Enhancing Financial Awareness - Kirkland Traderskirklandtraders.org/Notes/2016 EFA Notes (1)...

John Mohan Consulting LLC Enhancing Financial Awareness Notes ©2008 Updated 2/15/16 -

EnhancingFinancialEnhancingFinancialAwarenessAwarenessNotesNotes

JohnMohanConsultingLLC---June2008---Revised2016

TableofContents

Introduction..............................................................5Disclaimer ............................................................................ 5ResearchFavorsSelfManagement............................ 5

PrimaryGoals ...............................................................5Goal1–Minimizelosses ................................................ 5Goal2-Makemoney ....................................................... 5Goal3–CopyTheSuccessful ....................................... 5Goal4–CreateRules&Routines............................... 5Goal5-Usemoneywisely ............................................ 5

PointsToPonder .........................................................6OurMoneyIsn’tOurMoney ......................................... 6Inflation................................................................................. 6BallooningNationalDebt .............................................. 6OpenAROTHIRA ............................................................. 6Solomon'sWisdom........................................................... 6

Research/TradingTools ...........................................6

StockMarketOverview.........................................7HowOurEconomyFunctions...................................... 7

WhatIsBought&Sold................................................7Stocks ..................................................................................... 7ExchangeTradedFunds(ETFs).................................. 7IndexFunds ......................................................................... 7Options .................................................................................. 7PreferredStock .................................................................. 7REITs(RealEstateInvestmentTrusts) ................... 8OtherSecurities ................................................................. 8

FinancialParticipants ................................................8MarketTerminology...................................................8CommonAcronyms.......................................................... 9

ManagingRisk ....................................................... 10ProtectAccountsByDiversifying........................ 10ProtectTradesUsingHedges................................ 10ProtectTradesUsingSTOPS ................................. 10STOPTypes........................................................................10STOPConcerns.................................................................11

LossLimitBuyRules................................................ 11ChoosingProfitTargets .......................................... 11LookforResistance........................................................11MeasurethePattern ......................................................11

CommonTradingErrors ........................................12PortfolioManagement ............................................12

MarketCycles.........................................................12DailyTradingPatterns ................................................. 12WeeklyTradingPatterns ............................................ 12MonthlyTradingPatterns .......................................... 12YearlyTradingPatterns .............................................. 13PresidentialElectionCycle......................................... 135YearCycle....................................................................... 13WarCycle ........................................................................... 13

SearchingFor“BestofBreed”Stocks.............14InitialScreeningCriteria........................................14StockAnalysis ............................................................14VolumeRatioChanges ................................................. 14P/ERatio:(pricetoearnings)................................... 14Accumulation/Distribution ....................................... 14CashFlow........................................................................... 14Debt/EquityRatio .......................................................... 15InsiderTrading-Legal................................................. 15EPSGrowth5Year......................................................... 15Financials........................................................................... 15FloatSharesAvailable .................................................. 15BetaVolatility .................................................................. 15ComparativeStockAnalysis ...................................... 15

IBDCANSLIMCompanyAnalysis ........................15C=CurrentQuarterlyProfitIncreases ................. 15A=AnnualEarningIncreases................................... 15N=NewProducts,Management,orHighs.......... 16S=Supply&Demand ................................................... 16L=Leaders,NotLaggards .......................................... 16I=InstitutionalSponsorship..................................... 16M=MarketDirection.................................................... 16SelectIBDCriteria.......................................................... 16

WarrenBuffet’sAnalysis........................................16CODEAnalysis ............................................................17MutualFundSearches .............................................17

Trends&Patterns ................................................17TrendPatterns...........................................................17


Support&ResistanceLevels......................................18LargeMarketTrends.....................................................18SectorTrends....................................................................18IndustryTrends...............................................................18

ChartPatterns............................................................ 18

MovingAveragesTrends .............................................18Double&TripleTopsBearishReversals ..............19Double&TripleBottomsBullishReversals ........19HeadandShouldersReversals..................................19Flags&Pennants.............................................................19

BasePatterns ............................................................. 19

CupWithHandleBase ..................................................20FlatBasePatterns ...........................................................20AscendingBase ................................................................20

TimingIndicators................................................. 21VolumeIncrease ....................................................... 21

MACDLines&HistogramBars ............................. 21

Stochastics .................................................................. 21

AverageTrueRange(ATR).................................... 22

MomentumCrossover............................................. 22

BollingerBands(BBs)............................................. 22

Candlesticks ............................................................... 22

Heikin-AshiCandlesticks.............................................23CandlestickChart ............................................................24

McClellanOscillator ................................................. 25

RelativeStrengthLine............................................. 25

FibonacciRatios ........................................................ 25

TTMIndicators .......................................................... 25

TTMTrendIndicator.....................................................25TTMScalperIndicator ..................................................25TTMSqueezeMomentumIndicator .......................25TTMWaveIndicator......................................................26DataOverload...................................................................26

UnderstandingOptionContracts .................... 26ThreePartsOfAnOptionContract .........................26AdvantagesOfOptionTrading..................................26DisadvantagesOfOptionTrading............................26

CALLOptions-Buying&Selling .......................... 26

BuyingCallOptions........................................................27SellingCallOptions(CoveredCalls) .......................27

PUTOptions-Buying&Selling ............................ 27

BuyingPuts........................................................................27SellingPuts(CashCovered) .......................................27

OptionPricing............................................................ 27

IntrinsicValue:in-the-money....................................27ExtrinsicValue:amarket-makertool ....................27

OptionGreeks ............................................................ 28

WeeklyOptions ......................................................... 28

CombinationOptions .............................................. 28

OptionSellingGuidelines....................................... 29

OptionBuyingGuidelines ...................................... 29

PreparingToTrade..............................................30APre-TradeChecklist................................................... 30CreatingAlerts................................................................. 30

SignalsForEnteringStockTrades ......................30

ProtectingSecurityTrades....................................30

UsingSTOPStrategies .................................................. 30UsingHedges.................................................................... 31Diversifying....................................................................... 31

SignalsForClosingStockTrades.........................31

VolumeSellSignals........................................................ 31BrokenSupportSellSignals....................................... 31ClosingLosersSignals .................................................. 31ClosingNon-trendingPerformers........................... 31ClosingWinners.............................................................. 31

OptionTradeSignals/Fixes...................................31

ClosingOptionTrades.................................................. 31DecliningThetaFixWhenSellingOptions .......... 32RollingAnOptionTrade.............................................. 32

PlacingCombinationTradeOrders ....................32

Purchasingwith“OCO”orders ................................. 32Using“1stTriggersSequence”orders .................... 32Using“BlastAll”orders ............................................... 32

SelectingStrategies..............................................33OverviewofStrategies ............................................33

Up-trendingBullStrategies...................................33

QuarterlySectorETFsStrategy................................ 337/21MARetracementStrategy ............................... 34SellingVerticalBullPutCreditSpreads................ 34SellingCash-CoveredNakedPuts ........................... 347-21-49MovingAverageCross-UpStrategy ...... 34BuyingCallOptionsAtSupport................................ 35PurchasingLEAPS&SellVerticalSpread ............ 35SellingCallOptionsAgainstLEAPS ........................ 35BuyingBullCallDebitSpreads ................................. 35PocketPivotStrategy.................................................... 35BuyingStockSplits ........................................................ 36

Down-TrendingBearStrategies ..........................36

Down-trendingSignals ................................................ 36SearchingForDown-trendingStocks.................... 36SellingBearCallCreditSpreads............................... 36BuyingPutsITMAtResistance ................................ 37BuyingOTMLEAPSPuts ............................................. 37BuyingInverseETFs ..................................................... 37SellingPutOptionsAgainstPutLEAPS................. 37ShortSellingStrategy ................................................... 37

Volatility“WildHare”Strategies .........................37

BuyingOppositeOpeningGaps................................ 37BuyingAStraddle........................................................... 38BuyingAStrangle........................................................... 38

IncomeStrategies .....................................................38

SellingCoveredCalls..................................................... 38


CollectingTwoPremiums ...........................................38SellingCashCoveredWeeklyNakedPuts ............38FindingWeeklyOptions...............................................39WeeklyCreditSpreads .................................................39WeeklyDebitSpreadOptions....................................39ProtectiveCollarStrategy ...........................................39SellingIronCondors ......................................................40DividendInvesting .........................................................40

CustomizingThinkOrSwim............................... 41OpenATDAmeritradeIndividualAccount.........41ToAccessTOS...................................................................41FindingYourWayAroundTOS.................................41TOSTraining&HelpSources.....................................42ToRe-setPaper-tradingBalance .............................42GettingStartedCustomizingTOS.............................42

ToSet-upTOSWatchLists ..................................... 42ToSet-upTOSMonitorTab ................................... 42ToCustomizeEquitiesView.......................................42ToCustomizeOptionsView .......................................42ToChangeTheOrder/TradeHistoryViews .......42

ToSet-upTOSTradeTab ....................................... 42ToCreateASELLOptionsLayout ............................42

ToCreateABUYOptionsLayout ............................. 43ToCreateAProbabilitiesLayout............................. 43

ToSet-upTOSCharts ...............................................43Color-codingMovingAverageIndicators ............ 43C1–6mD-OverviewChart-072314..................... 43C2–3mD-RangePredictor072314 ...................... 44C3–3y2d–S/RPatterns072314 ............................ 44C4–10yM-08MarketCrash072314.................... 44C5–10d30m–End-DayVolume072314............. 44C6–CarterTools-1d5m-072314 ......................... 44C7–DayTrading/ES–1d3m-072314 ................ 45ToTransferCharts......................................................... 45

ToCustomizeTOSAnalyzeTab............................45

Glossary ...................................................................46OnTheLighterSide..................................................48FinalThoughts ...........................................................48ContactInformation.................................................48


Introduction

Most people, including me, do not have, or want to, spend the time watching or trading the stock market on a daily basis. Yet many are not satisfied with the interest earned from their saving accounts. Often people place their money with professional money managers. This may be beneficial if they chose wisely. Others like to manage their own money. I am one of those. I enjoy the investing process and like to help others understand the possibilities. Therefore I continue to rewrite these notes to assist me in organizing my thoughts so I become a more effective teacher.

These notes are a work in process, roughly written, incomplete at best, and subject to

constant revision as my knowledge increases.

D isc la imer

This material is a teaching/learning tool that helps to explain: (1) financial and investing concepts, (2) how to find trades using financial tools, and (3) when to buy and sell. These notes explore the process of money management, but do not provide financial. Each person is responsible for doing their own research before making financial decisions.

The financial world is complex, ever changing, as are the rules. Integrity is not a high priority for all players in the financial world so it behooves all of us to question and confirm all information before arriving at any financial decisions. Also, as a literary tool only, masculine pronouns are used to save time.

ResearchFavors Self Management

Research indicates individuals who manage their own money generally achieve better results than professional money managers because people hate losing their own money.

PrimaryGoals

These are my personal goals. Think about them.

Goal 1 – Minimize losses

How much risk are you willing to take? Walking across a street is a risk. Having others manage your money is a risk. Handling your own money is a risk. The question is not ‘Is there a risk?’ The question is ‘Is trading worth the risk?’

Highly successful traders lose approximately 1/3 of the time.

So get used to it. The idea of losing money occasionally is common so don’t let it eat you up emotionally. Look at the impact losses have on what must be gained back in order to break even.

Loss Percentage Gain Required To Break Even

10% 11%

20% 25%

30% 43%

Goal 2 - Makemoney

You can tell what is important to an individual by analyzing how they spend their time and money. Maybe your time is best spent looking for a highly successful money manager. If you decide to manage your own money,

Buy securities only to sell, not to own! All securities are BAD BAD BAD

unless they turn a profit. Unless you are a real gambler, consider only stocks that pay dividends and have done so for a long period of time. Why buy stock in a company that is not making money?

Goal 3 – CopyTheSuccessful

Imitate only those walking the walk, making profits over a long period of time. Remember, tangible assets are not money. Only when you have cash do you have money (flexibility). People often brag their diamond ring is worth ‘X’ amount of dollars. If you need a reality check, take a diamond ring to a pawnshop and find out how much cash you will get for it.

Goal 4 – CreateRules &Routines

Rules are established for good reasons. Rules are preventative in nature (helps avoid emotional decisions) and enhance success (repetition of desired behaviors. Follow buy/sell rules unemotionally.

You are looking for reasons not to trade.

Goal 5 - Usemoneywisely

After you have met your basic needs, consider using money to assist others in personal/professional growth. The greatest joys in life come from creating fond memories with others.


PointsToPonder

OurMoney Isn’t Our Money

Most people believe the Federal Reserve Bank (FED) is a USA Government institution. In reality, International Bankers privately own the Federal Reserve. The Federal Reserve Act authorized twelve private credit monopolies to create money out of nothing (thin air), lend it to our government at a guaranteed return 6% interest rate, and control the national money supply. This money is then owed back to the FED with interest.

Inf lat ion

Inflation is the investor’s number one enemy. For example, an item costing $100 in 1960 would cost $500 by 1995. In barely 35 years, the value of the US dollar fell 80%.

Bal looningNational Debt

There is no known way of avoiding a final collapse of a boom expansion brought about by increasing credit. The question is whether the crisis will come sooner as the result of a voluntary abandonment of further credit expansion --- or later, as a total catastrophe, when people of the world no longer have faith in our fiat currency system (the US Dollar). Currently, a number of major countries such as China and Russia are working toward replacing the US Dollar as the number one currency in the world with a basket of currencies related to exchange and trade agreements. These countries are also encouraging their citizens to purchase gold.

OpenAROTHIRA

A 22 year old who invests $2000 a year in a ROTH IRA for 43 years until he reaches age 65 ($86,000 total outlay) and earns 5% interest a year could earn a tax-free portfolio of $300,286. The advantages of a Roth IRA are:

! It provides a retirement income stream that is tax-free when being withdrawn.

! Easy withdrawal at any time without penalties or fees so it can act as both a savings and retirement account.

! It also provides tax-free wealth for heirs and you may continue to put money into it after age 70½.

Solomon's Wisdom

! A generous man will prosper; he who refreshes others will himself be refreshed. Whoever loves money never has enough. The rich rule over the poor, and the borrower is servant to the lender

! He who walks with the wise grows wise. He who hates correction is stupid. The prudent see danger and take refuge. But the simple keep going and suffer for it.

Research/TradingTools

Efficient use of time is important to me. Through all my wanderings in the financial world, I spend most of my researching and trading using the following tools:

! morningstar.com (free - ETFs)

! finviz.com (free – stock research) ! americanbulls.com (free – stock research/candles)

! dividendyieldhunter.com (free – preferred securities) ! markettrendsignal.com (subscribe – stocks & ETFs)

! navelliergrader.com (free- stock/ETF grader)

! finance.yahoo.com (free – stock news/research) ! investools.com (subscribe – stocks research)

! agorafinancial.com (subscribe – newsletters) ! etfchannel.com (free – ETF news/research)

! simpleroptions.com (free – options) ! investors.com (subscribe to IBD newspaper)

! ThinkOrSwim (free - TD Ameritrade trading software)

These seem to provide all the tools I need to research, analyze, and make trading decisions.


StockMarketOverviewInvesting started when someone had an idea that possibly would make money but didn’t have the financing to develop it. So money was sought from others who were willing to risk their cash in exchange for a share of the potential profits. Investing money comes from those who have extra, not those surviving from day-to-day.

When and if the business idea proved profitable and looked as if it would generate an income for an extended period of time, outsiders would try to buy shares in the company by offering cash to the original owners. If several people started bidding for shares and the shareowners were willing to sell, the price increased. This is how the stock market got started.

HowOurEconomyFunct ions

Classify what you see going on into the following groups.

! Necessities: basic food, shelter, clothing, energy, health care, education, utilities, taxes, etc.

! Capital Goods: cars, construction, major industrial equipment, transportation, electronics, etc.

! Discretionary Spending: fast food, fine dining, entertainment, recreation, travel, high fashion, jewelry, art, shopping, holidays, investing, charities, etc.

Then answer the following, “How do you think these areas will be affected by a downturn or upswing in the economy? Will there be an increase/decrease of (1) jobs, (2) income, and (3) spending in each of these areas?” In other words, if the USA runs into hard times, what is going to happen to these businesses if jobs are eliminated and/or income reduced?

WhatIsBought&Sold

The main focus of these notes is on buying and selling stocks, ETFs, Index funds and options. As a rule I avoid mutual funds because they cannot be protected with Stops.

Stocks

Stocks are shares of ownership in a company. Shareholders may benefit from company profits and a rising stock price. They may also lose their shirt if the company loses money and stock prices fall. Below are some well-known stocks.

SLW SLB JNJ DRYS SIRI WFC F GG SU PFE FRO DIS JPM GM FCX BTU LLY GMR TWX FITB PCAR HL CHK GSK PRGN DTV KEY TTM AUY MRO MRK OSG NFLX BK TM NEM NOG AVNR DAL TWC STD HMC SSRI RIG BMY LUV DISH CIT TSLA

ExchangeTradedFunds(ETFs)

ETFs, like mutual funds, hold a diversified portfolio of stocks and/or securities. With multiple securities, these types of investments aren’t subject to the wide array of risk including corporate scandals, after market earning reports, and other factors that affect individual stocks. However, ETFs are minimally managed because only top securities are included in the portfolio. ETFs have the following advantages:

! ETFs are safer because, ‘Stop-Loss’ orders may be placed/traded during market hours. Mutual funds are only traded after the market closes.

! ETFs have no penalties for early withdrawal and are ‘no-load’ securities (although usual broker fees apply).

! ETFs are passively managed so their expenses tend to be lower than comparable mutual funds.

! ETFs holdings are very apparent and portfolio changes are relatively infrequent.

! Options are available on some ETFs.

ETF Examples Oil OIL Nuclear NLR

Oil Services OIH US Dollar UUP China FXI Brazil EWZ Gold GLD Silver SLV Tin JJT Grain JJG

IndexFunds

Index funds represent entire business sectors.

S&P 500 Index (SPY) Dow Jones Industrial (DIA) NASDAQ 100 (QQQ) Russell 2000 Fund (IWM).

Options

Options (Calls and Puts) are purchasable and sellable contracts that guarantee rights, but not necessarily obligations to buy or sell a security for an agreed upon price within a certain time limit. Options may be used to leverage growth potential and help protect against huge losses. Options are discussed in much greater detail in later chapters of this booklet.

PreferredStock

Preferred stocks are shares issued by a corporation and typically pay a fixed interest rate ranging from 4% to 10% and above. See dividendyieldhunter.com. These interest rates remain constant on most--but not all preferred issues.

Dividends paid to owners of preferred stock are either cumulative or non-cumulative. Cumulative means that dividends continue to accrue even if they have been suspended for a while, but are not paid until after suspension ends.


Non-Cumulative means dividends do not continue to accrue (they are gone forever). In either case, if the dividends are suspended the company is likely in deep financial trouble.

Preferred shares normally carry no voting rights (unlike common shares) and generally have NO maturity date (most are perpetual). Most preferred stocks have an optional redemption period in which the shares may be redeemed, at the issuers’ option.

Preferred stock is purchased in the same manner as a stock purchase. However most preferred stocks have little volume so you should always use 'limit' orders.

REITs (Real Estate InvestmentTrusts)

REITs are publicly traded companies that own and manage investment-grade commercial real estate or loan funds to others for real estate purchases. REITs invest in office buildings, malls, industrial facilities, hotels, resorts, health care facilities, self-storage, etc. REITs provide a simple and inexpensive way to invest in commercial real estate without buying property directly. However, they are not very liquid.

REITs provide a fairly reliable source of income. At least 90 percent of its taxable income must be distributed annually to shareholders. The main benefit of a REIT is one level of taxation is removed (the REIT pays no taxes as long as they follow the rules). The main limitation of being a REIT is the restriction of earnings retained by the REIT. In order to grow there may not be enough free cash to expand so the REIT will be in a constant process of raising capital (either debt or equity) in order to expand.

Historically REITs have been good dividend payers, and depending on the overall economy, may make profits from reselling assets that they can then pay to shareholders. For a current list of available REITs see: dividendyieldhunter.com.

Other Secur it ies

! Mutual funds: pooled money managed by professional money managers who charge for their services. Mutual funds are only traded after the market closes each day and cannot be protected by STOPS.

! Bonds: loans made to a company or government with a guaranteed return if bankruptcy doesn't occur. Often bonds are sold to raise cash to expand the business.

o Bond prices and bond yields move in opposite directions. As prices head up because more people are buying bonds, yields head down.

o As inflation rises, bondholders receiving low interest payments usually sell their bonds so they can invest in assets that might outpace inflation.

