flag

4 Essential Trades of a Professional Trader

Bull Flag & Bear Flag

4 Essential Trades of a Professional Trader

STEP 1 :

• Look at Chart, any Timeframe (5 min, 60 min, Daily)

• Check for…

– Verified Breakout or Reversal

– Strong directional momentum

Bull Flag & Bear Flag

STEP 2:

• Bullish Trend

• Bull Flag formation

– Look for lower high / lower low bar Pattern (3 Bar)

- Look for entry at first break of previous bar high

Bull Flag & Bear Flag

Bull Flag

4 Essential Trades of a Professional Trader

STEP 2:

• Bearish Trend

• Bear Flag formation

– Look for higher high / higher low bar Pattern (3 Bar)

- Look for entry at first break of previous bar low

Bull Flag & Bear Flag

Bear Flag

4 Essential Trades of a Professional Trader

STEP 3:

• Continue to hold through subsequent bull/bear flags

• Possible to Add positions, 1st or 2nd flag

• Trend usually has 3 – 4 Flags before reversal

Bull Flag & Bear Flag

Questions on Bull & Bear Flags

The Do It Everyday Trade

4 Essential Trades of a Professional Trader

Mid-Morning Reversal

• Within the framework of the Opening Range, the Mid-AM reversal is one of the most consistent intraday trading patterns.

• You trade against a consistent trending move that runs some time in the first trading hour.

4 Essential Trades of a Professional Trader

Mid-Morning Reversal

• Between 10:15 – 10:30 – 10:45, look for a reversal pattern against the O.R. Move

• Highest probability move is a 50% retracement. Next highest 61.8%

Mid-Morning Reversal

4 Essential Trades of a Professional Trader

• * The OPENING RANGE *

- Opening Range of the trading day

- Defined by the first 30 minutes (9:30am – 10am Eastern)

- Opening Range High – the highest price the index traded in the first 30 minutes

- Opening Range Low – the lowest price the index traded in the first 30 minutes

4 Essential Trades of a Professional Trader

Opening Range

• * The Mid-Morning Reversal*

- 10:00 – 10:45 AM : Likely range of Mid-AM Reversal

- If Index moving +45° inside O.R. Box it will emerge at the top of the O.R. Box

- If Index moving -45° inside O.R. Box it will emerge at the bottom of the O.R. Box

4 Essential Trades of a Professional Trader

Mid-Morning Reversal

4 Essential Trades of a Professional Trader

Mid-Morning Reversal

Quick Reversal at 10AM

• Trade Setups for Reversals

- Double Tops / Bearish Divergence : still common, higher

probability of success because of 2 points of momentum & prices to compare, higher probability against O.R. High or against previous Daily Highs

- Double Bottoms / Bullish Divergence : higher probability of success because of 2 points of momentum & prices to compare, higher probability against O.R. Low or against previous Daily Lows

- Enter at the Second high/low price – in direction of divergence

4 Essential Trades of a Professional Trader

• Trade Setups for Reversals

- Head & Shoulders Pattern : Triple Top/Bottom

- Decreasing Momentum Setup

- Watch for Double Top / Bearish Divergence pattern to possibly develop into H&S pattern

- Watch for Double Bottom / Bullish Divergence pattern to possibly develop into Inverse H&S pattern

- Enter at the Right Shoulder as bearish trade

4 Essential Trades of a Professional Trader

4 Essential Trades of a Professional Trader

Mid-Morning Reversal

• Watch for a trending 20-30 min O.R. Move

• Between 10:15 – 10:30 – 10:45, look for a reversal pattern against the O.R. Move

• Highest probability move is a 50% retracement. Next highest 61.8%

Mid-Morning Reversal

4 Essential Trades of a Professional Trader

Questions on the “Do It Everyday” Trade Mid-Morning Reversal

Thank You for your Attendance