Thinking of shorting a stock making all time highs?

Shorting stocks that are making new highs can be very risky. Nevertheless, many undertake this strategy to try and profit when the stock tops out. And obviously if you are able to get short at that point and catch a significant downward move, profits can be very large. But it is nearly impossible to know when this will happen (indicators notwithstanding). In the mean time, losses can mount as a stock that looks 'top-heavy' continues it's meteoric rise. Is there a better strategy? How about an option straddle? A straddle is the simultaneous purchase of a put and call at the same strike price with the same expiration date. And since Implied Volatility, which affects option pricing is typically lower as stocks are rising, straddles can be bought for favorable pricing. If the stock continues to make new highs during the life the straddle you can profit on the call side, while if it does reverse significantly, profit substantially on the put side. And you're only risking the price of the straddle vs the margin required to sell short. The worst case scenario is that the stock flat lines, which would be very unusual for such stocks. Following is an example using Apple Computer, which reached an all time high of 705 in September of 2012 shown on this weekly chart:

 


Implied volatility (IV) of Apple call options reached a low in late July of 2012, as seen on this chart:




A 6 month straddle purchased at this time would have put options in place as Apple computer subsequently fell nearly 300 points (certainly large enough to cover the losses on the calls). Straddles purchased at previous IV lows would have likely profited from the continued rise of the stock. There are many more nuances to be understood about trading straddles, but they are certainly a viable alternative to to short selling stocks making new frequent highs. (Charts created in Metastock)

The products and demonstrations listed on this website are not recommendations to buy or sell, but rather guidelines to interpreting their respective analysis methods. This information should only be used by investors who are aware of the risks inherent in trading. MetaStock shall have no liability for any investment decisions based on the use of their software, any trading strategies or any information provided through other services such as seminars, webinars, or content included in the website.

“How to Choose the Right Charting Software for You”

Whether you are a independent investor, mutual fund investor, position trader, swing trader, or options player one crucial tool you need to succeed in today's institutional dominated marketplace is a good charting system. There are many charting software vendors including free internet based charting services, and many brokers now have basic charts as part of their online broker system.  The plethora of charting software has occurred over the past decade because it is the only way that the retail investor and retail trader can see what is going on in the hidden professional side of the market, where giant funds trade on Alternative Trading System platforms that are not in the exchanges and where High Frequency Traders control the open of the market. Often investors and traders are losing money not because they aren't capable, but because they are using inferior charting.

Without stock charts the average investor is trying to shoot darts in the pitch dark.  Even mutual fund investors must use charts to track the success of the mutual funds they select in an easy to use graphical format. For position, swing, and day traders stock charts are an essential part of trading. For Options players, charts are critical because the outdated options indicators no longer work. How do you choose the right Charting Software for your needs?

Professional charting systems are very pricey, often running in the range of one thousand to ten thousand a month for the charting service. Fortunately there are very low cost charting software that are excellent for retail investors and retail traders. Unfortunately many retail investors and retail traders try to use free charting services or the basic shell type charting system that comes with their brokerage account. Broker charts are not complete charting programs because they are not designed for trade analysis.  If you want to be highly successful and make consistently excellent profits from trading stocks, you need a charting program that can do the 7 things listed below.

1. Scans: A Charting program must be able to scan all the stocks in the market at one time or in groups based on criteria which include leading indicators, not the outdated indicators written decades ago like MACD and Stochastic. Leading indicators expose where the institutions are buying or selling before price moves.  Scans must be extremely adaptable so that you can have custom scans which bring up specific stocks with candlestick patterns and leading indicators.  Free stock charts and broker charts do not have scans, or if they do there is not the ability to create custom criteria. Scans are a necessity and the better the scan the faster your chart analysis and stock pick selection. Without scans, you are stuck using news or broker recommended stocks which means you are trading stocks your broker has in inventory and wants to sell to you to make huge profits from your trades. Scans are a critical tool. They separate the truly serious and successful trader, from the hobby trader who constantly loses money.