! Commodities: raw materials such as sugar, wheat, pork bellies, metals, etc. o During economic expansion commodity prices

generally rise due to increasing demand. o During a recession or deflationary times the

opposite is true except in the case of precious

metals. Sometimes people lose faith in paper money and purchase gold or silver as insurance against devaluation of the dollar.

o Note: In the Puget Sound area, rare coins, silver, gold, etc. may be purchased at Bellevue Rare Coins, Staggs in Kent, Northwest Territorial Mint near Federal Way, West Seattle Coins, and the Northgate Coin Shop.

! Currencies: paper money people believe has value. As the amount of paper money increases, the value of paper money decreases (gas used to be 23 cents a gallon). Trading currencies is trading the relationship between two currencies such as the US dollar compared to the Japanese Yen.

! Certificates of Deposit (CD): a type of investment that requires you to invest money for a certain length of time and guarantees the return (like a bond).

FinancialParticipants

! Banks and credit unions typically provide services including checking, savings, loans, credit and debit cards, notary services, safe deposit boxes, etc.

! Brokerage Firms typically manage all types of trades (stocks, mutual funds, ETFs, etc.) for a fee.

! Broker: a licensed professional who advises people about investments for a fee.

! Stock and Commodity Markets are exchanges where stocks, options, securities, indexes, currencies, commodities, etc. are traded.

! Market Maker: a professional securities dealer who buys/sells stocks or commodities he holds in inventory and must ALWAYS provide a bid and ask price at which they will buy or sell a security. Many market makers may place ULTRA-LOW BIDS to purchase a security when sellers want to sell immediately.

! Investors (speculators) are individuals who usually hold longer-term investments. Traders (scalpers) are individuals who usually trade quickly looking for quick profits. Day-Traders are looking to enter and exit the market within any given day so that they are back in cash by the end of each day.

MarketTerminology

! Beta measures volatility (price swing) in relation to S&P 500. A beta of 1.0 means average volatility. A beta of 1.5 means a stock is 50% more volatile. A beta of 0.50 is 50% less volatile.

! Bears expect prices to fall. Bulls expect prices to rise. Wild Hares expect prices to bounce all over in a short period of time (high volatility).


! Bid is the price the buyer is offering to pay. Ask is the price the seller wants in order to sell. Spread is the difference between the bid and ask price. Tight bid-ask spreads up to 30 cents are desirable.

! Depression: when the peak-to-trough contraction in the economy is more than 25%. A recession is when the peak-to-trough contraction is more than 10%.

! Diversify: to spread out an amount of money into different types of investments such as bonds, stocks, CDs, funds, real estate, collectables, etc.

! Dividend is the payment made to a stockholder representing their share of the company's profits.

! FIDO: If a trade goes against you, close it and then ‘Forget it and drive on.’

! Float is the total number of publicly owned shares available for public trading.

! Futures Market is an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date.

! Gap is when the security price opens higher or lower than the closing price of the previous day.

! GTC: ‘good ‘til canceled’ order.

! Hedge: an inverse (opposite) position established to protect an existing position.

! Interest Rate is the price paid for using someone else's money. It is typically expressed as an annual percentage rate, such as 6.5% APR.

! IRA-Roth: it provides a way to earn money for retirement, without having to pay taxes on the money earned when taken out. A Roth IRA is funded with after-tax money.

! IRA-Traditional: it uses pre-tax money to fund a retirement account, but the earnings are taxed when taken out. IRAs don’t just ‘make money’ on their own. The money must be invested in the market. Also, with few exceptions, the money cannot be withdrawn until age 59 ½.

! Leveraged ETF. An ETF designed to double or triple in price on a daily basis. If a regular ETF goes up 2% a day, a double leveraged ETF goes up 4%.

! Liability is something owed.

! Lien is the right given to a lender to collect against the borrower's property and/or money.

! Liquidity refers to how quickly an asset (any item of value that is owned) can be turned into cash.

! Long: ownership or trade owed to you. ! Margin Account: A brokerage account that allows

customers to buy securities with money borrowed from the brokerage firm.

! Market Order is a directive to buy or sell a security IMMEDIATELY at the best price offered at the moment. A market order is not recommended when purchasing, but recommended when making a QUICK exit to close a trade.

! P/E (Price-Earnings Ratio) is the current share price compared to its per-share earnings.

! Shorting: a trade owed to another. If a brokerage firm loans 100 shares of a stock to an individual, then immediately the stock is sold to collect the cash. Later the individual shorting hopes to buy back the stock for a lower price and return the 100 shares to the brokerage firm, keeping the difference (hopefully a profit).

! Stock Split: when existing shares are divided into multiple shares as in a 2-for-1 split when an additional share is received for each share held but the value does not increase. One share @ $100 becomes two shares at $50 each. Splits occur when a company decides it wants to reduce its stock price so smaller investors will buy it. Stock prices generally move higher after the first split. Multiple splits within a short period of time, say a couple of years or less, often cause a huge correction shortly thereafter.

! Unearned Income is money made that is not the result of labor. For example, money earned through compound interest or dividend payments.

! VIX (CBOE Volatility Index), also known as the ‘fear’ indicator, is a measure of expected volatility of option pricing over the next 30 days in comparison to the S&P 500. When the VIX moves up, fear increases, and the markets tend to be Bearish.

! Volume: in trading, the number of securities or contracts that were traded that day. In option trading, open interest is the current number of open (unexercised) contracts for each option.

CommonAcronyms

ARM=Adjustable Rate Mortgage. CD=Certificate of Deposit. CEO=Chief Executive Officer. CFO=Chief Financial Officer. COO=Chief Operating Officer. EPS=Earnings Per Share. IRA=Individual Retirement Account. NAV=Net Asset Value. NOI=Net Operating Income. ROE=Return on Equity. ROI=Return on Investment. S&P=Standard & Poor's. SEP=Simplified Employee Pension. TSA=Tax-Sheltered Annuity.

John Mohan Consulting LLC Enhancing Financial Awareness ©2008 Updated 2/15/16 -

ManagingRiskWalking across a street is a risk. Looking both ways before crossing reduces the risk. Investing in anything is a risk, whether it is a home, marriage, car, security, oil well, etc. The question is, “How much are you willing to risk to make a few dollars?” And are you going to insure that risk?

Often people jump into a trade based upon a rumor. More times than not, people lose their shirt. Investing should focus on limiting risk, rather than focusing on the fear of loss.

Skilled traders lose 1/3 of the time. So get used to it. The fear of losing, greed, and the excitement of playing the market influences many traders and often cause wild mood swings and stupid trades. These emotions must be controlled for a person to be successful. Trading must be managed like a business with a well-thought out plan that includes limited exposure to risk.

ProtectAccountsByDiversifying

Putting all your money into one company, mutual fund, ETF, or one sector is very risky. It could fall out of favor while others explode upward. Money flows from sectors to sectors depending upon which sectors are making money at the moment. The major sectors are:

Communications Consumer Cyclical Consumer Defensive Energy

Precious Metals Financial Global Real Estate Health

Industrials Miscellaneous Sector Natural Resources Real Estate

Technology Utilities Diversifying prevents losing too much money in any one industry. However, too much diversification can limit success. There is an erroneous belief that wide diversification protects against a market sell-off. It doesn’t! Focus on a few quality securities. Staying in cash may be a wise choice if the market is tanking.

ProtectTradesUsingHedges

A Hedge is an inverse (opposite) position and is purchased to protect an existing position --- like INSURANCE. Hedges increase in value if the price of the original security falls.

Usually the cost of a hedge is around 10% to 20% of the position being protected.

Below are ETFs that protect against a possible price decline.

Sector Bearish Double Inverse

Bearish Triple Inverse

Financials SKF FAZ Health Care RXD RHO Oil & Gas DUG ERY

Real Estate SRS DRV Semiconductors SSG SOXS

Technology REW TYP Utilities SDP SPXY China FXP CZI

S&P500 SDS SPXU Russell2000 TWM SRTY

ProtectTradesUsingSTOPS

Frequently novice traders fail to protect profits and lose money even though a security has bounced in and out of profitability several times. The use of a STOP is one way to protect an account.

A STOP is a chosen price used to SELL a security to reduce losses or to take profits.

Typically the location of the STOP is established based upon: (1) support/resistance levels, (2) moving averages, (3) the average true range of price movement or a (4) percentage of the purchase price --- 7% to 10% for securities and 35% to 50% for options.

STOPTypes

! Hard STOP. This STOP is set immediately after the initial purchase. This STOP may be adjusted or deleted anytime after it is initially established. Typically there is not charge to change STOP levels.

! Trailing STOP --- a favorite. As the price of a security rises, this STOP also rises. If a $30 security has a $3 Trailing STOP and the price drops below $27, the security will be sold. If however the security price increases to $45, the STOP will follow along and rise to $42. A Trailing STOP allows a winning trade to run while protecting against a loss if the price drops.

! Mental STOP. Full-time traders sometimes avoid hard stops to prevent being inadvertently stopped out of a trade due to a momentary large price swing. Rather they set up ‘price alerts’ that notify the trader instantly when a mental STOP has been hit. Then traders look to see if a dramatic increase in volume is the cause of the sudden price swing. If the volume increase is not apparent, then the trader does not close out the position.


! STOP Limit Order is an order to buy or sell at a specific price or better and is only ACTIVATED when the desired price is hit. If the market gaps down, this STOP may be skipped over resulting in a huge loss.

STOPConcerns

There are those who argue that STOPS increases the chance of being “stopped out” before the security reverses and blasts ahead. This often happens with thinly traded securities. In a normal market, stop-losses usually work as intended.

However, in a fast volatile market, where the price gaps are large which are caused by (1) breaking news or (2 market-makers playing a game of forcing the price low enough to trigger large clusters of automatic computer generated stop-loss orders at round numbers or well-known support and resistant levels.

The result is the security is sold at the next available market price, which could be much lower than the original STOP price. Then, after the security is sold, the market makers start buying at the reduced price creating a new rally. It is not fair, but it is what it is. Market makers are in the business to make money for themselves.

ThinkOrSwim sends market orders only when the STOP has been hit so the market makers are unaware of pending orders. Set up price alerts rather than using STOPS helps solve this problem if you have immediate access to your account.

LossLimitBuyRules

Knowing how much you are willing to risk is critical to minimizing losses. The keys to staying in the trading game are unemotionally following the “loss limit rules”.

Maximum Loss Per Single Trade Rule Conservative investors are generally not willing to risk more than 1% to 3% of their total trading account on a single trade. If conservative, risk 1%. If more aggressive, risk 3%. On a $100,000 account it means you are not willing to lose more than $3,000 on a single trade. Portfolio Size___________ times 1%, 2%, 3% (you choose)

equals ___________Single Trade Loss Limit Rule

Selecting A Stop-Loss Point. This rule is necessary in order to determine how many shares or contracts you may purchase while staying within the “Single Trade Loss Limit” Rule.

Security Stop-Loss Rule STOPS are set at 7% to 10% or support levels

Security Price___________ times 7%, 8%, or 10% STOP

equals___________Security Stop Loss Rule

Determining # Of Shares To Purchase. Divide the resulting figures from the “Security Stop-Loss” into the “Single Trade Loss” to determine the number of shares that may be purchased.

For example, if a stock initially costs $45, 10% of $45 is $4.50. Divide $4.50 (potential stock loss) into $3000 (Single Trade Loss Limit Rule). The result is 667 total shares of a $45 security may be purchased with a Trailing STOP of $4.50 without breaking the above two rules.

Number Of Shares To Be Purchased Rule Single Trade Loss _________ DIVIDED BY the Security

STOP Loss _____________ equals _________# of shares or

divided by 100 equals the # of option contracts__________

Purchasing Sequence. Novices jump right in and buy all the shares allowed. Skilled traders buy in gradually. Some use the following rule.

50-30-20% Security Purchase Rule If the timing is right, buy half (50%) of the desired shares. If the security rises 3%, buy another 30% of the shares. If the price rises another 2%, buy the remaining 20%.

Buy 50% of shares________@$________ Total ________ Buy 30% of shares________@$________ Total ________

Buy 20% of shares________@$________ Total ________

Applied Protection: Hard STOP Trailing STOP

ChoosingProfitTargets

Before you buy, pick your profit goal or the signals you may use to indicate when to sell. Otherwise you'll have no idea when to sell. Here's how:

Lookfor Resistance

The simplest way to pick a price target is to look for the nearest overhead resistance level. When looking for resistance levels, you're basically looking for pockets of sellers. Resistance prices are places where sellers have previously been more eager to sell and take gains than buyers were to buy. So they make good potential stumbling points down the road. Bottom line: when you meet resistance, be ready to sell if the stock's momentum doesn't carry it through to the next resistance level. This approach takes all the guesswork out of selling. Don't play wait-and-see.

MeasurethePattern

A simple method to determine price targets is measuring the height of a trend pattern and then projecting a move to that same height. It's all about small gains adding up to big profits-and avoiding big losses.


CommonTradingErrors

! Over-trading. If you’re not willing to trade a security for a significant length of time then don’t buy it at all. Not only is there substantial evidence attesting to how excessive trading eats away at profits, but there is a strong correlation between diminishing holding times and diminishing returns.

! Failing to wait for trend confirmation or going against the market/industry trends, especially on low volume.

! Averaging down. Buying when the price is dropping.

! Buying low priced stocks rather than quality stocks. Cheaper stocks are cheaper for a reason.

! Holding on to losing positions.

! Failure to take quick profits in choppy markets.

! Buying up-trending stocks on low volume after a huge sell-off with high volume.

PortfolioManagement

If the risk capital is $500 and it doubles once, the gain is $1,000. Add that to the original $500 and equals $1500. If

$500 is risked on the next trade and it is a loser, there is still $1000. Keep risking only $500 until the account is up 300% ($2,000). Once the account is up to $2000 put the risk at $1000. If the risk money ever falls below $2,000, go back to risking $500 until you reach $2,000 again. By always managing risk, you can go on a bad streak of losing 66% of your trades and still win.

! If a 25% gain is made, sell half of the shares owned. ! If a 100% gain in made, sell half of the remaining shares

still owned and let the others run with a trailing stop.

Those having a couple of decades before retirement may take more risks than retirees because time works in their favor. Those nearing retirement may consider diversifying accordingly.

! 70% allocated in conservative core holdings that may include a home, owning blue-chip securities that pay reasonable dividends, holding quality bonds, selling covered calls, and purchasing LEAPS.

! 20% allocated to higher risk trading activities hoping for the occasional homerun.

! 10% allocated to cash to take advantage of opportunities or needs that may arise.

MarketCyclesSome things happen on a recurring basis which cause a security’s price to rise and fall almost like clockwork. For instance, professional money managers generally make their trades during the last 30 minutes of the trading session. Christmas goods are usually shipped in August and September influencing the stock prices of UPS or FEDX, and companies that manage shipping throughout the world.

Dai ly TradingPatterns

Northwest trading hours are from 6:30 a.m. to 1:00 p.m. The following time periods are important to note.

! 1st Half- Hour - 6:30 to 7:00 a.m. is typically called the amateur hour because this is when most over-night orders are filled. It is also when the market makers take the greatest advantage of the amateurs.

! Lunch Hour – 8:30 to 10:00 a.m. is when most of the professional money managers in the East eat lunch and discuss possible trades.

! Last Half Hour – 12:30 to 1:00 p.m. NW is when money-managers and day-traders are often very active. Day-traders typically like to be back in cash by the end of the trading day. Therefore they close most of their trades if not all. Volume is typically higher then.

Money managers typically analyze most of the day and trade heavily during the last 30 minutes the market is open.

Weekly TradingPatterns

! Mondays are good days for buying in a bull market because historically prices drop on Fridays due to day-traders exiting trades and their fear of weekend news.

! Tuesdays-Thursdays are good days for selling options.

! Fridays are usually sell-days because perceived risk is higher when money is in the market rather than in cash.

Monthly TradingPatterns

! The Thursday before option expiration week (3rd Friday of the month) is typically the worst day of the month with options bottoming down to their lowest prices.

! The 3rd week of month (Expiration Week), on Monday or Tuesday, possibly SELL Covered Calls or cash-covered Naked Puts near the money with an extremely high extrinsic value and let time decay work.

! Avoid trading the last and first day of the month.


! Buy the market (SPY & IWM) the last four trading days of the month. Sell the market four trading days after the 1st of the month. May is typically negative using this strategy. November and December are positive.

Year ly TradingPatterns

! April Blues. If the market was up the previous year, many taxpayers sell some of their securities in April to pay their income tax. The result is the market turns down for a short period of time.

! Summer Season. Sell in May and go away! Many traders on Wall Street take their vacation in summer. This is called the Hampton Affect. Often the market trades quite lightly during this time.

! Fall Season. Market crashes or severe downturns occurred at the END of September or October in 1929, 1987, 1997, and 2008. Many mutual funds sell off their losers at this time of year so tax losses can be recorded. This may be a time to sell small and mid-cap no-name stocks then to repurchase them later a lower price.

! Holiday Season Through Spring. November through April has been the top trading months for investing in the Dow Jones Industrial Average (big cap stocks) since 1950. The average gain has been 19.6% in the past.

! November. Weight Watchers and fitness centers generally rise in price during this time followed by a quick sell-off late December or January.

! December. Many professionals sell small-cap losers by December 15 for tax purposes driving the prices down. There is also the Santa Claus Rally in which the S&P 500 rallies the last 5 trading days of December and the first 2 days in January by an average of 1.5% since 1950.

! January. The small-cap stock market typically rebounds. This is probably the best time to buy smaller companies if the company itself is fundamentally sound. o January Barometer. As the S&P 500 goes in

January, so goes the market for the rest of the year. It has been reliable 89% of the time since 1950.

o First Five Days In January. If the first five days in January are up, there is an 85% chance the market will gain an average of 13.4% by year-end.

Pres identia l E lect ionCycle

Wars, recessions, and bear markets tend to start/occur in the first two years of a president’s term because difficult agenda items tend to be put forth at that time. Stocks tend to perform best during the final two years of a presidential term with the highest returns occurring in the fourth year. This typically occurs because the economy is manipulated to the positive side so more people are inclined to vote for the incumbents.

5 Year Cycle

Most bull markets run 5 years and then a serious correction takes place. 2013 was the end of the last five-year cycle.

WarCycle

Regional conflicts and civil wars unleash the full fury of heavily armed, increasingly authoritarian governments. Everywhere, anyone with great wealth is asking: How can I get my money to the safest large economy in the world — the United States? What big-cap American stocks should I buy?

This is a critical thought because of the rising global chaos — and despite the meagerly growing U.S. economy, there is a good possibility that HUNDREDS OF BILLIONS of dollars from the very rich --- will pour into the safety of U.S. to be invested in large cap stocks (stable companies that have made money for a long period of time) sending the U.S. stock market and precious metals soaring.

Remember, money is always moving somewhere.

Money knows no national boundaries and has no loyalties. So the key question is “What is recognized as money?” Is it the US dollar, oil, coal, gold, silver? Over the last 1000 years paper dollars have come and gone.


SearchingFor“BestofBreed”StocksWhat companies have a history of making money, paying dividends, have a market niche of products and/or services that are needed by the public (not just wanted) and are continuing to expand?

Do you want to invest in companies that are losing money or beginning to decline?

First, look for companies that are the “best of breed” in a particular industry, i.e. making money and being purchased by professional money managers. Look at a company’s price performance in the 2008 market crash. If a security held its own during that time, it is probably a safer investment.

Also consider debt load. If safety is a goal, avoid companies with huge debt --- or at least buy companies that have more cash on hand than debt. Consider companies with a long history of dividends payments over the years.

Finally, look at the Dow Jones Trend Predictions that are released September 30th. If companies that make things (industrials) and companies that ship things (transports) are both moving in the same direction, then, over the last 104 years, the direction of the USA economy and stock market has been successfully predicted 92.6% time.

InitialScreeningCriteria

1. Determine Market Trends. What are the current market trends with the Dow, S&P 500, and Russell 2000?

2. Select Trending Top Industries. Industry rank is responsible for at least 50% of a stock price.

3. Search For Top Contenders. Many programs have prebuilt searches to aid in finding the best.

4. Scan For High Volume. Preferably look for securities that trade more than 400,000 shares daily. A security needs to be liquid; meaning that there are plenty of buyers when it is time to sell and get out of a trade. Occasionally I will consider buying a ‘Penny’ stock when I feel adventure-some, but low volume often means it is difficult to find buyers when it is time to sell.

StockAnalysis

Once a stock has been selected for analysis, begin by evaluating its financials, market niche, news, and any market estimates. The bottom-line is, does the company make money (or is ramping up to be quite profitable) or are the financials running flat or in a downtrend? Listed below are some of the criteria deemed important when considering a stock.

VolumeRatio Changes

Volume changes are critical indicators of when to buy or sell. Look for stocks with a volume change of at least 50%.

! Increased volume coupled with rising prices usually means institutions are buying.

! Increased volume coupled with falling prices means institutions are typically selling.

P/E Rat io: (pr ice to earnings)

IBD research found the best growth stocks in the past 50 years show no correlation between the P/E ratios and their huge runs. Many had high P/E before starting their runs. The P/E is the ratio of a stock price to its earnings per share. For example, if a stock is trading at $24 and the earnings per share for the most recent 12 month period is $3 per share, then the P/E of 8 is figured by dividing $24 by $3. The buyer is investing $8 for every dollar of earnings.

Accumulat ion/Distr ibut ion

Accumulation/Distribution indicates whether big money is buying or selling a security. If the price is rising and the day’s volume is above average, Acc/Dist increases which is a sign that big money is entering the stock. If on above-average volume days the security price has been trending downward, it is a sign that big money is exiting the security.

Only trade securities owned by professionally managed funds. Otherwise the professional money managers are not touting (gossiping about) the security to their colleagues. Institutional money managers are responsible for generating OVER half of the daily trading volume.

! Volume spikes in the last half-hour of the trading day indicates the professionals are buying or selling.

! A distribution is ‘significant’ when a market drops more than 0.2% on high volume with no retesting of the high.

! Four or five distribution days over several weeks usually signals the market has topped and is headed down.

! When the market climbs 5% above a distribution day close, it is showing it has the strength to overcome high volume selling.

CashF low

Companies with double-digit annual cash flow growth over the past five years outperformed the market by 286% when screened every quarter (Tycoon Report Jan. 2012). Sometimes a company may spend a significant amount of cash to acquire additional valuable assets signifying a negative cash flow. That is not bad. Continuing negative cash flow is a serious warning that a company may be in trouble.


Debt/Equity Rat io

This is the value of a company if it were liquidated. It measures how much debt the company has compared to its equity. The lower the debt ratio, the more financially sound. But that doesn’t always mean the stock is a good buy.

Ins ider Trading- Legal

This indicator shows the buying/selling patterns of company insiders --- those in the know --- such as the CEO, CFO, and COO, (versus directors who typically know less than the people managing the company on a day-to-day basis).

! Insider selling is typical. Usually the selling ratio is 43 to one and in small quantities. But if insiders are selling large quantities near a low price, watch out!

! If key insiders are buying large quantities with their own money --- it is bullish. Look for ‘cluster buying’ when all the key insiders are buying at the same time.

! When an insider exercises his right (option) to purchase company stock at a cheaper price and then immediately sells those shares, it doesn’t necessarily mean he is losing faith in the company if he still retains a large number of shares.

! Most think insider buying correlates to an immediate jump in price. It doesn’t. Insiders cannot buy on non-public information, but they can buy if they think the company has a great chance of landing something huge. It usually precedes a price increase within six months.

! Management of a company by a predominance of owners increases the probability of success because they have a vested interest in their company.

EPSGrowth5 Year

This reflects the percentage of earnings growth over the last five years. Growth of 25% per year or more is considered promising. Note, not all profits may be distributed to the stockholders. Some may be retained to use for further company expansion. Profits are distributed as “dividends”.

F inancia ls Look for continued growth in revenue and earnings. Compare the numbers quarter-by-quarter and year-by-year because some businesses are cyclical such as UPS or FEDX. This information provides insight into the past performance and helps discern whether the management is operating wisely.

F loat Shares Avai lable

The Float is the total number of shares traded by the public. A company may have 12 million outstanding shares, but only 10 million shares are available for public trading (the Float). Sometimes companies may buy back some of the ‘float’ shares to offset stock given to its executives, to temporarily boost its value so insiders can sell their shares at a higher price, or to provide shareholders gains in lieu of paying dividends so as to keep operating capital and reduce taxes.

Beta Volat i l i ty

The Beta score measures the underlying stock's volatility (price swing) in relation to S&P 500. A beta of 1.0 means the stock’s price volatility is equal to the volatility of the S&P. A beta of 1.5 means a stock’s price swing is 50% more volatile than the S&P. A beta of 0.50 is 50% less volatile. Generally, the safer slower stocks, like utility stocks, have a lower beta (usually less than one) while more risky stocks have a higher beta.

Comparat ive StockAnalys is

Compile a list of comparative stocks that trade over 400,000 and are optional and then compare them side by side. This is done in Investools by selecting the Investor Tool Box. Type in a stock symbol. Select under ‘Graph Links’ in the left-hand column the ‘Comparison Chart’ to compare individual stocks. Or ‘Stocks in Industry Group’ at the bottom of the left-hand column to create a list of promising stocks. Then select ‘Industry Comparison’ and type in some symbols.

IBDCANSLIMCompanyAnalysis

William O'Neil, founder of Investor’s Business Daily Newspaper (IBD) has done extensive research on the stock market and purchasing securities. He contends the market can be “timed”, giving clear indications on when the market is continuing upward based upon the “follow-through-day concept” of showing gains of 1.3% to 1.45% with significant volume that often occurs on day 4 through day 7 of an attempted rally. He also developed the ‘CAN SLIM’ investing analysis criteria that follows.

C = Current Quarter ly Prof it Increases

Strong growth in earnings, more than any other factor, is what defines the market leaders that potentially are going to experience big price advances. IBD recommends looking for stocks with a profit gain of at least 25% compared to the same quarter of the previous year. IBD found that three of every four such stocks boosted profits by more than 70% in their most recent quarter BEFORE their big run-ups.

! Increasing profits supported by increasing growth in sales is a positive. Sometimes companies boost earnings by cutting costs. That works for only a short time.

! A warning ‘possible sell signal’ is generated when profit growth slows by two-thirds or more from the previous growth rate. O’Neil prefers to see two straight quarters of decline before turning negative on a company. .

A = Annual Earning Increases

Annual earnings growth should be at least 25% for the last three to five years. Some of the biggest market winners had annual earnings growth of 50%+ before starting their big run-ups. A trend of three to five years of annual earning increases coupled with recent strong earnings in the last several quarters increases the probability of success in an up-trending market.


N = NewProducts, Management, or Highs

Old companies or newly created companies that provide these new things or new services tend to increase in value because of an increase in sales.

! The best performers are relatively young companies that have gone public in the last 15 years. They often have a market niche few rivals can match and are readily being acquired by mutual funds.

! When a strong market/industry rally takes hold, these companies have the greatest potential to hit new highs quickly and make stunning runs.

S = Supply &Demand

When there are plenty of buyers and few sellers, prices increase. When demand for stock shares increases, a company with the least amount of shares available will experience a greater price increase. Usually older larger companies with billions of shares are more sluggish than companies trading only 50 million shares.

L = Leaders, Not Laggards

There are many ‘wannabes and also-ran’ companies. Their price growth results are average at best. Select best-of-breed stocks from the top three in strong industry groups with the best quarterly/annual earnings growth.

! Look for stocks in fast-rising industries and sectors. IBD research shows 49% of a stock’s price rise is tied directly to the performance of the industry and sector itself.

! In a bull market correction, the stocks that drop the least are usually the best on rebound.

I = Inst itut ional Sponsorship

When big traders (mutual funds, pension plans, etc) are buying millions of shares, it is a good sign the price will run-up. Also check the Accumulation/ Distribution Rating and compare it to the daily volume of a 20-day moving average to get a fairly up-to-date picture of what is happening. Often the big traders buy one day and then wait four to eight days for a slight fall back before making another larger purchase.

M= Market Direct ion

Track the trend averages using the S&P, DJIA, and NASDAQ. Also consider industries and sectors trends. Markets are either in a confirmed uptrend helping prices to rise, an uptrend under pressure that tends to confuse the issue, or a correction in which prices are falling.

Se lect IBDCr iter ia

Listed below are some of the criteria IBD deems important s.

! ROE - Return On Equity. Calculated by dividing net annual income by average shareholder’s equity over the last two year. The greatest growth stocks in the last 50 years had had a 17%+, meaning a $1.70 was earned on each dollar of equity per year.

! SMR Rating. A proprietary rating pioneered by IBD to help investors identify companies with superior Sales Growth, Profit Margins, and Return on Equity ratios. When young companies really start selling product or services, the potential for huge growth is great.

! EPS - Earnings Per Share. A target rating of 80+ means that the stock has out performed 80% of the market in terms of profit growth. This scale ranges from 1 (lowest) to 99 (highest). Stocks with an EPS growth rate of at least 25% compared to a year-ago suggest a company has products that are in strong demand. If the EPS continues to grow, this generally impacts the price quite favorably.

! RS – Relative Strength. This is a measure of a stock’s price performance over the last twelve months compared to all stocks in the IBD database. The rating scale ranges from 1 (lowest) to 99 (highest) with more weight given to the latest three months of performance. Stocks with the highest ratings tend to go higher while the weaker ones die off.

WarrenBuffet’sAnalysis

Warren Buffet focused on investing in small-cap low-priced stocks. Here’s why. If you buy a $100 stock and it goes up $1, you’ve made only 1%. But if you buy a $5 stock, a $1 gain equals a 20% profit. Low-priced stocks of rapidly expanding businesses will provide some of the biggest gains. He considers the following factors important.

! Brand recognition: a well-known company with strong core products in its industry.

! Earnings consistency: a growing company with no negative years of earnings growth in past 5 years.

! Long-term debt that is less than two times the company’s net income. This ensures the company has not taken on too much risk through its borrowings.

! Return On Equity of 15% or more. ! Free cash flow that is positive.

! Returned earnings of 12% to 15% or better.

! The current operating and net profit margin is greater than or equal to the current median of its industry.

! The total liabilities to total assets ratio for the last fiscal quarter (Q1) is less than or equal to the industry’s median total assets to total liabilities ratio for the same time period.


! The seven-year growth rate in earnings per share from continuing operations ranks in the top 75% of the entire database.

! The three-year growth rate in earnings per share from continuing operations is greater than or equal to the seven-year growth rate in earnings per share from continuing operations.

! The earnings per share from continuing operations for the last 12 months and for each of the last seven years are positive.

As a side note, John Templeton started in 1939 using a variation of this strategy. He bought every small-cap stock that traded for $1 or less. In four years he quadrupled his money and is now worth $1.8 billion today.

CODEAnalysis

Agora Financial puts out a newsletter called “Capital & Crisis” which analyzes potential investments using the acronym CODE.

! C = is cheap when compared with replacement cost or private market value.

! O = is for owner/operators that own a large part of the company and have their own money at risk.

! D = is for open disclosures so the business is transparent, easy to read and understand.

! E = is for excellent financial condition, debt can easily be covered by assets.

MutualFundSearches

I no longer invest in mutual funds because sellers cannot get out of a mutual fund during intraday trading. As a result there is no protection if the market crashes during the day.

On the plus side, mutual funds require little monitoring and can be highly successfully if the right industry is chosen. When I did invest in mutual funds I stayed in no-load funds and stayed with top families such as Vanguard and Fidelity.

! No-Load Mutual Funds where there are no fees charged for buying or selling. On an average these tend to be more profitable than loaded funds.

! Loaded Mutual Funds where an upfront fee or exit fee is charged to enter or cash out a fund.

The following are examples of mutual funds in quality families at this time. Mutual fund symbols end in “X”.

Mutual Fund Examples CAN SLIM CANGX Internet INPIX

Metals VGPMX Foreign MINDX Energy VGENX Bond TSHYX

Real Estate PETAX Balanced PVSAX Technical JTCAX Health PRHSX

Morningstar.com provides a list of mutual funds that may be arranged by total return year-to-date. Morningstar.com provides many FREE services with additional assistance available for a minimal charge. I use the free services.

Trends&PatternsSecurity prices rise and fall. The objective is to anticipate WHEN there is a good possibility the prices are going to make a direction change so as to take advantage of: (1) buying opportunities, (2) selling for profit, or (3) to minimize losses. The following patterns should help to identify price trends.

TrendPatterns

If a trader is wrong about the trends (market trends, sector trends, industry trends, and the trend of the security itself --- all other factors are basically worthless. What is popular one moment may be a ‘dog’ shortly thereafter. Trends are your friends. Money is always flowing somewhere!

Trends are characterized by a series of zigzags where the prices rise and then retrace before possibly making its next breakthrough. This up/down pattern is commonly seen with all securities. Trends resemble peaks and valleys.

! An uptrend is a series of price swings resulting in higher highs and higher lows.

! A downtrend is a series of price swings resulting in lower highs and lower lows. Generally, a 20% price drop signifies a trend change in a security.

! A sideways trend is a series of horizontal peaks and troughs that reflects a period of indecision. The prices may be consolidating, forming a base from which to launch upward in a strong trend or crash quickly.


Support &ResistanceLevels

Support/resistance levels are similar to the floor and ceiling of a room where the price of a security generally ranges until it makes a break through --- either up or down.

! The Support Level (floor) is the lowest level to which a price falls and from which it keeps bouncing upward without declining further. It is where buyers start purchasing. Some call it a ‘base’ of support.

! The Resistance Level (ceiling) is the highest level to which a price raises and from which it keeps bouncing downward without rising any higher. It is where the sellers become active and take profits.

LargeMarket Trends

A large market trend is determined by analyzing the buying and selling volume of the Dow, NASDAQ, S&P 500, and Russell 2000. The NYSE handles most institutional trading.

! Small Cap Bearish Selling Stocks (Russell 2000 ---stocks with a market capitalization of $300 million to $2 billion) tend to be sold first when the market reverses. These are the less experienced companies that pay little to no dividends and are less proven. That is why they are seen by many investors as bellwether stocks. The pessimists say, “If the smaller stocks break down, the bigger stocks are likely to succumb to selling pressure.” The old Wall Street adage is "

When the troops stop following the generals, trouble looms ahead.

! Large Cap Bearish Selling Stocks (Dow and S&P 500 --- those with a market capitalization of over $10 billion) are typically among the last stocks to be sold in market corrections. That's because these are often stocks that pay dividends, investors have held for forever, and are willing to hold through thick and thin.

! If the NYSE is selling and the OTCBB is buying (unaware of what is happening with institutional money) the small investor generally loses money.

! When new smaller companies are making highs and older, more stable companies are declining, the market is probably headed for a decline.

Sector Trends

Money is always flowing into the “hot” sectors and out of the “cold” sectors. ETFs may be traded in each of these sectors. Below are most of the major sectors.

Communications Consumer Cyclical Consumer Defensive Equity Energy

Precious Metals Financial Global Real Estate Health

Industrials Miscellaneous Sector Natural Resources Real Estate

Technology Utilities

Industry Trends

Industry trends deal with a broad analysis of related businesses. The following are some ETFs that are representative of the major industries of the world.

Internet HHH Oil Service OIH Materials IYM Retail PMR Insurance PIC Consumer IYC Transport IYT Telecom IYZ Nanotech PXN Big Tech QQQQ Software PSJ Media PBS

Semicondctrs PSI Biotech PBE Water PHO Alt. Energy PBW

Defense PPA Construction PKB Pharmacy PPH Global GTAA

Health Care IYH Bond Market TLT

ChartPatterns

The following are some commonly seen patterns that indicate where support/resistance levels may be found. Knowledge of these help determine timing of entry/exit points.

MovingAveragesTrends

A simple way to see the trend of a security is to use Moving Averages (MAs). A Simple MA is figured by ADDING all the prices of a specific time period and DIVIDING by the number of time periods selected. An Exponential MA (EMA) weights the near-term prices heavier than prices that are further out. MAs are lagging indicators that determine the path of least resistance. The following is a MA chart.

A Simple Moving Average Trend Strategy. When moving averages (MA) cross over one another on high volume, it usually signals a trend change. When used with other timing tools, it helps determine when to trade.

! Up-trending Strategy. When the 7-day MA crosses upward through the 21-day MA or the 21-day MA crosses upward through 49-day MA, WAIT 3 DAYS to see if the candles remain above the MA trend lines. If the candles remain above, consider buying.


! Down trending Strategy. When the 3-day MA crosses downward through the 7-day, 21-day MA, or the 49-day MA, WAIT 3 DAYS to see if the candles remain ENTIRELY BELOW the MA trend lines. If the candles remain below, consider selling.

Double &Tr ip le TopsBearish Reversals

Double and triple tops appear only after an uptrend and when the price fails to break through its resistance level two or three times followed by an increase of selling volume. A low volume rebound in price is an indication that institutional investors are cooling on the stock. Also, if the security falls back to its 49-day moving average more than two times, it is time to be more cautious, protecting against a rapid fall in price using tighter STOPS.

Double &Tr ip le BottomsBul l ish Reversals

These appear only after a downtrend and are considered only reliable if they extend at least seven weeks. The key is the price fails to break support two or three times on low volume followed by increased buying volume. A double bottom base looks like a “W” with a slightly lower right side than left side. When a breakout occurs, the price crosses the apex of the “W” on higher volume.

HeadandShoulders Reversals

The Head & Shoulders Top is the #1 performing bearish chart pattern. It typically takes five to six months to form.

Both patterns display three peaks or valleys with the middle one being higher or lower than the two outside ones. The neckline is the support or resistance level which, when shattered in higher volume, is a trend reversal sign.

The TOP pattern with the three mountain peaks usually signals a reversal and an average price decline of 22% and only a 4% failure rate. The BOTTOM pattern with the three valleys is not as reliable.

F lags &Pennants

The flag is a small rectangle pattern that may slope slightly upward or downward from the previous trend on declining volume. The pennant is a small symmetrical triangle that begins wide and converges also on declining volume. The ‘flagpole’ is that part of the pattern that displays a sharp price rise or drop before consolidation begins resulting in the formation of the flag or pennant. The top of the flagpole is the future buy-point once the price breaks upward out of the flag or pennant pattern.

These patterns signal a PAUSE in an uptrend or downtrend, usually occurring right after a steep price rise or fall. This pause is typically reflected in decreasing trading volume. Then when the price resumes its trend with a spike in volume it often signals the continuation of a trend.

! Flags and pennants typically take five days to four weeks to form. After that they are not as reliable in predicting future price movement.

! A bullish signal occurs when the price rebounds beyond the upper trend line of the sideways.

! It is commonly thought that the length of the flagpole indicates the potential price increase.

! A lack of a volume spike on the day of the uptrend continuation is an indication that this pattern may not be reliable and may actually reverse.

BasePatterns

Base patterns typically form when a stock price falls 15% to 35% after an uptrend of 30% and consolidates over a minimum of seven weeks up to three to six months.

! A decline greater than 35% significantly reduces the chance of a stock climbing back from the retracement.

! Shorter patterns aren’t true bases. Seven weeks is to digest previous gains and to shake out investors who aren't inclined to hold or buy more. Start counting the first week the stock's price closes lower after reaching a new closing high.


! Late-stage breakouts from (3rd or 4th bases) often fail 80% of the time. Breakouts from 1st and 2nd bases often produce profits of 20% to 25%.

! V-shaped patterns typically form late in an uptrend and often signal when institutions are exiting as indicated by large selling volume on the left side of the pattern.

CupWithHandle Base

This is a highly reliable pattern developed by William O’Neil of Investors Business Daily Newspaper. It operates on the premise that winning stocks don’t go straight up. Often they retrace up to 35%, frequently after a 20% to 30% gain. If the price retracement occurs with weak volume it indicates a general unwillingness among professional money-managers to close their positions.

! The entire cup/handle formation must be at least seven weeks long. Most patterns develop within three to six months although some have taken 16 months.

! An 8% to 12% declining handle usually begins with a down day and should take at least five days to form. Volume should be light in the handle phase. Handles with prices that drift upwards have a higher failure rate. The handle should be above the 50-day moving average.

! Price closes at the end of each day should be tight, within 1-1.5% of the prior week’s close.

! In most cases the bottom part of the cup should be rounded rather than a narrow ‘V’ shape because that shape tends to scare out the unsure holders.

The buy point is 10 cents above the highest point of the handle or the left-side high of the base.

! Make sure the volume is at least 40% above the average volume when it crosses the buy point. Without the volume support the trade is suspect.

! Avoid purchasing stocks that breakout below their 10 week moving average (past trading history).

! A saucer-shape pattern may occur that is shallower than the cup pattern with corrections of 12% to 20%.

Sometimes it develops without a handle and prices just explode upward, breaking out to new highs.

F lat BasePatterns

Flat base patterns are not typically first stage patterns. They typically occur after a cup-with-handle or double bottom. These are continuation patterns where supply and demand seems to be evenly balanced. The same ‘highs’ are constantly tested as are the same ‘lows’. They take typically 5 weeks to form after correcting less than 15%. The buy point is usually 10 cents above the left-side high of the base.

Very powerful advances may break loose from this tight trading formation. What to look for is volume drying up as the stock stays at or about the same level going horizontally. Draw a trend line across the top of this formation. When the stock breakouts through the trend line, the trading volume should noticeably increase.