2. Leading Hybrid Indicators: The charting software must have all the modern new leading hybrid indicators, not just the old outdated indicators every broker promotes.  There's a reason why they don't provide leading indicators.  Indicators must capable of being modified and adjusted. In addition they must have different period settings and be capable of adding subordinate indicators or dual primary indicators on the same template.  Indicators are an essential part of highly profitable trading.  Tracking the institutions to know where they are accumulating and distributing, will be worth every penny spent on your charting software.

3. Custom Indicators: The charting software should be able to have custom indicators that can be modified to your trading style, so that your set of indicators is unique to you.  Professional traders have their own proprietary indicators they do not share with anyone else, which keeps them unique and earns them higher profits.  There should be indicator templates that can be saved and used over and over every time you study stock charts.  Indicators must include not just stock indicators but also fundamental, financial, historical, and market indicators so you don't need to search for information but can quickly see how many institutions hold the stock, and what percentage of ownership of the outstanding shares is held by institutions.  A complete set of indicators that can be adapted and modified, with the ability to add new indicators is an essential tool for every trading and investing style.

4. Conditional Sorts: Some free charting software and broker software have a few sorts, which are mostly very basic or completely outdated and not relevant for today. Sorts in the best charting software will have Conditional sorting capability, and multi-tier sort capabilities. Conditional sorts save huge amounts of time and keep the best stocks rising to the top of your Scans and Watchlists.  These sorts are a tool every professional uses because they save time, keep their workflow efficient, and present better stocks to trade than news, guru, or broker recommendations.  Superior stock picks mean superior results. 

5. Watchlists, Lists and Alerts: Watchlists, analysis lists, etc. are another must have feature that most free charting programs do not have.  Being able to put stocks on a Watchlist for future study and monitoring is crucial to higher profitability and stronger stock pick selection.  Being able to have as many Watchlists as you want with all types of criteria and sorting capability is a huge asset to investors and traders. You want to be able to spend less time searching for stocks or listening to the news, and more time enjoying your profits from trading. Alerts are a new addition for many charting programs and function similarly to professional alert systems within charting software. Alerts keep you on top of stocks that may not be ready with the ideal entry at the moment, but will be a in a few days.

6. Market Data:  If the data in your charts is not accurate or up to date, it can harm your trading without you even realizing it.  Data needs to be structured in a manner by the charting program that allows you to see various time frames, patterns, and layouts so that you can determine who controls price at that time. There are 9 major Market Participants all trading and investing at different times and on different order processing platforms; 54 Dark Pool Alternative Trading Systems ATS, 9 Electronic Communication Networks for Electronic Trading aka Day Trading ECNs, and 16 US Exchanges. Data must be gathered properly and accurately from a vast number of locations, so make sure the charting software you use has reliable Market Data.  Just because it is in your broker account doesn't mean the Data is properly structured, sorted, documented, and delivered timely.  Your software should also include other market data beyond just US stocks.  If you are trading in another country, you need charting programs which have that market data accurately displayed and readily available.  If you want to trade other instruments beside stocks, the charting software must include data for that instrument.

7. Trading Style Customization: The Charting program must have the capability to be customized in every way for your trading style.  That means far more flexibility and customization than broker free charting programs.  Attempting to use charting software that is not designed and customized for your trading style increases risk with the probability of glitches, mistakes, and bad trades.  Your trading style is foremost when choosing a stock charting program.  Make sure the program has a feature for your instructor or mentor to write you notes and provide training within the charting software structure.  Having access to your teacher's education and training will help you improve as you learn to trade. Trading style customization allows you to trade without having to compromise your trading screens and monitors, because you can lay them out properly for maximum online instant analysis.

Most traders spend inordinate amounts of time trying to find stocks. By spending a small amount of money and investing in a complete charting software program with all the features you need to find the best stocks for your trading style and trading parameters, you are now trading like a professional and can earn professional level profits.

Sure you can continue to use that free basic charting program, but you are pinching pennies and throwing away huge dollars in profits. You are maintaining the status quo of mediocre retail trading results, and keeping yourself stuck in a system that is not designed to make you highly profitable. Take charge of your trading by investing in tools that can help make you successful.

Martha Stokes CMT

Chartered Market Technician

Member of Market Technicians Association

Master Rated Technical Analyst for Decisions Unlimited, Inc.