AscendingBase

The ascending base has three or more rising valleys on stocks with rapidly improving fundamentals. This pattern often leads to a huge rise in pricing within several weeks to a few months. Often volume will begin declining, remaining below average until a significant volume increase signals a breakout upward.


TimingIndicatorsBuy/sell timing tools are comprised of: (1) indicators that display the entire range of a price movement and (2) oscillators that have range boundaries such as zero to 100%. These predictive tools help determine when to buy, sell or not trade. Not trading is a strategy, especially when the market is really choppy.

VolumeIncrease

A significant increase of 50% in trading volume is a very strong trend indicator. As individuals, the volume we personally generate has very little impact on the market. Our trading of a thousand shares is almost irrelevant except in penny stocks that are high-risk trades because there may only be a few buyers when you want to sell. It is only when the professional money-managers spend millions do trends begin to develop.

Huge volume changes often occur the last half hour of a trading session.

Typically, if a security trend and market trend match with supporting high volume, the security price has a 90% chance of increasing overnight.

Professional money managers tend to buy large quantities and then wait four to eight

days before buying again. So when there is a dramatic change in DAILY VOLUME compared to its average daily volume, PAY ATTENTION!

! Rising prices with high volume mean institutional money managers are buying. The larger the volume increase, the better chance it is a true breakout. During major breakouts it is not uncommon for new market leaders to show volume spikes from 200% to 1000%. To avoid a false breakout, many analysts agree . . .

A breakout is typically confirmed when there is at least a 3% penetration

of support or resistance. ! Rising prices with little volume is often a sucker’s rally

and novice buyers tend to be taken to the cleaners. Falling prices with high volume mean institutional money managers are selling.

! Falling prices with little volume may mean a strong base of support is forming for a possible uptrend.

MACDLines&HistogramBars

The MACD (Moving Average Convergence/Divergence) lines are one of the most reliable lagging indicators used to identify trend reversals, especially down trends. It uses exponential moving averages (EMA).

The typical MACD is a 12-day EMA less the 26-day EMA. The 12-day EMA is faster and responsible for most of the MACD movement. The 26-day MA is slower and less reactive to price changes in the underlying security. A 9-day EMA is then plotted to act as a signal line to identify trend reversals.

The MACD Histogram Bars attempts to interpret the MACD and predict trend changes. It is less reliable than the MACD so other indicators should be used to confirm MACD Histogram predictions. The histogram bars consist of green bars when MACD is above its 9-day EMA and red bars when MACD is below its 9-day EMA.

Stochastics

Stochastics is another lagging indicator that measures at what point the price of a security is within the entire price range of the security over a given time period. It is one of the most reliable indicators in predicting short term down trends.

Stochastics depicts who is dominating --- BUYERS buying at higher prices or SELLERS selling at lower prices. It is also used to predict upcoming trends.


There are two default bands on a Stochastics chart. They are a 75% to 25% price range that may be adjusted to an 80% and 20%. A reading of 80% or higher means the security is in the upper 20% of its highest price trading range. A reading below the 20% price range indicates the security may be oversold.

! When the indicator crosses above the 80% line it means people are buying at higher prices and the security is near the top of its highest prices. If the indicator drops below the 80% line a bearish signal is generated.

! The reverse is true when the indicator drops below the 20 % line it means the security is selling near its lowest prices. If the indicator rises above the 20% line, a bullish upward trend is indicated.

AverageTrueRange(ATR)

ATR is an indicator that measures price swings. It may be used to determine how far out a seller of CALLS or PUTS may want to place their strike price. It is not a directional indicator. A dramatic price movement in either direction results in a sharp upturn on the ATR price chart. The ATR may be used to validate the enthusiasm behind a price breakout upward or downward. A bullish reversal on a chart with an increase in ATR would reinforce the reversal. A bearish break with an increase in ATR would show strong selling pressure and reinforce the breakdown of support.

MomentumCrossover

The Momentum Crossover simply takes the closing price of the security seven days ago and subtracts it from the current closing price. The “crossover” arrow appears when there is a reversal from negative to positive OR positive to negative.

BollingerBands(BBs)

BBs show the price range and current volatility for the last 20 days. BBs are comprised of two standard deviation lines, encompassing typically a 20-day simple moving average. BB expects to encompass 95.2% of the prices being scrutinized.

! Narrow Bands indicate a security is trading within a tight trading range and with low volatility. Often contracting BBs provide advance notice of an impending trend change. Ideally both bands curve toward each other. Then, suddenly the security may make a strong directional move, breaking out of its channel. Frequently the first move out of extremely narrow BB is false and will reverse immediately.

! Boundary Reversals. It is thought when a security trades up to its upper BB it has become overbought and ripe for a fall. When that same security falls and touches or even penetrates its lower BB, it is thought to be oversold and ready to bounce upward.

Candlesticks

The Japanese invented candlesticks (CSs) in the 1600's to help predict trends. CSs are made up of both solid and hollow candle bodies with ‘wicks’ at both ends of the candles.

! A HOLLOW CS means the price of the stock is rising. The opening price is at the bottom of the candle body and the closing price is at the top of the body. A hollow CS indicates a strong interest in buying. Hollow green candlesticks often represents rising prices.

! A SOLID CS indicates heaviness; the price is falling as selling occurs. The opening price is the top of the candle body and closing price at the bottom of the candle body. Solid black or red often represents falling prices.

! WICKS are the thin lines above and below the main candle body. The bottom wick represents the low price traded during that time period. The top wick signifies the high price for that time period.

! A SOLID GREEN COLORED CS means the day’s closing price was lower than the opening price, but the green means the day’s closing price GAPPED UP HIGHER than the previous day’s closing price.


Candles are more reliable if two or three candles in a row indicating a particular trend receive confirmation from other timing tools such as the MACD or Stochastics.

CS patterns near support or resistance with high trading volume predict short-term

reversals of 5 to 15 days or minutes depending upon the time period selected.

! Buying Pressure. Long hollow candlesticks show strong buying pressure if there is volume support. They indicate prices have advanced significantly from open to close and buyers were aggressive.

! Reversals. After extended declines, long hollow candlesticks may indicate a potential bullish turning point or support level.

! Hollow candles with no lower wicks or “tails" indicate a strong uptrend. This is the time to add to a long position or exit short positions.

! One candle with a small body surrounded by upper and lower longer wicks indicates a trend change. Risk-loving traders might buy or sell here, while others will wait for confirmation before going short or long.

! Filled candles indicate a downtrend. This is the time to add short positions and exit long positions if the volume is increasing.

! Filled candles with no higher wicks identify a strong downtrend. Stay short until there's a change in trend.

The following are some of the more common candlestick patterns. Doji look like a cross because the open and close are exactly the same. Dojis are often a sign of market consolidation and represent a potential reversal when occurring at support or resistance levels on high volume. Bullish Hammer and Bearish Hangman are REVERSAL CANDLES that look the same but occur in different locations. A true hammer or hangman has an extended wick that is 2-3 times longer than the body of the candle and the opposite wick is very short or non-existent. It doesn’t matter if the candles are solid or hollow. Hammers occurring at the bottom of long down trends are said to be hammering out a solid support level. A Hangman occurring at the top of a long uptrend is predictive of an upcoming drop and requires additional confirmation from other tools. Bearish Shooting Star. This is a predictive reversal candle that occurs at the top of a long uptrend and is suggests of an upcoming drop. The star is fizzling out. It looks similar to the Hangman except the wick configuration may be slightly different in length.

Heik in-Ashi Candlest icks

The Heikin-Ashi Candle is a specially programmed candlestick that is extremely useful for spotting trends and trend changes. It filters out the noise or wild swings in the daily price swings and helps identifies classic chart patterns and support/resistance levels. These candles are fairly reliable in trend prediction when used with volume indicators and momentum oscillators. The following signals identify trends and buying opportunities: ! Long hollow Heikin-Ashi candles with no lower wicks

indicate a strong uptrend. ! Long filled Heikin-Ashi candles with no higher wicks

identify a strong downtrend.

! A single Heikin-Ashi candle with a small body surrounded by upper and lower wicks indicates indecision and a possible trend change.

For more information about candlesticks, read Japanese Candlestick Charting Techniques by Steve Nison. He is considered one of the foremost authorities on this topic. Also, americanbulls.com provides additional candlestick understanding.


Highly Reliable Bearish Reversal & Bearish Continuation Candle Patterns

Dark Cloud Cover

Kicking Reversal

Abandoned Baby

Evening Star

Evening Doji Star

Identical Three Crows

Three Inside Down

Three Outside Down

Upside Gap Two Crow

Falling Three Methods

Engulfing Outside

Reversal*

Three Black Crows

CSsEffectiveatSupport/ResistancewithhighVOLUME

Highly Reliable Bullish Reversal & Bullish Continuation Candle Patterns

Piercing Line

Kicking

Abandoned Baby

Morning Doji Star

Morning Star

Three Inside Up

Three Outside Up

Three White

Soldiers

Concealing Baby

Swallow Rising Three Methods

Mat Hold

Side By Side White

Line


McClellanOscillator

The McClellan Oscillator (MO) is a delayed indicator of what the market is doing. At the end of each day it looks at the number of stocks advancing and declining in price. The difference between these numbers is called the daily breadth. Once the market breadth is calculated, the difference between fast and slow EMAs of this value is the final result.

When the Oscillator is positive, it generally portrays money coming into the market. Conversely, when it is negative, it reflects money leaving the market. It is considered a buy signal when the McClellan Oscillator surpasses the zero level and a sell signal if it falls below it.

RelativeStrengthLine

The RS line compares an individual stock's price to the performance of the S&P 500. When the line is sloping upward, it means the stock is outperforming the S&P 500. When it's moving sideways it is in line with the S&P 500 and when it's sloping downward, it's underperforming.

The RS line will sometimes rise even if the stock falls because the S&P is falling at an even faster rate. So if you find a stock that has just formed a cup with handle or a flat base, check the slope of the RS line. If it's simply flat-lining or heading downward, you might want to search for another candidate.

FibonacciRatios

Fibonacci ratios appear throughout nature: spider webs, pinecones, snail shells, bacteria growth, animal horns, hurricanes, etc. They were discovered by Leonardo Fibonacci, a 12th century Italian and are used in trading to help establish support and resistance. One number sequence is: 1, 2, 3, 5, 8, etc. Each number is the sum of the two previous numbers. Some ratios act as retracements levels: 38.2%, and 61.8%.

To draw a ‘Fib Retracement” on an up-trending stock, place the curser at the highest price and drag downward to the lowest price. On down trending stocks, drag from the lowest price to the highest to establish support and resistance lines.

To add Fibonacci’s click on ‘Charts Tab’ and then ‘Charts’. In the bottom left-hand corner there are four small white boxes. Select the box furthest to the right. Click on it and select ‘Fibonacci Retracements’ or others of interest.

TTMIndicators

John Carter who wrote the book called Mastering The Trade developed these timing tools.

TTMTrend Indicator

This indicator has blue bullish candles and red bearish candles. Each candle incorporates the close of the previous six trend periods in order to get an idea of what the actual TREND in the market is at the moment.

Blue bars indicate sustained buying pressure, indicating that the average closing price of the prior six bars is in the upper 50% of the trading range. (selling pressure = lower 50%). Red bars indicate sustained selling pressure.

TTMScalper Indicator

The TTM Scalper indicator is a day trading buy/sell indicator. It marks a "pivot high" or "pivot low" with a white arrow. This is done after 3 higher closes or 3 lower closes.

TTMSqueezeMomentumIndicator

This indicator has colored bars with occasional red dots appearing on the midline. When red dots appear it indicates the security is undecided (wishy-washy) and getting ready for its next move. The normal signal is red dots, no trade.

When green dots appear, it means the momentum indicator is on. When the green dots are followed by a red dot, it means the volatility is expanding. The length of the vertical bars is a measure of the strength of the momentum.

If the bars are light blue go long/bullish. If the bars turn to dark blue the bullish momentum is declining. If red go short/bearish. If yellow the bearish momentum is declining. The indicator works on all time frames but Carter likes the two and five minute time frames best.


TTMWave Indicator

The theory behind wave cycles is very basic in trading although the waves vary in amplitude and duration. These waves have created unique trading patterns as a result of analyzing the individual security prices over a period of time.

The purpose of this indicator is to objectively identify the waves patterns that have been identified so as to take advantage of their prediction of upcoming trend changes.

There are 2 separate waves that make up the indicator. The “short-term wave”(plotted in red/yellow) indicates the short-term strength and direction of a market. The “long-term wave” (plotted in cyan/blue) measures the longer-term strength and direction. The two waves are overlaid to show the correlation between the two.

Typically the blue wave is used as a filter to keep the trader on the right side of the market. For the highest probability setups, look for the blue indicator to be on the same side of the zero line. Therefore, if the short-term wave crosses zero going from bearish to bullish, avoid taking a bullish entry if the long-term wave is bearish and therefore not in agreement in regard to market trend

Data Overload

Data overload is common among novice traders. It stops many from trading. They suffer ‘Analysis Paralysis’. Select only a few of the lagging indicators and predictive tools that you know well and use them. Otherwise you will analyze all the time and never trading.

UnderstandingOptionContractsWhen buying car insurance you are purchasing a PUT option and the insurance company is selling a PUT option. When buying a lease-to-buy contract on a home, you are basically buying a CALL option!

There are two basic option contracts, CALLS and PUTS. Basically, an option is a contract between two parties; a buyer and seller. One buys an option on an underlying security and another sells an option on the same underlying security.

Option trading is buying or selling CONTROL of something you may or may not own for a select period of time. In the stock market, it is least expensive way to trade securities (stocks, ETFs, indexes, etc.).

One option contract CONTROLS 100 shares of an underlying security.

ThreeParts Of AnOptionContract

! Strike Price – an agreed upon buy/sell price at which the buyer and seller agree to do (strike) a deal.

! Expiration Dates – when the option contract expires (time duration). Most American monthly option contracts expire the 3rd Friday of the month. However, some securities provide weekly options, which expire every Friday. Weekly option trading makes up 40% of the total option market.

! Premium – the cost of option. The money the buyer pays immediately to the seller. This transaction shows up in the sellers account as a deficit. Time-decay (theta) slowly reducing the deficit.

Typically, the underlying security is SELDOM bought or sold by option traders. Rather the option contracts themselves are bought, sold, rolled, or expire worthless.

AdvantagesOf OptionTrading

! Selling options may generate a weekly/monthly income. ! Options control securities without having to own the

security itself. Options are cheaper.

! Options may be used to protect profits and hedge or insure positions to minimize losses.

! Options allow one to acquire securities at reduced prices.

This chart demonstrates the leverage advantage of purchasing a Call option when the share price raises $5.65.

Buying Option vs. Buying Security

Option cost per share

Security cost/share

Purchase Price $ 1.85 $ 30.20 Sold Price $ 7.40 $ 35.85 Profit In Dollars $ 5.55 $ 5.65 Profit Percentage 300% 18.7%

D isadvantagesOf OptionTrading

! The degree of complexity in determining what and when to buy or sell.

! The limited time duration works AGAINST the option buyer and FOR the option seller.

CALLOptions-Buying&Selling

A CALL option is similar to a lease-to-buy option contract used to purchase or sell a home. The renter (possible buyer) pays $850 per month for the right, but not the obligation, to buy the home anytime within the next three years for a pre-


agreed- upon price, say $300,000. The renter/buyer hopes the value of the house increases during that time.

The landlord owner (possible seller) immediately collects the $850 rent per month and hopes to sell the house within the allotted time if the contract holder STILL wants to purchase the house for the agreed upon price. The seller usually just wants to get rid of the house because he can’t afford making payments on the house.

BuyingCal l Options

Call buyers hope the price of the underlying security raises. For example, if the buyer purchases the right to buy one option contract (a 100 shares at $1.15 per share = $115 for the contract) of a security at $30 that expires in three months and the security rises to $45, the buyer profits $1500 per contract (one contract controls 100 shares times $15 profit per share equals a $1,500 gain).

The profit potential is unlimited for the Call buyer. The risk is the loss related to the cost of the option (in the example above a $115 loss). Time decay works against the option buyer if the contract expires within the agreed upon time frame and the underlying security did not increase in value.

Se l l ing Cal l Options(CoveredCal ls )

The Covered Call (CC) seller immediately receives the premium for selling the option ($115 in the above example). It gives the right for someone to take the security away from the seller at a certain price ($30) within a certain time period (2 months). Time works in favor of the seller because the security must rise in price so the buyer wants to do the deal within the agreed 2-month time frame. The profit potential for the seller is limited to the premium initially received.

To sell a Covered Call the seller must own 100 shares of the security.

Covered Call selling is a way to:

! Generate a monthly income from securities already owned.

! Increase the value of the portfolio by purchasing securities and selling in-the-money CCs with the hope of being called out of the underlying security.

PUTOptions-Buying&Selling

Buying a PUT option is like purchasing car insurance. The buyer pays $1,200 for a year of car insurance. The insurance company collects the money and agrees to fix or replace the car should it be wrecked within that year.

As each month passes, the value of the insurance policy decreases. The insurance company hopes the buyer of the insurance doesn’t wreck the car so the entire premium stays with the insurance company.

BuyingPuts

Put Buyers hope the security price drops dramatically so the security can be purchased at a lower price and then sold to the seller of the Put option at a higher price. For example, when the Put buyer purchases the right to sell a security to the Put seller at $55 within two months (at a cost of $1.35 per share= $135) and the security drops to $10, the Put buyer could “stick it to the seller” --- theoretically buy the security at $10 and sell it to the Put seller at $55. However, in most cases, the option contracts themselves are bought and sold rather than the underlying security itself. The Put buyer’s risk is the loss related to the cost of the option ($135). Time decay works against the buyer.

Se l l ing Puts (CashCovered)

Put Sellers receive a premium ($135 in the above example) and hopes the option expires worthless. The seller wants the option price of the security to stay the above the strike price ($55) so the option expires worthless.

The profit potential is limited but the risk is extremely high if you don’t know what you are doing. For example, when the option buyer purchased the right to sell the security to the Put seller at $55 and, if the underlying security drops to $10, the buyer of the Put option will sell the Put option to the seller for a $45 profit per share resulting in a $4500 loss to the Put Seller per contract. OUCH! WATCH OUT!

OptionPricing

The price of an option is comprised of intrinsic and extrinsic value. The extrinsic value is controlled by the market-makers.

Intr ins ic Value: in-the-moneyvalue

To figure the intrinsic value of an option, subtract the option strike price ($55 in the following example) from the current underlying security price ($60.05). The difference is the intrinsic value ($5.05). Intrinsic value is the amount an option is in-the-money (ITM) --- built in value.

Current security price $60.05

Intrinsic Value Security price minus strike

price

Extrinsic Market Maker value of time & volatility

July $55 Strike Price Option Price $6.75 $5.05 $1.70 July $65 Strike Price Option Price $1.80 0 1.80

Extr ins ic Value: a market-maker tool

Options out-of-the-money (OTM) are comprised entirely of extrinsic value which is an additional fee charged by the market-maker for TIME DECAY (time remaining in the contract) and VOLATILITY (price swings). The market maker is a professional exchange dealer who has the responsibility of making bids and offers and maintaining an


orderly trading market. The market maker can adjust the extrinsic value of an option anytime he wants.

! Time decay is the amount paid by the seller for the time remaining in the option contract. As an option approaches expiration, the option loses value which is expressed in the option Greeks as THETA. Think of car insurance. If $1200 is paid for a year of car insurance, the last month of the policy would be worth only $100 or less if it were to be cashed out

Time decay works AGAINST the option buyer and FOR the option seller.

! Volatility is the range of the price swing (from high to low) --- NOT the direction. Volatility pricing is determined by comparing current (implied) volatility to its historical volatility.

o Implied volatility measures the current volatility. If the current volatility is higher than the historical volatility, the option is usually priced higher.

o Historical volatility is the past price movement of the underlying security. If the historical volatility is higher than the current volatility, the option price is considered undervalued.

Volatility of the underlying security affects the premium. The more volatile the price action, the higher the premium. This benefits the seller of options. If the volatility is low, this usually benefits the buyer of options.

Volatile options cost more and pay more than options that have minimal

ranging price movements. When the market falls, there is an increased demand for PUTS. These PUTS are then priced higher because the probability is high that these contracts will become profitable sometime during the time of the option contract. When there are many sellers of Covered Calls, it causes the option prices to fall. When there are more buyers of Call prices rise.

OptionGreeks

Option Greeks help market makers assign a monetary value to the extrinsic factors that influence option pricing.

! Delta (very significant): how much the option price moves when the underlying security price moves $1.00. A Delta of .75 means the option price moves 75 cents for every dollar change in the underlying security. CALLS have positive delta while PUTS have negative delta.

! Theta (very significant): how much time decay reduces the theoretical value of an option per day. Theta doesn't reduce an option's value evenly. Time decay really accelerates 45 to 30 days out on long-term options, the last five days, and the last day of the contract expiration.

! Vega (very significant especially in day trading options):

how much an option price changes when the implied volatility changes 1%. An increase in volatility will increase the option price. For example, if XYZ has a Vega of 0.20 and the volatility increases 1%, the option price will increase by 20 cents.

! Alpha: a statistical way to evaluate the risk-adjusted momentum; incorporates both risk and reward.

! Beta: a security's volatility when compared to the market as a whole. A rating above one means the security is, on average, more volatile than the market. A rating below one means the security is less volatile.

! Gamma: how much the delta changes after a $1 move in the underlying security price.

! Kappa (Vega): represents the ratio of the dollar price change in the price of an option to a 1% change in its expected price volatility.

! Rho: Measures sensitivity of an option to a change in interest rates.

WeeklyOptions

Some securities offer weekly options that expire on Fridays every week. Over 40% of the option market is comprised of these weekly options. The advantages of weekly options are they are cheap, easily traded, and give traders 52 opportunities a year to make a profit of at least one percent per week.

They are often displayed as follows: “Jun2 16 (6). This is translated to mean: the 2nd week of June, 2016 with 6 days left before expiration Friday.

CombinationOptions

Combination option strategies are comprised of two or more options (legs) placed on the same security either in the same month commonly called Vertical Spreads or paired over several months, commonly called Time Spreads.


The disadvantage of these strategies is complexity. The advantages of combining options are:

! Reduced capital needed to make trades.

! Limits risk and losses. The most that can be lost in option trading is the difference between the credit/debit range of exposure in the trade.

! Provides versatility because these strategies can work in bull, bear, or neutral markets.

OptionSellingGuidelines

Option selling is one of most consistent ways to make money. Open interest or liquidity is not important when selling. If someone is willing to buy what you are selling, make the sale.

As a review, the trader SELLS the right for a security to be taken away (CALLS) or sells the right for a security to be sold to him (PUTS) at a certain price. The Seller collects a premium. Time decay works in favor of the seller.

Option Selling Rules " Sell option contracts which expire in 60 days or less.

" Sell weekly options on Tuesdays or Wednesdays.

" Look for an extrinsic value of 30 cents or more.

When selecting a selling option strike price . . .

! Sell out-of-the money (OTM) options to collect a little extra money from a security or LEAP you already own, want to keep, and the underlying security seems to be staying within a channel.

! Sell at-the-money (ATM) options to collect maximum premium from a security. It shouldn’t matter to if the security is called away if the desired gain is made.

! Sell in-the-money (ITM) to have the security called away if selling CALLS or PUT to you if you desire to purchase the security at a discounted price.

OptionBuyingGuidelines

Buying options is a riskier trade than selling because time works against the buyer. Novice traders tend to make the mistake of gravitating toward buying lower-priced options.

Option Buying Rules " Buy options which expire in three months or more.

" Look for a Delta of .70 or more if the security is over $10 and a bid/ask spread of 30 cents or less on short-term options. Spreads on LEAPS are often much greater. That is normal. " Open interest must be above 500 on short-term options so there are buyers when it is time to sell to close the trade. Open interest on LEAPS is often limited or non-existent. " Look for a 50% volume increase over the average volume to confirm the trend.

When selecting a strike price . . .

! Buying out-of-the money (OTM) options are cheapest and many beginning traders gravitate toward them in hopes the security will make a huge upward price move. The downside is the underlying security may trade much higher over time, but the option --- with a very low delta and high theta --- could trade even lower.

! Buying at-the-money (ATM) options near support or resistance in hopes there will be a quick, pronounced price movement. However, time decay reduces the option’s extrinsic value beginning 60 days out.

! Buying in-the-money (ITM) options have a higher chance of being profitable since they have: (1) a high intrinsic value, (2) a low extrinsic value, (3) a high Delta (+.70) which results in quicker profits, and (4) a relatively low Theta so time decay does not greatly impact the option pricing.


PreparingToTradeBEFORE placing a trade establish a checklist of things to do and then do it. You need to know (1) when to get in a trade, (2) how to protect the trade, (3) how to fix the trade if it has gone against you, and (4) when to get out --- win or lose!

A Pre-TradeCheckl ist

Find out the following information or you are trading blind.

! What are trends of the market, industry, and security? ! Does the security have confirming increased volume?

! What are the support and resistance levels?. ! Is there confirmation from multiple indicators?

! How will the trade be protected and/or fixed it if it should move against you?

! What are the desired profit and stop levels?

Creat ingAlerts

Create alerts to notify you of changes in price movement that breaks through or bounces off support, resistance, or a buy/sell level. Select the ‘MarketWatch’ tab and ‘Alerts’ in TOS. Enter a stock symbol. Click on ‘Ask’ and the ‘Create Alert’ box will appear. Adjust the alert signals to desired action. Alerts are listed at the bottom of the page and on the charts. The alerts can be moved on the chart page by dragging them.

Us ingText Notes

To keep track of your trade reasons consider writing notes on your TOS charts. Select Charts tab and Charts. Enter a stock symbol. In the lower left-hand corner of the chart, click on the little white box to the right. It will open a pull-down. Select ‘Text Note’ a quarter of the way down the list. Then move the little pencil symbol to an open spot on the chart. Click on it and a ‘Note’ box will appear. Proceed to write a note with the date on it and the click ‘OK’ to record.

SignalsForEnteringStockTrades

Professionals are always buying or selling. Your job is to figure out what they are doing and copy the successful.

Trade what is happening, not what you are wishing for!

! Consider buying or selling when the volume increases at least 50% above its daily moving average. This often happens during the last half hour of the trading day.

! Consider buying or selling when a breakaway gap occurs in the trend direction on heavy volume. A breakaway gap is when a price opens far above the highest price reached at any time during the previous day.

! Consider buying when a price breaks upward through resistance and stays above it for at least three days.

! Consider buying when the buy point is 10 cents above the left-side high on a cup-with-a-handle pattern that has developed over seven weeks or more.

! Set a buy point at 10 cents above the middle of the “W when a double or triple bottom is formed,

ProtectingSecurityTrades

Trades maybe protected somewhat by using STOPS, inverse hedges, diversifying, or a combination thereof. The key is to have the protection plan in mind and be ready to put the protection in place the moment the trade is initiated.

UsingSTOPStrategies

A STOP price is determined BEFORE the trade is initiated and immediately activated as a ‘good until cancelled’ order (GTC). Then once a trade is moving in the desired direction, the STOP may be adjusted if the situation warrants.

As an example, what if a trade begins to moves against you after making a small profit? Suppose 100 shares of XYZ were purchased at $40.71 with a 7% trailing stop. Now the price is $45.07 with support at $39.90 and resistance at $45.80. What if the price continues to bounce downward off upward resistance --- right around the $45.80 level?

! On normal or decreasing volume, tighten the Trailing Stop 2% 5% ($43.51) so a profit is retained.

! On a volume spike --- set the Trailing Stop 4% below resistance starting at $44.96 to lock in profits and possibly gain more if the price continues to run up.

! If the price spikes upward on high volume set a new stop at $45.40 just below the new support.

! If a security is highly volatile, loosen the STOP. ! An advanced strategy is to link a STOP to a sequence of

other commands. For example, a ‘STOP Limit Order’ may read, “The STOP must hit the first price, then retrace, then hit it again before a market order to sell is placed.” This helps protect against sudden downturns.

! When using Mental Stops, ignore the stop price until the market has closed for the day. It is not uncommon for share prices to plunge during a particular trading session, and trigger all sorts of selling action, only to finish higher by the end of the day. It is the “end of the session” price that counts. Sell next day if the price remains below the Stop.

! Not every security has to have a Stop price. If the company has a decent dividend and is a successful


business, the dividend payout tends to provide solid floor for the price action. Holding a security and reinvesting the dividends is a profitable strategy most of the time.

A Stop may be automatically attached when a security is purchased. In TOS, select Trade tab and All Products. Type in a security symbol. Right click on Ask and select Buy Custom with Stop. The ORDER ENTRY TOOLS appear at the bottom of the page. On the green line adjust the quantity and price to the desired amount. On the two red lines, adjust the STOP to the desired type of STOP by clicking on the yellow triangle and making a choice. Change DAY to GTC. Adjust the STP (Stop) price to the desired amount. Click on Confirm and Send. Re-read the order to check everything before sending.

UsingHedges

A Hedge is an inverse (opposite) position and is purchased to protect an existing position --- like insurance. Also, a PUT option could be purchased to protect against a dramatic fall in the price of the security. Usually the cost of a hedge is around 10% to 20% of the position being protected.

D ivers i fy ing

Putting all your money into one company, mutual fund, ETF, or sector is very risky. Money flows from sectors to sectors depending upon which is making money at the moment. However, too much diversification can limit success. There is an erroneous belief that wide diversification protects against a market sell-off. It doesn’t. Cash is a form of diversification and may be a wise choice if the market is tanking.

SignalsForClosingStockTrades

Trades are closed to (1) lock in profits, (2) protect capital, or (3) because the trend is moving against the trade.

VolumeSel l S ignals

! Sell if a security achieves a new high on low volume. This may be a ‘suckers’ rally since institutions are not buying.

! Sell if a stock price drops on the heavy volume, falling through major support levels (49-day or 210-day MAs).

! Sell if several stock leaders in an industry are staging big downside reversals, breaking through the 210 day MA line on high volume.

BrokenSupport Sel l S ignals

! Sell if the price has stayed above the seven day MA during its upward run and then suddenly drops below it.

! Sell if a price breaks a support line set by at least three intraday or intraweek low points during a price climb.

! Sell if major securities in different industry groups start to breakdown at the same time. This is a sign of overall market trend change.

! Sell if a company’s rate of bottom-line growth falls by at least two-thirds.

! Sell if a company posts its largest one-day loss.

C los ingLosers S ignals

! Sell if a stock is 7% under the purchase price. Sell if an option has dropped 50% in value.

! Sell if a stock is a recent purchase and has fallen 3% to 5%. Take a look at its history.

! Sell if the stock price breaks downward through the 210 day moving average line in high volume or stays below it for a couple of days.

C los ingNon-trendingPerformers

! If a stock is bumping along, you may want to sell to raise more cash for purchasing star performers.

! If the price jumps quickly to a 12% gain and then falls back to a 3% gain, you may sell to protect gains.

C los ingWinners

! If a stock gains 20% in the first of weeks after a breakout, consider holding for eight weeks.

! If a 20% gain developed slowly, consider setting a tighter STOP or selling since most stocks will begin consolidating after such a gain.

! If the gain came from erratic action, sell. Consider taking smaller profits.

! If a stock has dropped back to its 49 day MA for the third time

! If a climax top occurs during the end of a big price run during a one to three week time frame which is characterized by . . .

o the largest daily price increase since the start of the price run.

o the price spread for the week is bigger than for any prior week of the trend.

o the volume is the highest since the beginning of the upward growth.

OptionTradeSignals/Fixes

ClosingOptionTrades

! Let sold options expire worthless unless closing the trade will free up cash for another trade.

! If the gain in the underlying security is greater than the gain in the sold option, close the option.

! When the option approaches support or resistance on decreasing volume the STOP level is tightened.

! Close one leg of a combination option at a time if one option is losing dramatically and the other gaining.


Decl in ingThetaF ix WhenSel l ing Options

The key is to WAIT until expiration Friday so almost all of the extrinsic value (Theta) is eaten up. Then, if the current price exceeds the strike price, all you will pay for is the intrinsic value of the option if retained ownership is desired.

Assume 100 shares of GG are purchased at $40.50. A $40 monthly Covered Call is sold for $2.50. Subtract 50 cents from the $2.50 received in premium. The gain is $2 per share divided by $40 = a 5% gain. Then suppose the price rises to $44.50 by expiration. The intrinsic value of the $40 CC option is now $4.50. To buy back this contract you will pay $4.55 ($4.50 of intrinsic value plus the brokerage fee. Since you originally received $2.50 for selling the option and now you have to pay $4.60 to buy back the contract and close the trade, the real cost is $2.10. However, the gain in the price of the underlying security increased $4.00 per share. Subtract $2.10 option loss from $4.00 gain in the underlying security equals a $1.80, a 4.5% gain.

If the price rises to $40.83, that is only 33 cents over the purchase price. The initial premium received for selling the CC was $2.50 less 50 cents so the net is $2 per share. Now assume the option price at or near expiration is 83 cents. Subtract 83 cents from $2.00. Your gain per share is $1.17 if you buy the contract back (a 2.9% gain). Plus the security remains with the seller with a 33 cents increase in added value over the original purchase price.

Rol l ing AnOptionTrade

Rolling is a trading strategy in which the trader simultaneously closes an open option position and opens a new position in the same security at a different expiration date with possibly a different strike price. Rolling may provide additional premium to increase profits or minimize debts. The goal is to continue the current strategy, but rearrange its timing or position in order to maintain a high probability of success. It is used when the option is continuing its anticipated trend.

! A Vertical Roll closes the current option and buys the same amount at another strike price in the same month.

! A Horizontal Roll closes the current option and moves the option forward from month to month using the same strike price.

! A Diagonal Roll combines both the vertical and horizontal Rolls, possibly changing strike prices while moving the trade forward to the next month or months.

If the original purchase started with a .75-delta, roll to the next strike price up (if buying Calls on a rising security) or down

(in the case of buying Puts on a dropping security) to again achieve a .75 delta. This allows some of the profit of the original trade to be pocketed.

PlacingCombinationTradeOrders

Besides just placing a single buy or sell order, there are ways to create combination trade orders with some unique characteristics. A few are listed below.

Purchasingwith“OCO”orders

This is a favorite. OCO orders means “one cancels others”. It allows two or more orders to be sent at the same time. Then when one fills, the other orders are canceled. An OCO order may be used to establish both a STOP and Profit Target at the same time after the initial purchase order is filled. As soon as the purchase order is executed, all other orders are activated.

To initiate an OCO order select ‘Trade tab’ and ‘All Products’. Type in a security symbol. Right click on Ask and select ‘Buy Custom with OCO bracket’. The ORDER ENTRY TOOLS appear at the bottom of the page. Set the green line to LIMIT, DAY, and BEST. Adjust the QTY and LIMIT price to the desired amounts. On the first red line put in the profit target price. On the second and third red lines adjust the STOP to the desired type by clicking on the yellow triangle. Change DAY to GTC. Adjust the STOP price and then send.

Us ing“1s t Tr iggers Sequence”orders

Sequence orders are ones in which if the first order is filled, the following order(s) will then be activated and so on. These advanced orders allow setting of a sequence of orders to be sent to market.

The execution of the first order triggers the second order. If order number two is executed, it will activate order number three and so on. This advanced combination order can have a series of up to seven orders. All orders depend directly and exclusively on the first one so that if the first order is filled, all orders linked to it are activated.

Us ing“Blast Al l” orders

This type of order allows sending up to 8 orders at once. Any type of order can be placed on this stack. Each order is completely independent meaning that one can choose a different number of shares or contracts, and limit orders, make some orders good for the day and some good-till-cancelled.


SelectingStrategies

OverviewofStrategyChoices

Below is an overview of some strategies that may be used to trade the market depending upon current trends and the desired objectives of the investor/trader. Some strategies require constant vigilance while others may only take a few hours a week or month.

! For Long-Term Up-trending strategies. Buy sector ETFs, the security itself, and buy Calls. Sell cash covered Naked Puts.

! For Short-Term Up-trending strategies. Sell weekly and monthly Covered Calls ATM. Sell Bull Put Spreads. Buy leveraged ETFs. Sell Naked Puts.

! For Down-trending strategies. Sell Covered Calls if retained ownership is desired. Buy Puts. Sell Bear Call Spreads. Buy inverse ETFs. Short a security.

! For Non-trending strategies. Sell Iron Condors. Sell Covered Calls for extra income. Sell cash covered Naked Puts OTM.

! For Volatility strategies. Buy Straddles and Strangles. Sell Covered Calls deep in the money to be called out.

! For Income strategies. Sell Covered Calls. Buy Dividend securities. Buy bonds. Buy REITS.

Up-trendingBullStrategies

Most amateur traders invest using only up-trending strategies because we as Americans tend to have an optimistic outlook. However, these up-trending strategies rank third in terms of profitability. Remember . . .

! The most common trading error is to believe it is best to buy low and sell high. Research supports buy high and sell higher is far more profitable.

! Buy only leading stocks in leading groups during a confirmed market uptrend at or near a 52 week high. A leader’s average run lasts 12 to 18 months.

Quarter ly Sector ETFs Strategy

This is a favorite strategy for those who do not have the time to research individual securities. This strategy requires checking SECTOR ETFs only four times a year, at the start of each financial quarter.

ETF prices change based upon what the market makers predict will happen in the next 6 to 12 months. Many studies indicate

ETFs that were strong in the last three months will have positive gains in the next quarter and may continue to do well for over a year.

To create a scan for the top SECTOR ETFs open an account in www.Morningstar.com. It’s free. Click on ‘ETFs’ in the middle of the gray tool bar. On the next screen click ‘ETF Screener’ below the purple box in the section titled ‘Tools’. On the new screen that pops up, delete the default criteria by clicking on the X to the far right. To start, click on ‘Add Criteria’ on the right side of the dark gray tool bar. It will create a new page.

! In the left column click on ‘Liquidity’ and move the cursor to the right-hand column that is labeled “Average Daily Volume’ and click on ‘Add Criteria’ below. Further down the page ‘Average Daily Volume’ pops up with ‘Range’ as a column heading. Change the low range in the left-hand box under ‘Range’ from 100 to 100,000 shares traded daily. Adjust the right-hand box value to 100,000,000.

Then go back up to the ETF Screener box and select ‘Performance’ in the left column by placing the cursor over it.

! Slide the cursor to the middle column over ‘Market Return 3-Month’. Click on ‘Add Criteria’ in the right-hand column. The criteria will appear below. In the left-hand box under ‘Range’ change it to 3. The right box does not need to be adjusted.

! Then select ‘Market Return 1-Month’ and ‘Add Criteria’. Change the left Range to zero so as to exclude ETFs that lost money in the previous month. The right box does not need to be adjusted.

! Then add ‘Morningstar Ratings’ changing the ‘Range’ in the resulting left box to 3 so as to eliminate some of the lower rated ETFs. The right box does not need to be adjusted.

! Next add ‘Market Return 1-Year’ and ‘Market Return YTD’ to gather additional information if so desired. It is not necessary to change any of their ‘Range’ scores.

Next move the cursor to the top right of the big gray box and click on ‘Close Criteria’. Click on ‘Categories’ next to it. Look in the left-hand column and click on ‘Sector Equity’. The 14 major financial sectors of the world will pop-up with a number following each sector. The number represents the number of ETFs in each sector that satisfies the selected scanning criteria.

! Click on each ETF sector that has a number following it. Choose the sectors that have the largest number of ETFs that meet the scanned criteria. These sectors represent where the big money is moving in (billions of dollars).


! Click on ‘Add Category’ and the resulting sector ETFs will be added at the bottom of the page. Click on column heading ‘Category’ at the top of the sector list below. This will arrange the ETFs by category.

! Begin analysis by selecting ETFs in each sector that have the highest five star Morningstar Ratings, highest volume, and have the greatest gains in the last one and three months.

! Compare carefully and then choose the best ETF in each section. Only choose one ETF in each sector in order to diversify. Then purchase, spending approximately equal amounts of money in each sector of choice.

! Put STOPS just below support levels and Profit Targets just below resistance.

! Check your holdings at least once each quarter, usually between the 5th and 15th of the month in January, April, July, and October.

! If you don't own the best SECTOR ETFs, switch out of your previous holdings and purchase ETFs that were tops last quarter.

! Finally, be wary of ETFs that have been losing value in the last month.

7/21MARetracementStrategy

This is a favorite strategy of mine. It is typical for up-trending securities to have price retracements.

! Alert Day & Possible Entry Price. (1) When the 7-day MA crosses upward over the 21-day MA, record the highest price the security reached on the CANDLE WICK THAT DAY. (2) This will eventually become the entry price IF the following condition is met.

! Wait For A Pullback to the 21 MA. (3) If the price retraces and the candle-wick TOUCHES the 21-day MA --- not closes upon or opens at, consider placing a BUY order at market (good-till-cancelled) at the ‘entry price’ that was established on the Alert Day. A Buy Limit Order is an offer to purchase a stock at specific price or higher and is only executed when it reaches that price. (4) Cancel the buy order within a month or if the 7-day MA crosses below the 21-day MA and stays there.