Instructor and Developer of TechniTrader Stock Market Courses

For additional training visit http://technitrader.com

This Stock Discussion and Training Lesson is sponsored by TechniTrader.com

MetaStock® Partner

©2014 Decisions Unlimited, Inc.  All Rights Reserved.

TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader and its instructors or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues.  At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

TechniTrader Weekly Stock Discussion: “How to Use Bollinger Bands in a Platform Market Condition”

MetaStock® SPRS Series - Week 153 – January 10, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

Bollinger Bands® have been gaining in popularity in the past couple of years.  This is no surprise given the changes in the Market Structure, and how price behaves with more of the Exchanges, Dark Pool Alternative Trading Systems ATS, Electronic Communication Networks ECNs, and other orders now automated.

Bollinger Bands offer a highly visual method of seeing the compression patterns that occur before breakouts of significant magnitude.  This indicator also helps those traders and investors who are still struggling with Spatial Pattern Recognition Skills and have trouble recognizing whether at stock is still trending up or down, or if it has shifted sideways.  The sooner a trader can identify a sideways shift the better as sideways patterns require different entries, stop losses, and exit strategies.

It is important that you maintain a good ratio on your chart screen so that the Bollinger Bands are properly displayed.  Many times traders attempt to use too many indicator windows on one template layout.  Be sure that the height and width ratios are close to the Golden Mean ratios.

Bollinger Bands make it far easier to determine if a platform is underway, or if it is a wider sideways or trading range pattern.  

Below is an example of a stock that had been in a trading range pattern over a few months, then it had a High Frequency Trader HFT velocity run.  The current compression shows near perfect horizontal Bollinger Bands on both the upper and lower band, indicating that price is compressing inward equally from highs and lows. This is a powerful price pattern that is often missed by novice traders.

The equal compression means that there is equilibrium between buyers and sellers at that moment, which tends to favor the upside after an HFT driven velocity run. Quiet accumulation is underway with Dark Pool ATS buying going on unnoticed for the moment. Dark Pools control price to create these patterns.

Since this first velocity run was triggered by HFTs, the next move up is likely to also be an HFT gain day.  The next few days the stock moves up a little higher and compresses again, then HFTs move the stock up a couple of points in one day.

Summary: The entire sideways action after the first HFT velocity run was a period of quiet accumulation with Dark Pools buying on their ATS, and the general market exchanges unaware of their activity. Once the word gets out, HFTs automated orders drive price upward.  There were 2 entries before the stock moved on HFT price action, and both entries offered a low risk entry prior to the big run day.

To use Bollinger Bands properly, you must incorporate volume indicators.  Bollinger Bands is a price channel indicator, so the direction the stock will take is not easily evident to most traders.  By adding volume a trader has a complete set of data, which provides all the necessary information to determine what direction the stock will move out of the compression pattern.

Many traders benefit from adding Bollinger Bands with volume indicators to their trading rules and parameters. 

For more information on Bollinger Bands visit http://goo.gl/ePuJB5

Trade wisely,

Martha Stokes CMT

Chartered Market Technician

Member of Market Technicians Association

Master Rated Technical Analyst for Decisions Unlimited, Inc.

Instructor and Developer of TechniTrader Stock Market Courses

For additional training visit http://technitrader.com

This Stock Discussion and Training Lesson is sponsored by TechniTrader.com

MetaStock® Partner                                                                 

©2014 Decisions Unlimited, Inc.  All Rights Reserved.

TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader and its instructors or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues.  At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service

A Formula-Based Resolution

Writing custom formulas with the MetaStock Formula Language is a skill anyone can learn.  While some may find it easier because they have worked with  other software or have an affinity toward math or computers, this does not prevent others from mastering the art of writing formulas.  Yes, I did call it an art.  Formula writing is based in math and logic but it also involves structure.  The ability to not only write the formula but do so clearly is only gained through practice. 

As this is the start of a new year, when many are creating resolutions and goals, I thought I would suggest one for those interested in improving their formula writing ability:

Create a new formula at least once a month.