For example, if the 7-day MA of XYZ company crosses over the 21-day MA of $47 and reaches a high at some time during the day of $54.31, this is the ‘Alert Day’ that establishes the ‘Entry Price’ of $54.31. If a week later the stock price retraces back to the 21-day MA that is now $48 and touches it during the course of the trading day, immediately place a ‘Buy Limit order at $54.31. Within a few weeks if the price rises above the $54.31 it will be purchased at market.

Se l l ing Vert ical Bul l Put Credit Spreads

This is a favorite of my college students. It is a two-legged option strategy typically used with an up-trending security. It requires very little capital and protects against major losses. The objective is to SELL a Put that will expire worthless and

PURCHASE a further OTM Put to protect against gap down losses (insurance) that will also expire worthless. Both options have the same expiration date.

Assume a security is trading at $56.00 and support is around $55.50. Purchase a $50 Put for 25 cents. Then sell a $55 Put collecting $1.50 from the sale. Subtract the 25 cents paid from the $1.50 received. The net is the maximum profit --- $1.25/share. If the underlying security price falls below $50 and the trade has not been fixed before this occurs, the maximum loss is $3.75 per share ($5.00 minus $1.25).

Se l l ing Cash-CoveredNakedPuts

This is a favorite among professionals. However, selling cash-covered Naked Puts is extremely risky. The seller hopes the security price will rise or stay flat so the option expires worthless. If the underlying security price gaps down it will result in a tremendous loss for the seller who is required to purchase the security at the higher strike price.

Selling Naked Puts is used when there is high volume and the price is bouncing upward off support. If the price stays above the sold Put strike price, time-decay eats into the option price reducing its value to the point that the option expires worthless and the seller keeps the premium. If the price drops below the strike price the seller has to purchase the security at the agreed upon price or close the trade before expiration. For example, suppose an ETF is priced at $16.84 and support is $15.91. A next month $16 Naked PUT is sold for 80 cents. A 5% gain would result if the security is not Put to the seller. Divide 80 cents by the strike price to determine the gain.

Selling Naked Puts OTM is also a way to obtain a desired security at a discounted strike price. The seller gets paid to buy the security at a strike price the seller chooses. Suppose an ETF is priced at $63.44 and a $64 Put is sold for $3.55. The extrinsic value of this option is $2.99 ($64 minus $63.44). Divide the premium price received of $2.99 by the $64 strike price. This results in 4.7% discount for purchasing the security at $64. Such a deal!

7 -21-49MovingAverageCross-UpStrategy

When moving averages (MA) cross over one another on high volume, it may signal a trend change. These signals, when used with other timing tools, helps determine when to trade.

! When the 7-day MA crosses upward through the 21-day MA or the 21-day MA crosses upward through 49-day MA on high volume, WAIT 3 DAYS to see if the candles remain above the MA trend lines. If the candles remain above, consider buying.

! When all three MAs are parallel and moving up, consider buying! Then when the 21-day MA starts to trend sideways or flattens out, sell half.

! If a stock has institution backing, the 49-day MA should be a strong support level. When a pull-back occurs to the 49 MA on low volume, a buying opportunity begins when the stock starts to rebound on higher volume. The buying may continue until the price extends 5% above the high reached before the pull-back.


BuyingCal l OptionsAt Support

Call buyers hope the price of the underlying security raises. The risk is losing the cost of the option. Time decay works against the option buyer. If strong support appears, consider buying a Call that is at least three months out with a Delta of 70 or greater. As an example, if a security is currently priced at $27.26, a $25 Call may be purchased for $3.80 a share (100 shares equals $380). Assuming the price of the security rises above $25 before expiration, say to $30, the option buyer has three choices:

! Sell the option contract for $5.72 (.70 Delta x$2.74 gain=$1.92 +3.800= $5.72). The profit is $192. Closing the trade by selling the contract is typically what most traders do.

! Let the option expire and the brokerage house will exercise the contract for you for a small fee.

! Roll the contract. Roll the Call over to the next time period when the Delta reaches 86 or higher or when the current options are less than 50 days out. Buy a Call that expires within a 50 to 150 day time period with a Delta of around 70. Sell when the option falls to 50%, or when the trend flattens out.

Purchasing LEAPS&Sel l Vert ical Spread

Purchase a LEAPS Call option at-or-near-the-money that is year out or longer. SELL a Put option at the identical strike price and expiration date to collect the premium and reduce the cost of the trade. Then PURCHASE lower strike price Put to insure against a dramatic price drop. For example, if GDX is priced at $51.77. Purchase a January 16 $50 Call for $9.35. Sell a January 16 $50 Put collecting $7.85. Then purchase a January 16 $40 Put for $3.80 to limit risk in the event of a dramatic price drop. The resulting cost is $5.30. The buyer now controls 100 shares for only 10% of the underlying ETF price.

Se l l ing Cal l OptionsAgainst LEAPS

Buy LEAPS Call option and sell a near-month or weekly Call option ATM or ITM to profit from rapid time decay. The objective is to reduce the cost of the LEAPS by collecting premium from the sale of the near month option. For example, if a June security is trading at $40 and expected to be non-trending for the next few months, buy a LEAPS option (say a $40 call for $400) and sell a near month $40 Call option for $200. This results in a debit of $200. If the security closes just below $40 on expiration Friday, the near month option expires worthless. The long-term option loses some time decay value but is still worth $350. Selling this nets a $150 profit after taking into account the initial debit of $200.

BuyingBul l Cal l Debit Spreads

Purchase a lower strike price call (for example, a $25 strike price @ $3.60) that creates a debit. Then SELL a higher price call ($30 strike price for $1.10) and collect the $1.10 credit. Subtract this credit from the $3.60 debit. It reduces the cost to $2.50. The desired result is that the price of the security will

rise high enough to cover the cost of the trade and make a few dollars. The maximum that can be earned is achieved when the security price reaches the $30 strike price. Anything above that and the security will be called away.

Pocket P ivot Strategy

The Pocket Pivot (PP) strategy is used to identify early buy points in up-trending ‘best of breed’ stocks. The key indicator is volume; 10-15 days of decreasing volume with a down-trend in pricing followed by a volume spike greater than the highest down volume day over the prior 10-15 days.

A PP generally occurs in one of three places: (1) At support level, (2) at a break out, or (3) after a short consolidation after a break out. This strategy should only be used with fundamentally strong stocks showing constructive chart action (tight chart action) trading more than 400,000 shares daily. The search for PPs should center on a daily chart with 7,49, and 210 day moving averages. The following are general parameters regarding PPs.

! A proper PP occurs only in stocks that follow their 49-day moving average during their previous price run up.

! If the PP occurs right near its 7-day MA, it may be bought, otherwise it is extended and should be avoided.

! PPs should emerge within a constructive basing pattern or, in some instances, when a noticeable pull back has occurred after a sharp run up. It is not a valid buy point when a PP is in an extended price run.

! If a PP occurs after the stock has broken out upward, the price should remain near its 7-day moving average. It can undercut the 7-day MA as long as it shows resilience by showing volume that is greater than the highest down volume day over the prior 7 days.

! Do not buy PPs if the overall chart formation is in a multi-month downtrend (+5 months). It is best to wait for the rounding part of the base to form before buying.

! Do not buy PPs if the stock is under critical moving averages such as the 49-day MA or 210-day MA. If it well under its 49-dma, and getting support near the 210-dma, it can be bought provided the base is constructive.


! Do not buy PPs if the stock formed a 'V' where it sells off hard down through the 7-day MA or 49-day MA then shoots straight back up in a 'V' formation.

BuyingStockSpl its

A stock split increases the number of shares in a company, which increases its liquidity in the stock; there are more buyers and sellers for 10 shares at $10 than one share at $100. The price is adjusted such that before and after the split the market capitalization of the company remains the same and price dilution does not occur. For example, an investor with 100 shares priced at $50 per share receives 200 shares valued at $25 a share when a 2 to 1 stock split occurs. Originally the market capitalization was 100 × $50, or $5000. Now the price of each share is adjusted to $25. The market capitalization is 200 × $25 = $5000, the same as before.

Stock splits of 2-for-1, 3-for-1, and 3-for-2 splits are common. Some companies oppose splits and keep the price high to reduce the trading volume. Berkshire Hathaway is an example.

Historically, the odds are a stock split will cause the share price to continue to increase, sometimes doubling in two to three years after a split.

Down-TrendingBearStrategies

A down-trending market is usually the most profitable for traders. However, most people tragically do not know how to trade using down-trending strategies.

Prices fall faster than they rise, typically taking five years to reach a high versus three

months to lose most of the gain.

Down-trendingS ignals

! When moving averages (MA) cross downward over one another on high volume. When the 3-day MA crosses downward through the 7-day. 21-day MA or the 49-day MAWAIT 3 DAYS to see if the candles remain ENTIRELY BELOW the MA trend lines. If the candles remain below, consider Bear strategies.

! On the Stochastics chart, when the 3-day yellow dash line crosses downward through the blue dash line.

! If an up-trending stock suddenly slices below its 49-day MA in high volume.

SearchingFor Down-trendingStocks

When searching for down- trending stocks, consider the following elements.

! A ridiculously high valuation. Look for a stock with a P/E ratio 50% higher than the industry average, or more than 50% higher than the company's historic P/E ratio.

! A high degree of optimism. If the whole market is in love with a stock, there is no one left to buy to push the

price higher. It only takes one major seller to kill the positive momentum and reverse the price action.

! A price action that has just turned down following a steady incline or parabolic rise. When the stock trades below its 49-day moving average it is an excellent early indication the momentum is shifting to the bearish camp.

! When the Accumulation-Distribution ratings are indicating significant selling on the part of institutions.

Se l l ing Bear Cal l Credit Spreads

This is a favorite strategy. The objective is to SELL a Call at or near the-money (bouncing downward off resistance) that will expire worthless. Then PURCHASE a further out-of-the-money Call at a higher strike price to protect against a sudden gap up in the security price (insurance). Both options have the same expiration date.

Suppose XYZ is trading at $56.00. Sell a $55 Call collecting $1.50 from the sale. Then purchase an insurance $60 Call for 25 cents that gives you the right to buy the security from another at $60 should the price of the security rise above $60. The maximum profit is $1.25/share ($1.50-.25=$1.25). If the security price is below $55 on expiration Friday both Calls expire worthless and the entire profit is maintained. If the underlying security price rises above $60 the maximum loss is $3.75 per share ($1.25 less the $5.00 spread).

Diane Evanger shared her rules she uses to manage this conservative, income-generating strategy. She sells a front month or second month out-of-the-money Call spread for a 75 cent credit or greater with a return of 20% or greater. Her goal is to generate a 60-65% maximum profit in five days. What she looks for is:

! A security channeling down or sideways, making lower highs in the last 3-4 weeks with a market forecast that is bearish to neutral.

! A five point spread or greater between support and resistance.

! Volume greater than 1,000,000 shares with open interest in options greater than 500.

! She prefers (but not requires) a security trading below its 30-day moving average and a security price greater than $25 with weak fundamentals and a low accumulation.

She enters the trade when the security begins to bounce downward from resistance (MACD/Stochastics are beginning to roll over and there is a bearish candlestick formation). She exits the trade when:

! A 60-65% profit is attained (she places a GTC order to close trade after the trade is filled).

! The MACD/Stochastics begin to turn up and/or candlestick formation confirms a trend reversal.

! The security price closes above resistance (stop loss).

! The security breaks resistance on heavy volume. ! Prior to news announcements (earnings, security split,

mergers, etc.).


BuyingPuts ITMAt Resistance

Put option pricing moves fast. They are often more successful than buying Call

options. Puts need more watching. If there is high volatility and the underlying security is bouncing downward off resistance, purchase deep-in-the-money Puts with a high Delta (-.70), low Theta, and low extrinsic value.

For example, if XYZ is priced at $27.44 and the price is possibly going to drop because of: (1) a poor earnings report, (2) candle confirmation, (3) MACD Histogram confirmation, (4) volume is increasing on the sell side, and (5) the general market trend and sector trends are dropping, a November 32 Put could be purchased for $4.56 that has a Delta of -.70, a Theta of .01, intrinsic of $3.24, and extrinsic of $1.32. Then for every dollar drop in price, the value of this Put will increase 70 cents. A drop to $24 will increase the value of this Put to around $6.70, a 32% gain.

BuyingOTMLEAPSPuts

If, on above average volume, the security, sector, and market are all trending downward, consider purchasing long-term out-of-the-money Puts. Suppose XYZ is priced at $34.11 and the price appears to be going down, consider purchasing a $25 Put at $2.35 that is at least six months to a year out with current open interest of 500 so there are buyers when you want to sell.

Buying InverseETFs

An inverse ETF moves in the opposite direction of the underlying asset. The main benefit of an inverse ETF is that it allows investors to quickly and easily take advantage of falling asset prices. The main risk is that inverse ETFs don’t always act as anticipated. While on a daily basis an inverse return on the underlying index is expected, over the longer term the return on ETFs can vary drastically from expectation. Assuming an investor pays for the position outright (no leverage), the loss is also capped at the amount invested, since the price of the ETF can’t drop below zero.

Se l l ing Put OptionsAgainst Put LEAPS

This is a time-spread strategy that may span months or years. It involves buying long-term Put options (LEAPS) and selling near-month options ATM or ITM to profit from rapid time decay. The objective is to reduce the cost of the LEAPS by collecting premium from the sale of the near month options.

For example, if a June security is trading at $40 and expected to be non-trending for the next few months, buy a one or two years LEAPS (say a $40 Put for $400) and sell a near month $40 Put option for $200. This results in a debit of $200. If the security closes just above $40 on expiration Friday, the near month option expires worthless. The long-term option loses some time decay value but is still worth $350.

Short Sel l ing Strategy

The main benefit of short-selling is that investors can profit from falling asset prices. When you short a stock, you are "borrowing" the stock from the brokerage institution and selling the stock immediately at its current price. If the price drops, then buy the stock back at the lower price and return the stock back to the brokerage house. This is done automatically when the trade is closed. The gain is the difference between initial selling price less the purchase price when closing the trade minus costs for margin fees.

For example, supposed XYZ is trading at $130, and you believe it will decline in value. You short-sell 100 shares and receive $13,000 (less fees and expenses) into your account. Then your account shows a negative 100 shares balance, which means you need to buy back those shares, called “covering”, at some point in the future. If the price rises to $150 and you cover, it’ll cost $15,000 to buy back 100 shares, resulting in a loss of $2,000 plus fees. But if the price drops to $100 and you cover, it only costs $10,000 to buy 100 shares, and you pocket $3,000 in profit less fees.

The main risk of short-selling is that while profit is capped (a stock can only fall to zero) and risk is theoretically unlimited. In a short position the asset could rise indefinitely, forcing investors to cover at a higher and higher price. If enough people selling short decide to close out their positions it can cause the stock to quickly bounce upward. If the stock moves too high, it can cause a "short squeeze" which has a cascading effect of driving the price higher and higher. Short squeezes can occur in almost any heavily shorted stock, but they seem to be exacerbated when the company has good fundamentals and reports a positive earnings or future guidance.

Volatility“WildHare”Strategies

High volatility trading deals with securities whose prices swing wildly from one extreme to the other. Day-traders are very active in this arena.

BuyingOpposite OpeningGaps

A Gap is when the price of a security opens above or below the highest or lowest price of the previous day close.

When an opening gap occurs OPPOSITE to its current trend it has a 90% chance of returning to its previous channel the first day or a 95% chance of returning to its previous channel within the first week.

! To trade a gap-up with a down trending stock, buy a next month deep-in-the-money Put. Then when the security swings drops back, close the trade.

! To trade a gap-down with an up-trending stock, buy a next month deep-in-the-money Call. Then when the upswing to its normal trading range occurs, sell the Call.

To initiate the trade, check the news and volume. Then enter the trade at the opening --- as soon as a gap is identified. Determine your stop-loss. Then watch the trade for the first


20 minutes. If the trade is not working or stays in the same place, exit the trade. Gap trades should be closed out at the end of the trading day or set a tight stop-loss point.

To search for gaps in TOS, elect ‘Scan’ tab. Select ‘Stock Hacker’. Click on ‘Add Stock Filter.’ In first rectangle click on yellow triangle in the lower right- hand corner and select ‘Last’. Fill in ;min’ with ‘5.00’. Add a second filter and select ‘Volume’ and fill in ‘1,000,000’. Add a third and select ‘% Change’ and fill in ‘+7.00%’. Then select ‘Show 50’ and matches by ‘Symbol’ and ‘Ascending’. Then click on Scan. Save this scan as a ‘7% GAP-UP’ query. To make a GAP –DOWN query fill the ‘% Change max fill’ to a -7.00%. You will find these daily scans in the list under ‘Setup’ located in the upper left-hand corner of the TOS chart.

BuyingAStraddle

A Straddle is a two-legged short-term option strategy. It simply involves buying an at-the-money Call option and an at-the-money Put option, both with same strike price and expiration date. The desired result is the price of the underlying security jumps significantly in either direction to cover the cost of the combined premiums.

When placing the order, put a STOP on both options. Then once the price trend starts, sell the losing option and let the profitable one run with a tight trailing stop. For example, if XYZ is trading at $40 in June, buy a July 40 Put for $100 and a July 40 Call for $100. The net cost to enter the trade is $200, which is also the maximum possible loss. If XYZ security rallies and is trading at $50 on expiration Friday, the July 40 Put will expire worthless, but the July 40 Call expires in-the-money and may have an intrinsic value of $500. Subtracting the initial debit of $200, the profit is $300. If the security is still trading at $40 on expiration, both options will expire worthless.

A Straddle is typically used over earning reports. Many times, a security price will gap up or down following the quarterly earnings report. A sell-off may occur even though earnings are good if the professional money managers anticipated greater results. Look for securities with a history of gaps during earnings. Time works against this strategy, but the profit potential is unlimited. A straddle may be purchase up to two to three weeks prior to the earnings announcement in anticipation of good or bad news.

To find companies that are announcing earning in TOS, click on ‘Market Watch’, then ‘Calendar’. In the left hand column select earnings. In the upper right hand corner select the time period. After the scan produces results, click on the blue securities for more details.

BuyingAStrangle

The long Strangle involves buying both a call option and a put option on the same security. The options expire at the same time, but the difference between the Straddle and this strategy is that the Strangle has different strike prices. A Strangle can be less expensive than a Straddle if the strike prices are out-of-the-money. The owner of a long Strangle

makes a profit if the underlying price moves far enough away from the current price, either above or below. This position has limited risk since the most a purchaser may lose is the cost of both options.

IncomeStrategies

Sel l ing CoveredCal ls

Selling Covered Calls is a popular low risk strategy used with stocks already owned. However the seller must own 100 shares of the underlying security. Therefore a large outlay of cash is required to meet the requirements of this strategy.

! Sell out-of-the money (OTM) Call options to collect a little extra money from a security or LEAP you already own, want to keep, and the underlying security seems to be staying within a channel. Suppose 100 shares were purchased for $64. Then a $65 CC option was sold for $2 per share collecting the $200 premium ($65 divided into $2 equals a 3% gain). If the price stays below $65 by expiration, the option expires worthless and security remains with the CC seller.

! Sell at-the-money (ATM) Call options to collect maximum premium from a security. It shouldn’t matter whether or not the security is called away if the desired gain is made.

! Sell in-the-money (ITM) to have the security called away if selling CALLS or PUT to you if you desire to purchase the security at a discounted price. Suppose IPI was purchased at $27.80 and rose to resistance at $32.40. Then it looked as if it was going to pullback to $29.20, a current support level. A $27 CC could be sold to collect a $6.40 premium. Subtract 80 cents of intrinsic value from option price = $5.60. Divide $27 in to $5.60. This is a 20% gain for possibly two-months.

Col lect ingTwoPremiums

PURCHASE 100 shares of a stock if it is a strong profitable company. Then SELL a Covered Call option at-or-near-the-money to collect maximum premium. Also SELL a Put option at the identical strike price and same expiration date to collect more premium. Then PURCHASE a lower strike price Put to insure against a dramatic price drop.

For example, if XYZ is priced at $22.77, buy 100 shares and then sell a Covered Call at $23 to collect a $1 premium. Also sell a $23 Put to collect another $1. Then purchase a $22 Put for .44 cents to insure against a dramatic drop in price. The net gain from these option trades is $1.54. If called out another .23 cents is added to the mix which totals $1.77 divided by $22.77 equal a 7.7% gain.

Se l l ing CashCoveredWeekly NakedPuts

This is a favorite trading strategy. The goal is to have the PUT option sold expire worthless. It won’t make you rich in the short term, but like the turtle racing the rabbit, its potential over the long term is fabulous. It generates weekly/biweekly


income. Typically two to fours hours a week is spent mainly on Tuesdays and Fridays searching out and making/closing trades. Avoid trading during earnings reports.

Only stalwart companies that are rising or non-trending are traded --- companies I wouldn’t mind owning if they happened to be PUT to me. IF the stock is PUT to me (I must buy it) the following week I will sell Covered Calls on the owned stock at or near the money.

Listed below are companies I have used in the past that have worked quite well with this strategy. Typically these stalwart companies have been around a long time, have strong cash flow, and pay dividends.

AAPL ALXN AMBA BA COST DATA DE FDX FSLR GG GILD HD LUV MCD NSC PSX SBUX SCTY SLW SWKS TSO UNP VLO WMT WTW

! To begin, set up Chart Two in TOS labeled “C2– 3mD -

Range Predictor 111915”. The description is found in the chapter “Navigating & Customizing Trading Tools.” Also click on the “Live News” on the side bar.

! Then under the “Trade Tab”, create the “1-Selling Options 102815” layout.

! To find a trade, select a stalwart stock that trades weekly options --- like COST. Open the Trade Tab. Select the “Selling Options” format. Open the Weekly Options charts for this week and next --- a maximum of 10 days out. Look to the right, the PUTS side of the chart. Scan down the Prob.ITM column looking for a range between 20% to 30%. Then look left to see if the Extrinsic is above 30 cents. If it is there might be a possible trade.

! If the Extrinsic is above 30 cents, open Chart 2, Range Predictor. What is the long-term trend? Is it upward or flat? Downward is bad. What is the average true range of the price movement, particularly in the last couple of days? In COST case, the ATR is $2.60 at the time of this writing.

! Subtract the ATR of $2.60 from the price of the stock ($163.67 less $2.60 = $161.07). Does the $161 fall within the 20-30% probability of expiring in the money? In this example, the $157.50 strike price has only a 21% chance of expiring in-the-money, which is even better because the probability of COST being PUT to us is even lower. And the extrinsic value is 77 cents.

It is my experience that almost all of these types of trades have expired worthless allowing me to keep the extrinsic money that was paid to me. And the beauty of these trades is often you are in cash over the weekend.

Warning. The downside of this trade is it requires enough cash to purchase the security if the sold Put option is exercised or if the price of the underlying security falls dramatically.

F indingWeekly Options

! Compile a watch list of securities you want to own because of long term stability and dividends.

! Determine if you are going to sell a Put because you don’t own the stock or sell a Call because you own a 100 shares of the security.

! Then look for a minimum of +30 cents extrinsic value. With expensive securities look for +60 cents extrinsic.

! Check probability of being in-the-money at expiration, average true range, and trend before making the final decision.

! Determine support/resistance and look for any reversal patterns. Beware of trading over “earnings release date” because of the potential to “gap” up or down.

! Generally sell weeklies on Tuesday or Wednesday so as to be in the market only four days maximum and in cash over the weekend.

Weekly Credit Spreads

Use securities that exceed $200 in value for weekly credit spreads in order to obtain a higher premium. This is a high-risk trade that is generally successful UNLESS the security “gaps” beyond its average true price range within the select time period, typically 14 days.

As an example, suppose ISRG is trending downward and selling for $484.64. And its ‘average true range’ of price movement for the last 14 days is $17. To initiate the trade a $500 Call is sold and a $505 Call is purchased for a 40 cent credit. Hopefully both of these trades expire worthless by expiration Friday. If ISRG rises above $500 the most that could be lost is the $460, the difference between the spreads less the 40 cents.

Weekly Debit SpreadOptions

This two-legged strategy involves: (1) buying a deep ITM (in-the-money) option and (2) selling a deep ITM option with the hope that both of these options expire ITM. Say AAMC is selling for $603.83 and its ‘average true range’ of price movement for the last 14 days is $22. To initiate the trade a $540 Call purchased and a $545 Call is sold. The cost of the trade is $4.60. If AAMC remains above $545 by expiration Friday, the spread between $540 and $545 is worth $5 at closing. Subtract the $4.60 originally paid for the spread from the $5. This results in a 40 cent gain at expiration that equals an 8.6% profit (.40 divided by $4.60).

Protect ive Col lar Strategy

One fear of selling Covered Calls is the price of the underlying security may drop dramatically resulting is a huge loss. The collar strategy is basically an out-of-the-money covered call strategy with the purchase of an additional protective put. It is a good strategy to use if the trader is writing covered calls to collect premiums but wish to protect against an unexpected sharp drop in the price of the underlying security.


A Collar is constructed by: (1) purchasing 100 shares of security, (2) selling Covered Calls against that holding, and (3) buying a protective Put. The Puts and the Calls may be both out-of-the-money options that have the same expiration month and same number of contracts.

For example, purchase 100 shares of the XYZ currently trading at $48 in June. Create a collar by selling a July 50 covered call for $2 while simultaneously purchasing a July 45 put for $1. The cost of the trade is $4700. You paid $4800 for the 100 shares of XYZ, another $100 for the put, and received $200 for selling the call option.

On expiration date, if the security rallied by $5 to $53 the call is activated and the trader sells the shares for $5000, resulting in a $300 profit ($5000 minus $4700 original investment).

But if the security price drops $5 to $43, the July $45 put allows the shares to be sold from $4500 instead of $4300. Thus, the net loss is limited to only $200 ($4500 minus $4700 original investment). Had the price remain at $48 at expiration, the net a paper gain is $100 since only $4700 was paid to acquire $4800 worth of stock.

Se l l ing IronCondors

This four-legged strategy that involves selling and buying Calls and Puts during the same month. It is two vertical spreads tied together to generate cash from selling options that hopefully expire worthless. For example,

! (1) sell a Put that is out-of-the-money to collect premium. On a security trading at $45 in June, sell a July 40 Put for $100.

! (2) Then buy a Put at an even lower strike price such as a July 35 Put for $50. This is “fire” insurance” in case the price drops dramatically.

! (3) Then sell a Call that is out-of-the-money to collect premium, say a July 50 Call for $100.

! (4) The buy a Call at an even higher strike price, a July 55 call at $50 for insurance.

The net credit received when entering the above trade is $100. If on expiration day the security is still trading around $45, all the 4 options expire worthless and the trader keeps the entire credit received as a profit.

Enter the trade one to two months prior to expiration. Exit the trade 2 to 10 days before expiration or when a 75% to 80% profit has been achieved. Close out any leg of the Condor when it gets down to $.10 or less. Close out the entire trade when it is $.25 or less and there is still 3 or 4 weeks to go.

A loss occurs when the security price falls outside the range of the sold Call or sold Put. If the security is trading at $35 on expiration day, all the options except the July 40 Put sold expire worthless. If the sold July 40 Put has an intrinsic value of $500, the option has to be bought back to close the trade at a loss of $400 ($500 minus $100 credit received).

To find Iron Condors in TOS, select the ‘Scan” tab and choose ‘Spread Hacker’. In the ‘search’ box enter Iron Condor. In ‘spreads for’ box enter S&P 500. Then initially set the

following parameters. Underlying Price=$50 to $100. Probability of Profit=60% to 75%. Days to Expiration=30 to 60 days. Mark=$.50 to $.60 (how much credit received). Max profit=25% to 50%. Then hit the scan button.

D iv idend Invest ing

A dividend is a share of the company’s profits typically paid out to investors on a quarterly basis, but could be paid monthly or yearly. When searching for dividend stocks, look for a stable earnings history in dominate businesses.

Vanguard Natural - VNR Linn Energy - LINE Compass D. - CODI Blackrock Kelso - BKCC Hercules Tech - HTGC National Grid - NGG AllianceBerstein - AWF Western Asset - EDS Pimco Strategic - RCS Templeton Emerging - TEI Microsoft - MSFT Johnson & Johnson - JNJ Procter & Gamble -PG Wal-Mart Stores - WMT General Mills - GIS Intel Corp - INTC PepsiCo Inc - PEP Abbott Laboratories -ABT Waste Mngement -WM Clorox Company -CLX Piedmont N. Gas -PNY Kinder Morgan -KMP

Warren Buffett once said that they could close the stock market for five years and he wouldn't care. That's because he focused on getting a great value for his investment dollar and let compounding increase his wealth safely for many years.

! Fast growth companies often do not pay dividends. They keep their profits to reinvest in their long-term growth (buying more equipment or to buy back shares which decrease the outstanding shares of stock and potentially increase the value of those shares.

! Dividend-paying securities often fall out of favor in rapidly rising bull markets, subsequently regaining a strong following during unpredictable or slow growth bear markets.

When searching for strong dividend stocks look for a lower Dividend Payout Ratio (DPR). To calculate the DPR divide the annual dividend by the Earnings Per Share (EPS). If a company paid an annual dividend of $1 per share and had an EPS of $2, the payout ratio would be 50%. Generally, a lower DPR is better because the more paid out in dividends the less they are building up cash, paying off debt, and investing in growing the business. Some analysts suggest looking for DPRs under 60%; others say under 80%.

! Look for dividend growth for five years because it provides an indication of overall performance. The stock price, profits, cash, and dividend should be increasing. To be considered one of the best, a company should have paid and increased their dividends for at least 25 years with a steady increase each year. For example, Johnson & Johnson has raised its dividend for 49 consecutive years. Procter & Gamble has raised its dividend for 56 consecutive years

! Compare the yields to other stocks in the same industry. If the yield is excessively high it could be a sign of


increasing risk. Also compare the industry itself to other industries in the market to see where the industry stands.

! Compare the net income by quarter to the same quarter of the previous year. A company can still make money and have a negative net income growth rate, but they will not be able to continue to expand their business.

! Does the company have an excellent credit rating with little or no debt and/or cash to cover the debt?

! Look for a stable Return On Investment (ROI) because it shows how long it will take to earn money back from the initial investment. The ROI is composed of dividend payments and increase in stock price. It is desirable for both to show a stable, upward trend.

! Find out how the company did during the 2008 market crash.

A common error in dividend investing is to buy a stock solely based upon yield alone. Yield is important but safety must consider. If the company is weak it may wise to avoid it. Also, when a company cuts its dividend it is saying something has gone wrong such as: (1) profits have dropped, (2) the company is taking on too much debt, and/or (3) because the stock price has fallen so sharply that the yield is far beyond the industry average. In most cases, investors should sell their shares once a long-standing dividend is cut.

To receive a dividend, buy the stock three days before the ‘owner of record date’ to collect the dividend. Then hold across the owner date to capture the dividend. Then sell the stock if so desired. Be aware, typically the value of the stock may go down the exact amount of the dividend.

CustomizingThinkOrSwimThe following are instructions for customizing and using and the ThinkOrSwim (TOS) trading tool. Owned by TD Ameritrade, TOS has been rated by Barron’s Magazine as one of the best trading platforms. TOS is free. The only costs are the fees charged for opening and closing trades.

The beauty of TOS is its flexibility, extensive teaching tutorials, access to immediate help from LIVE humans, access to current news, and access to a free ‘paper-trading’ account where you can practice your investing skills. When first opening TOS most are over-whelmed by its complexity. Start learning it. It is worth it.

OpenATDAmeritrade Indiv idual Account

Go to www.tdameritrade.com. Click on the Trading Tools and Platforms. Click on Thinkorswim. Click on the ‘open an account” tab, and fill out the registration forms. You need not fund it at first. When questioned, indicate you are going to actively trade and it is a “Cash, Margin & Option” account. Select electronic statements and trade confirmations.

Then open the account and close it immediately. Then open it again and click on paper money. The total process should take about 45 minutes to an hour. There are a few forms that need to be printed and mailed, but the application process will explain it.

To Access TOS

This procedure is subject to change. As in the past, the continue upgrades may be altered the process a couple of times after these notes are published. Probably the preferred way is to login at www.tdameritrade.com. Then click on ‘Trade Tools Tab’ and select ThinkOrSwim. On the right hand side select ‘Download Platform’ and proceed as directed.

In the past accessing was accomplished by going to www.thinkorswim.com. Click on the “Software” tab at the top of the page and Choose DeskTop – thinkDesktop trading. It must be downloaded. Then log in and log out. Then log in to Desktop-thinkdesktop. When you open your account may choose to ‘Connect to either “Live Trading” or ‘Paper Money’. Choose ‘paper Money’ to start practice trading.

F indingYour WayAroundTOS

To take advantage of the charts and layouts I created, click on the following tab sequences when working with “Paper Money” or “Live Trading” accounts. I usually avoid trading on margin even though I am in a margin account. In a margin account, you may borrow money from your broker for a fee and invest or trade with that money. But, by borrowing and using leverage in this way, both losses and gains are significantly magnified. I won’t invest borrowed money in the stock market. It is a very risky idea.

! Monitor Tab>Account Statement>Order History> Equities>Options.

! Trade Tab>All Products>enter a security symbol> Option Chain if there are options>Single or Vertical> Layout>1-Sell Options>2-Buy Options>3-Probabilities.

! Scan Tab>Stock Hacker or Option Hacker or Spread Hacker depending upon search.

! MarketWatch Tab>Calendar and Alerts. ! Charts Tab>Charts, enter a security symbol>Style>

Load style>C1-6mD-Overview Chart to start the chart selection process.

! Help Tab>Launch Learning Center.


Finally, make sure you select a specific account after opening TOS. It is located at the top of the page on the left. Sometime people can’t find their previous trades because they are inadvertently looking at <TOTAL> (ALL ACCOUNTS).

TOSTraining&HelpSources

The ‘Help’ Tab is located at the top of the page, near left-center, along with the other tabs. Click on ‘Launch thinkdesktop’s Learning Center’ or open the ‘Search Here’ in the ‘Walkthroughs & Demos’ section. Most of these helpful tutorials/videos are only two to three minutes long. Below are some navigational hints.

! Blue triangles open sections.

! Black triangles change the list sequence. ! Blue dots open information on specific trades.

! White/Gray dots open customizing choices.

To Re-set Paper-tradingBalance

If you need to reset the paper-trading account balance to $100,000, you are normal. Beginners lose at first. Don’t trade “real” money until you are trading successfully.

To reset your balance, call the ThinkOrSwim help desk and talk with a real-live person. Their phone number at the time of this printing is 866-839-1100 extension 209229. Ask how to reset the paper trading account. This procedure has changed several times. So I thought it best for you to talk to them.

Gett ing StartedCustomiz ingTOS

Upon opening your TOS account, in the upper left-hand corner is ‘Account.’ Select ‘Margin Account’. NOT the <TOTAL> (ALL ACCOUNTS)

You must purchase a security in the account to set up layouts.

When I wrote these notes, I was using the following set-ups. That doesn’t mean they are the same as my current set-ups. I keep adapting as I increase my understanding and efficiency.

ToSet-upTOSWatchLists

In lower left hand corner, click on the gray rectangle with an arrow in it. This opens and closes the watch list column. Click on the ‘+’ to add a watch list. Boxes appear in the watch list column with + or /. Click on the boxes to increase or decrease the number of watch lists you want to use. Click on the wrench to close.

Then choose a watch list. Click on gray dot to the left of ‘Symbol’. Click ‘Customize’. Move the following ‘Available Items’ to be included in the new ‘Current Set’: Symbol, Last, Net Change, % Change, Strength Meter, and Send to [5] Purple. Click on the gray dot again and ‘Edit’ to change the watch list name. I use five watch lists: Futures, Insurance, ETFs, Stalwarts, and Working. Click OK to close.

The following symbols are included on my “Futures” watch list: /SI (silver), /GC (gold), /QM (oil), /YM (Dow), /ES (S&P 500), /TF (Russell 2000), and VIX (CBOE Volatility Index).

My insurance watch list includes: DUG, DUST, DXD, EUO, FAZ, GLL, SDS, TMW, UDN, UDNT, ZSL.

To create timesaving shortcuts, link the purple watch list color to the appropriate tabs. Click Trade Tab, MarketWatch Tab, and Charts Tab. Then click the multi-colored square to the right of white rectangle below ‘All Products’ and select the [5] purple box. Now these tabs are linked to the watch lists.

ToSet-upTOSMonitorTab

Across the top of the page are tabs. Click on the ‘Monitor’ Tab. It should turn yellow. Select ‘Account Statement’ that is just below the tabs line. Click on the blue triangles to open Order History, Trade History, Equities, and Options.

To CustomizeEquit ies V iew

This view only shows if you own securities. Right click on the gray dot next to ‘Symbol’ and ‘Customize’ will drop down. Adjust to read: Symbol, Description, Quantity, Trade Price, Mark, P/L%, P/L Open, and Mark Value.

To CustomizeOptionsView

This view only shows if you have open option positions. Right click on ‘Symbol’ and ‘Customize’ will drop down. Adjust to read: Symbol, Option Code, Expiration, Strike, Type, Qty, Trade Price, Mark, P/L%, P/L Open, and Mark Value.

To ChangeTheOrder/TradeHistory Views

In the blue bar at the top of the page you will find ‘today for’ pull down that may be adjusted to set the number of days that you want to view. This is especially important when you want to look at the history of a trade.

ToSet-upTOSTradeTab

Click on the Trade Tab. Select ‘All Products.’ Then type in a security symbol that has options. Open ‘UNDERLYING’ and ‘OPTION CHAIN’ by clicking on the blue triangle.

To CreateASELL Options Layout

On the same line as ‘OPTION CHAIN’ but about 2/3 to the right is ‘Spread’ which should say ‘Single’. If not, change it by using the yellow triangle pull-down in the lower right-hand corner. Just below and to the right is the ‘Strikes’ pull down that should read ‘All’. On the ‘Layout’ pull-down, select ‘Customize’ which brings up the Customize Information Layout form.

Add and remove items so as to end up with Extrinsic, Intrinsic, and Probability In-The-Money. Delta and Theta could be included if so desired. Bid and Ask show up automatically. Then return to Layout pull-down and select


‘Save As’ and type in a name for this personalized layout such as ‘1-Selling Options 102815’.

To CreateABUYOptionsLayout

On the ‘Layout’ pull-down, select ‘Delta, Gamma, Theta, Vega’. Then a second time on the Layout pull-down, select ‘Customize’ which brings up the ‘Customize Information Layout’ form.

Add and remove items so as to end up with the following in this order: Volume, Open Interest, Delta, Extrinsic, Intrinsic, and Theo Price. Bid and Ask show up automatically. Then return to Layout pull-down and select ‘Save As’ and type in a name for this personalized layout such as ‘Buying Options 080515’.

To CreateAProbabi l i t ies Layout

On the ‘Layout’ pull-down select ‘Customize’ which brings up the Customize Information Layout form.

Add and remove items so as to end up with the following in this order: Impl Vol, Probability ITM, Probability of Touching, Probability OTM, Delta, and Theo Price. Then return to Layout pull-down and select ‘Save As’ and type in a name for this personalized layout such as ‘Probabilities 080515’.

ToSet-upTOSCharts

The following charts are saved under the ‘Charts’ tab, on the second line ‘Charts’, and on the third line under pull-down ‘Style’ rectangle located on the same line as white rectangle located directly under the Monitor Tab. Each chart title is coded as follows: chart number (C1), duration (3mD=3 months daily), title, and date revised. All the moving averages are color codes so consistency is maintained and my memory isn’t challenged repeatedly.

Color-codingMovingAverage Indicators

I plot the following simple moving averages (MA) on time frames outside the norm based upon my belief in the Christian Trinity and the number seven which stands for completeness. These MAs are configured and colored-coded as follows.

! 3-day MA: yellow dashes. Indicates quick momentum changes and often used with the Stochastics tool to warn against an upcoming short-term downtrends.

! 7-day MA: blue dashes. The 7/21/49 MAs on daily charts have functioned together to provide reasonably reliable indicators of current trends and trend changes.

! 21-day MA: green line. The 21/49 MAs provide a medium view of trends and possible changes.

! 49-day MA: purple line. This MA shows the stock’s broad trend. It filters out much of the day-to-day noise of confusing price volatility. The 50 day SMA is the indicator the professional fund managers’ watch. If this MA is crossed upward with high volume, then

professionals buy with both hands. If crossed downward with volume, huge selling occurs.

! 210-day MA: gold dots. If the security price drops below this MA it is considered the ‘Death Cross.’ Also, when the 49-day MA crosses upward over the 210-day MA, be prepared for a reversal. The chance of the price continuing upward is only 2%. If a stock price move 70%+ above the 210-day MA, consider locking in profits.

C1–6mD- OverviewChart - 072314

Purpose of chart: To introduce most of the moving averages and timing tools used when setting-up other charts.

Click ‘Charts’ Tab at the top of the page. Type in a security symbol such as ‘’DDD’ in the white rectangle below Monitor and Charts.