If you are at a loss for what to write, look in the MetaStock online Help and read about one of the indicators built into MetaStock.  Almost all include a text description of how the indicator is calculated.  Use that description to write a formula that performs the same calculation. 

Plot your indicator and the built-in indicator in the same chart.  I suggest making one a different color and then putting the both in the same window.  If you correctly created the formula, one will completely cover the other and you will only see one color.

I used this exercise when I started learning the formula language.  It is something you can do in your spare time.  You do not have trades waiting on this work so you should not feel pressured or stressed.  This is meant to encourage you to discover the formula language as learn more about the indicators.  If you get stuck, email what you have to the formula team at formulas@metastock.com and we will be happy to assist you.

To find out more about how the MetaStock team can assist you with formula writing visit our support section.

TechniTrader Weekly Stock Discussion: “Trading and Investing as a Process”

MetaStock® SPRS Series - Week 152 – January 3, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

All too often traders and investors get caught up in popular strategies such as “red light/green light,” “buy on the dip,” or “stop and reverse SAR.”  They start trading and investing as soon as they have learned the new strategy taught at a seminar, trade show, or webinar.  If they are lucky they may make modest profit during the first few trades, then suddenly they have a series of losses. They struggle and work harder, trying to force the strategy they learned to work. They become frustrated or angry at the market, market makers, Wall Street and anyone else they bump into.

Their losses go from a string of losses to chronic loss syndrome. This syndrome is a series of losses with an occasional profitable trade which continues to encourage them to keep trying. They go to more free weekend seminars, watch more free webinars, and wander around more trade show searching for answers. They are sure that it is some magical trick, or something they are missing that is causing the losses.

However the problem is much deeper than that, and it starts with the notion that a strategy is all that is needed to trade and invest successfully.  Strategies are taught first because they are all in public domain, meaning they are free for anyone to learn. Also they are an easy subject to present at a free seminar. They are short, to the point, and make it seem as if the retail vendor, broker, or speaker is has the answer to their trading and investing problems.

The real culprit is the lack of a trading and investing process. A trading and investing process is not difficult to learn and in fact, makes trading much easier and simpler than struggling to use several strategies and guessing all the time, or waiting for some news event to try and jump into a stock to scrape perhaps a dime of profit from all that work.

What is a trading and investing process?

It is a set of rules with parameters and a complete process that you follow every time you trade and invest. This begins with how you find stocks, analyze stocks, select the best stock to trade, risk analysis, point gain potential, and risk to reward ratio.  It includes using the proper order, the proper stop loss, the proper trailing profit stop, to exiting the trade with the most profit possible.  It is about having a trading style first with a complete process, and an understanding of the 6 market conditions.  Then it is applying the appropriate strategy for the particular market condition that is currently underway, and the strategy most suitable for the stock selected.

When traders learn a complete trading and investing process rather than random strategies, gimmicks, or relying on news, their consistent profitable trades rises significantly. They begin to enjoy trading and investing again, and they gain confidence in their ability to trade and invest in all market conditions.

A trading and investing process is not just watching the major indexes, but also determining market conditions.  The indexes only include a small number of the thousands of listed stocks.  What happens beyond the index component stocks is far more important because index stocks are bought for charters, mutual funds, and by smaller investors, whereas the underlying stocks that are best for short term retail trading tend to lead the big blue chip stocks.

Indexes are a part of the overall analysis but they do not provide a complete analysis of what is going on in the markets.  Using news, indexes, and guru opinions is what causes most of the losses for retail traders.  Using a trading and investing process eliminates the problems that result from insufficient trading preparation and inadequate analysis.

For more information on “How to Trade” go to http://goo.gl/AII8Kn

Trade wisely,

Martha Stokes CMT

Chartered Market Technician

Member of Market Technicians Association

Master Rated Technical Analyst for Decisions Unlimited, Inc.

Instructor and Developer of TechniTrader Stock Market Courses

For additional training visit http://technitrader.com

This Stock Discussion and Training Lesson is sponsored by TechniTrader.com

MetaStock® Partner

©2014 Decisions Unlimited, Inc.  All Rights Reserved.

TechniTrader is the Registered Trademark of Decisions Unlimited, Inc.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader and its instructors or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues.  At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.