Click on the ‘wrench’ symbol on the same line to the right. It opens a ‘Chart Setting’ box. Click on ‘Time Axis’ tab and adjust first column to: TIME, 6 months, Day. Adjust ‘Expansion Area’ to 5 in the second column. Click on ‘Appearance’ tab and adjust to ‘CANDLE’, check ‘Show Wicks’. Click on ‘Equities’ tab and uncheck ‘Show Volume Sub graph’. Click on ‘Extended Session, Highlight Extended Session’ and ‘Show Corporation Actions’. Then click on ‘Options’ tab and uncheck ‘Show Volume Sub graph’, Click on all the rest. Then click on ‘OK’ to save the results.

Then click on the ‘dripping oil can’ to the left of the wrench to open an ‘Edit Studies and Strategies’ box. Click on ‘Studies’ tab to the far left. Scroll down to ‘MovAvg TwoLines’ and highlight. Click two times on ‘Add Study’ at bottom of column. Then look at ‘Added studies & strategies’ in the ‘Price’ box and highlight ‘MovAvgTwoLines’ so the ‘white gear’ symbol appears. Click on it and the ‘MovAvgTwoLines Customizing’ chart appears. Change the ‘Inputs’ to: fast length to the number 3, slow length 7, and average type to SMA. Change the ‘Plots’: fastAvg to yellow dashes and slowAvg to blue dashes. Repeat to add another pair of 21 & 49 and adjust the line styles and colors accordingly. Make sure the box ‘Show study’ is checked.

Then scroll down to ‘SimpleMovingAvg’, highlight, and‘Add Study’ at bottom of column. Highlight ‘SimpleMovingAvg’ so it pops up. Change ‘Inputs length’ to the number 210 and customize color and line style. Make sure the box ‘Show study’ is checked.

Then add the MomentumCrossover twice, one positive (yellow), one negative (blue), and adjust to length to 7.

Add the following studies on the lower subgraph: VolumeAvg (49), MACD (7/21/9 EMA), StochhasticFast (80, 20, 7, 3, HIGH, LOW, CLOSE, SMA), MoneyFlow (CLOSE), and McClellanOscillator (NYSE, 19,39,100,-100,No). Click OK to close.

Finally, Click on the ‘Style’ rectangle next to the wrench. Scroll down to “Save Style” and enter the style name, in this case, C1- 6mD – Overview Chart 072314. Then check the


white box ‘Include study set’ because if you don’t, you will lose all the programming you just did.

C2–3mD- RangePredictor 072314

Purpose: To take advantage of studies and tools which assist in predicting future prices and the typical range of price changes within a select period of time.

Click Charts Tab at the top of page and then click the ‘Style’ tab just to the right of the ‘wrench’ symbol and scroll down to ‘Load Style’ and select ‘C1- 3mD Overview Chart’.

Click on the ‘wrench’ symbol on the same line to the right. It opens a ‘Chart Setting’ box. Click on ‘Time axis’ tab and adjust to 3 months daily. Then click on the ‘Appearance’ tab and adjust ‘Chart Type to HEIKIN ASHI’. Check under ‘Ticks Fill Down and Show Wicks’. Then click on ‘OK’.

Then click on the ‘dripping oilcan’ to the left of the wrench to open the ‘Edit Studies and Strategies’ box. Add and remove studies so as to end up with the following. On the upper subgraph place the ‘ProbabilityOfExpiringCone (49,77)’ and remove all others. On the lower subgraph add ‘AverageTrueRange (14)’ and remove the rest except ‘VolumeAvg (49). Adjust all studies to match the numbers above. Click OK to close. Finally, Click on the ‘Style’ rectangle next to the wrench. Scroll down to “Save Style” and enter the style name, in this case, C4- 3mD – Range Predictor 072314. Then check the white box to ‘Include study set’ to retain your programming.

C3–3y2d– S/RPatterns 072314

Purpose: To make it easier to see support and resistance patterns over an extended period of time.

Click Charts Tab at the top of page and then click the ‘Style’ tab just to the right of the ‘wrench’ symbol and scroll down to ‘Load Style’ and select ‘C1- 6mD Overview Chart’ to start programming.

Click on the ‘wrench’ symbol on the same line to the right. It opens a ‘Chart Setting’ box. Click on ‘Time Axis’ tab and adjust first column to ‘TIME, 3 years, 2 Days’. Then click the ‘Appearance’ tab and change the ‘Chart Type to LINE’. Click on ‘Equities’ and uncheck ‘Show Extended Session and Highlight Extended Session’. Then click on ‘OK’ to save.

Then click on the ‘dripping oil can’ to open the ‘Edit Studies and Strategies’ box. Remove everything except the VolumeAvg (49) and the ‘MoneyFlow (CLOSE)’ study. Click OK to close. Click on the ‘Style’ rectangle next to the wrench. Scroll down to “Save Style” and type in the newly created style name, in this case, C2- 3y2d – S/R Patterns 072314. Then check the white box to ‘Include study set’ to retain your programming.

C4–10yM- 08Market Crash072314

Purpose: To visualize the impact the 2008 Market Crash had on the price of a select security.

Click Charts Tab at the top of page and then click the ‘Style’ tab just to the right of the ‘wrench’ symbol and scroll down to ‘Load Style’ and select ‘C2- 3y2d – S/R Patterns 072314.

Click on the ‘wrench’ symbol on the same line to the right. It opens a ‘Chart Setting’ box. Click on ‘Time Axis’ tab and adjust first column to ‘TIME, 10 years, Month’. Then click on ‘OK’ to save.

Then click on the ‘dripping oil can’ near the wrench to open the ‘Edit Studies and Strategies’ box. Add ‘SimpleMovingAvg (CLOSE, 1, 0) and remove all the rest. Click OK to close. Finally, Click on the ‘Style’ rectangle next to the wrench. Scroll down to “Save Style” and enter the style name, in this case, C3- 10yM – 08 Market Crash 072314. Then check the white box to ‘Include study set’ to retain your programming.

C5–10d30m–End-DayVolume072314

Purpose: To focus on the impact institutional money managers and day-traders have on purchasing or selling volume at the end of the trading day.

Click Charts Tab at the top of page and then click the ‘Style’ tab just to the right of the ‘wrench’ symbol and scroll down to ‘Load Style’ and select ‘C1- 3mD Overview Chart’.

Click on the ‘wrench’ symbol on the same line to the right. It opens a ‘Chart Setting’ box. Click on ‘Time Axis’ tab and adjust first column to ‘TIME, 10 days 30 min’. Click on ‘Appearance’ tab and adjust ‘Chart Type to HEIKIN ASHI’. Check under ‘Ticks Fill Down and Show Wicks’. Then click on ‘OK’ to save.

Then click on the ‘dripping oilcan’ near the wrench to open the ‘Edit Studies and Strategies’ box. Add, remove, and configure studies so as to end up with the following: ‘MovAvgTwoLines (CLOSE 7, 21,0, SMA), ‘Bollinger Bands EMA (CLOSE, 0, 21, -2.0, 2.0), ‘VolumeAvg( 49) and MACD (7/21/9 EMA)’. Finally, Click on the ‘Style’ rectangle next to the wrench. Scroll down to “Save Style” and enter the style name, in this case, C5- 10d30m – End-Day Volume 072314. Then check the white box to ‘Include study set’.

C6–Carter Tools - 1d5m- 072314

Purpose: To see what is happening minute by minute during the trading using John Carter’s trading studies.

Click Charts Tab at the top of page and then click the ‘Style’ tab just to the right of the ‘wrench’ symbol and scroll down to ‘Load Style’ and select ‘C5- 10d30m - End-Day Volume’.

Click on the ‘wrench’ symbol to open the ‘Chart Setting’ box. Click on ‘Time Axis’ tab and adjust first column to ‘TIME, 1 day, 5 min’. Click on ‘Appearance’ tab and adjust ‘Chart Type to ‘BAR’. Then click on ‘OK’ to save.

Then click on the ‘dripping oil can’ to open the ‘Edit Studies and Strategies’ box. Click on ‘Studies’ tab to the far left to add the following studies: ‘TTM_Trend (6, Yes), TTM_Squeeze (CLOSE, 20, 1.5, 2.0, 1.0), TTM_Wave. Remove all the rest


except ‘MovAvgTwoLines (CLOSE, 21,49,0, SMA), and VolumeAvg (49) on the Lower Sub graph. Click OK to close.

Finally, Click on the ‘Style’ rectangle next to the wrench. Scroll down to “Save Style” and enter the style name, in this case, C6- 1d5m – Carter Tools 072314. Then check the white box ‘Include study set’ to retain programming.

C7–DayTrading/ES– 1d3m- 072314

Purpose: To see what is happening minute by minute focusing on volume, trend lines, and support and resistance.

Click on the ‘wrench’ symbol to open the ‘Chart Setting’ box. Click on ‘Time Axis’ tab and adjust first column to ‘TIME, 1 day, 3 min’. Click on ‘Appearance’ tab and adjust ‘Chart Type to ‘BAR’. Then click on ‘OK’ to save.

Then click on the ‘dripping oil can’ to open the ‘Edit Studies and Strategies’ box. Adjust the following studies to: ‘MovAvgTwoLines (CLOSE, 18,50,0, SMA), and VolumeAvg (20). Get rid of the rest. Click OK to close. Save the style naming it C7- Day Trading /ES - 1dm –072314. Then check the white box ‘Include study set’ to retain programming.

To Transfer Charts

1. Log into an account with the charts already programmed. 2. Open each chart that you wish to transfer in a separate

window 3. Click Setup (in the top right hand corner). Select "save

workspace as" - Save as "Johns charts" 4. Log out of the account

5. When logging into the account that needs the charts select "Johns charts" from the workspace drop down.

6. Individually save each chart to the new account. When saving a workspace it saves directly to each computer. If you desire to delete the workspace after the charts are transferred – Click on "Setup" then "Delete Workspace"

ToCustomizeTOSAnalyzeTab

This tool helps predict the percentage of risk when considering a trade. It is used primarily to analyze the selling of credit spreads. Click on the Analyze Tab. Select ‘Risk Profile’.

Type in a symbol of a current credit spread you are trading such as GOOG (Goggle). Look to the right to the ‘commissions plot lines’ and adjust the yellow outlined rectangles below to read ‘EXCLUDED, Date and P/L OPEN’. Look further to the right to ‘prob mode’ and adjust the box below to ‘Probability OTM’. Then change the ‘prob date’ to the expiration date.

Drop on down to “PRICE SLICES’ on the far left. Adjust two of the ‘Stk Price’ lines to the outward ranges of your spread. They should be in the ‘Lock’ mode with the remaining line being ‘Live’ mode that displays the current price. The chart above should display vertical red dash lines that represent the two spread boundaries and the current price. The probabilities of expiring out-of-the-money (OTM) are displayed in red near the top of the chart.


Glossary! Abandon: The act of not exercising or selling an option

before its expiration.

! Acquisition: When one company buys enough security of another company to take control of that company.

! All-or-none order (AON): A type of option order that requires the order be executed completely or not at all.

! Arbitrage: The simultaneous purchase and sale of identical assets in two different markets with the intent of profiting by the price discrepancy.

! Assigned: To have received notification of an assignment on short options.

! Automatic Exercise: Exercising all expiring equity options that are held in customer accounts if they are in-the-money by .01 or more.

! Averaging down: Buying more of a security or an option at a lower price than the original purchase so as to reduce the average cost.

! Base: A break in an uptrend when a security pauses to catch its breath before heading upward again.

! Beta: a security's price movement when compared to the market as a whole: a score of one means the beta is average. A plus one means more volatile.

! Blue Chip Security: a name given to the securities of major corporations, like IBM and General Motors.

! Broker is a licensed professional who advises people about investments and may work for brokerage firms.

! Brokerage Firms manage security trades and other investment vehicles for a fee.

! Buy Limit Order is an offer to purchase at specific price or better and is only executed when that price is reached.

! CBOE: The Chicago Board Options Exchange.

! Close: The reduction or an elimination of an open position by buying or selling.

! Collateral: Securities against which loans are made.

! Cover: To close out an open position. ! Day order: An order that instructs the broker to cancel

any unfilled order at the day’s closing.

! Death Cross: When the 50-day moving average crosses downward over the 200 day moving average.

! Debit: Money paid out from an account that results in decreasing the cash balance.

! Deflation: A decrease in the prices of goods and services, usually tied to a contraction of money in circulation. .

! Depreciation: Reduction in value over time.

! Depression: A recession, where the peak-to-trough contraction in real growth exceeds 10%. A “great” depression is where the peak-to-trough contraction in real growth exceeds 25%.

! Derivative / derivative security: A security whose value is determined in part from the value and characteristics of the underlying security.

! Equity: The amount the investor would keep after all positions have been closed and all margin loans paid off.

! Exercise price (strike price): The price at which the owner of an option can purchase (call) or sell (put) the underlying security.

! Expiration Friday: The last business day prior to the option's expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month.

! Fiat Money: Paper money the government declares to be legal tender although it has no intrinsic value and cannot be redeemed for money with intrinsic value, such as gold and silver coins or any commodity.

! Finance Charge is the fee paid when the entire debt is

not paid within the time period.

! Float: the total number of publicly owned shares available for trading.

! Gap: When the price opens substantially above or below the highest or lowest price of the previous close.

! Good-'til-cancelled (GTC) order: A limit order that remains in effect until it is either filled or cancelled.

! Hedge / hedged position: A position established with the specific intent of protecting an existing position. For example, an owner of common security may buy a put option to hedge against a possible security price decline.

! Historic volatility: A measure of actual security price changes over a specific period of time.

! Implied volatility: The volatility percentage that produces the 'best fit' for all underlying option prices on that underlying security.


! In-The-Money: An adjective used to describe an option with intrinsic value.

! Index Funds are securities that represent an entire index. For example Spiders (SPY) cover the S&P 500 Index, Diamonds (DIA) cover the Dow Jones Industrial, the QQQQs follow the Nasdaq 100, and the iShares track the Russell 2000 Fund (IWM).

! Index: A compilation of several security prices into a single number. Example: the S&P 100 Index.

! Inflation: An increase in the prices of goods and services, usually tied to an increase of circulated money.

! Interest Rate is the price paid for the use of someone else's money expressed as an annual percentage rate.

! Leg: A term describing one side of a trade.

! Leverage: A term describing the greater percentage of profit or loss potential when a given amount of money controls a security with a much larger face value.

! Liability: Something owed for.

! Lien: a right given to a lender over a borrower's property or money when the borrower cannot pay a debt.

! Limit order: A trading order placed with a broker to buy or sell security or options at a specific price or better.

! Liquidity / liquid market: A trading environment characterized by high trading volume, a narrow spread between the bid and ask prices, and the ability to trade larger sized orders without significant price changes.

! Long: Ownership.

! Margin / margin requirement: The minimum equity required to support an investment position. To buy on margin refers to borrowing part of the purchase price from a brokerage firm.

! Market Maker is professional exchange securities dealer who has the responsibility of making bids and offers and maintaining a fair and orderly market.

! Market order: A trading order placed with a broker to immediately buy or sell a security or option at the best available price.

! Non-equity option: Any option that does not have common security as the underlying asset. Non-equity options include options on futures, indexes, etc.

! NYSE: New York Security Exchange.

! One-cancels-other order (OCO): An option order which treats two or more option orders as a package, whereby the execution of any one of the orders causes all the orders to be reduced by the same amount.

! Open interest: The total number of outstanding option contracts on a given securities.

! Option writer (seller): The seller of an option contract. ! Option: A contract that gives the owner the right, but

not the obligation, to buy or sell a particular asset (the

underlying security) at a fixed price (the strike price) for a specific period of time (until expiration).

! OTM: (Out-of-the-money): An adjective used to describe an option that has no intrinsic value.

! P/E (Price-Earnings Ratio) is the current share price compared to its per-share earnings.

! PEG. Price/Earnings-to-Growth Ratio. A ratio of a stock's valuation, that is, how expensive a stock is relative to its earnings and expected growth. It is calculated by dividing a security’s forward P-E ratio by its projected three-to-five year annual earnings growth. A fairly priced stock has a ratio of 1. A lower PEG means that the stock is more undervalued.

! Premium: Total price of an option: intrinsic value plus time value.

! Recession: Two or more consecutive quarters of contracting real (inflation-adjusted) GDP, where the downturn is not triggered by an outside factor such as a truckers’ strike.

! Resistance: A term used in technical analysis to describe a price area at which rising prices are expected to stop or meet increased selling activity. This analysis is based on historic price behavior of the security.

! Rolling: A trading action in which the trader simultaneously closes an open option position and creates a new option position at a different strike price, different expiration, or both.

! SEC: The Securities and Exchange Commission that is an agency of the federal government in charge of monitoring and regulating the securities industry.

! Sector index: An index that measure the performance of a narrow market segment, such as biotechnology or small capitalization securities.

! Sell Limit Order is an offer to sell at specific price or better and is only executed when it reaches that price.

! Settlement: The process by which the underlying security is transferred from one brokerage account to another when equity option contracts are exercised.

! Short security position: A strategy that profits from a security price decline. The trade is initiated by borrowing a number of shares of a security from a broker-dealer and immediately selling them on the open market immediately to collect cash. This strategy is closed at a later date by buying back the security, hopefully at a lower price, and returning the owed shares back to the broker-dealer.

! Spread: A trading position consisting of two legs, each of which alone would profit from opposite directional price moves. As orders, these opposite parts are entered and executed simultaneously in the hope of (1) limiting risk, or (2) benefiting from a change of price relationship between the two parts.

! Strike price: The price at which the owner of an option can purchase (call) or sell (put) the underlying security.


! Security split: An increase in shares by issuing of a set number of shares for each share already owned such as a ‘2-for-1’ (for every share owned, another will be given).

! Strike price interval: The normal price differential between option strike prices. Equity options generally have $2.50 strike price intervals if the underlying security price is below $25, $5.00 intervals for securities $25 to $200, and $10 intervals above $200.

! Tick: The smallest unit price change allowed in trading a security. For a listed option under $3 in price, this is generally 1/16th of a point. For a listed option over $3, this is generally 1/8th of a point.

! Time value: The part of an option's total price that exceeds its intrinsic value. The price of an out-of-the-money option consists entirely of time value.

! Transaction costs: All fees associated with executing a trade and maintaining a position. These include brokerage commissions, fees for exercise, exchange fees, SEC fees, and margin interest. In academic studies, the spread between bid and ask is taken into account as a transaction cost.

! Underlying security: The security subject to being purchased or sold upon exercise of the option contract.

! Volatility: The rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a security moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.

! Write / Writer/ Seller: To sell an option that is not owned through an opening sale transaction. While this position remains open, the writer is subject to fulfilling the obligations of that option contract; i.e., to sell security (in the case of a call) or buy security (in the case of a put) if that option is assigned. An investor who so sells an option is called the writer, regardless of whether the option is covered or uncovered.

OnTheLighterSide

! Broker: What my financial planner has made me. ! Bull Market: A random market movement causing an

investor to mistake himself for a financial genius.

! CEO: Chief Embezzlement Officer. ! CFO: Corporate Fraud Officer.

! FIAT Money: Financial Instrument Administering Theft of Money

! Insanity: Doing the same thing over and over again and expecting different results. - Einstein

! Institutional investor: An investor who is now locked up in a nuthouse due to significant losses.

! Liquidity: When you look at the performance of your investments and wet your pants.

! Market Correction: The day after you buy securities.

! Miles Per Gallon: A recent study found that the average American walks about 900 miles a year. Another study found that on average Americans drink 22 gallons of alcohol a year. That means that the average American gets about 41 miles to the gallon!

! Profit: An archaic word no longer in use. ! Security Analyst: The idiot who just downgraded your

security after you bought it.

! Security Split: When your ex-wife and her lawyer split your assets equally between themselves.

! 401 Keg Plan: When these notes were first written, if you had purchased $1000 of Delta Airlines shares you have $49.00 a year later. If you had purchased $1000 of AIG shares , you have $33.00. If you had purchased $1000 of Lehman Brothers shares, you have $0.00. But if you had purchased $1000 worth of beer when these notes were first written, drank all the beer, then turned in the aluminum cans for a recycling refund, you would have received $214.00. Based on the above, the best current investment trading strategy is to drink heavily and recycle.

FinalThoughts

Do the research. Follow the risk management rules. Minimize losses. When trading, buy only to sell! All securities are bad! When investing, find only the best companies that pay well from their profits.

There are many resources available on-line which explain in greater detail the topics I have attempted to summarize in these teaching notes. It may behoove you to refer to them. Hopefully you appreciate what was attempted here. Like I said, this is just a rough draft. It is my hope that you can see the value of tracking and trading your own money.

ContactInformation

John Mohan Consulting, LLC John Mohan or Tyler Petty

PO Box 877 – Kirkland, WA 98083 425-822-0882 -- [email protected]

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