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Giving You The Strategy and Tactics You Need To Respond To Any Market Condition

The Importance of Using Stop Losses

2/22/2018

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Step-by-Step guide to Setting Up Options Trades

2/15/2018

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Wiggle Room

2/13/2018

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​Good traders have stop-out points for trades, the point where you’re “wrong.” The aim is to experience a paper-cut. i.e., a minor loss, as opposed to getting your arm chopped off having a trading catastrophe.
A good methodology suggests a clear-cut point where your trade thesis has broken down, you admit you’re wrong and it’s time to move on. Having said that, the market has a certain amount of randomness and “natural vibration.” Some of us at PTL give our trades a little extra “wiggle-room” to account for this. Over time we’ve found this keeps us in trades where we would have normally gotten stopped out, thereby avoiding a loss in exchange for a win where we typically get 2:1 or better on a trade.
Of course, trading records need to prove this is worthwhile so that the periodic extra wins pay for the tradeoff in building in extra room in the trade, and then some. Naturally, there’s no “free lunch.” The tradeoff in doing this takes one of two forms:
  1. You assume extra trade risk – instead of having $0.50 of risk on a 500-share trade, for a total risk (“R”) of $250, you allow for $0.60 of risk for the same share quantity, i.e., R = $300. So here you experience a bigger loss if the trade fails.
  2. You keep your R constant, and you “pay” for the greater trade cushion by adjusting the position size. In the above scenario, you reduce the shares traded from 500 to 400, so you still have about $250 of trade risk. But since you trade 20% fewer shares, your potential profit for hitting a given price target is reduced by that percentage. So here you pay with a lower trade-profit
AT PTL we’re fans of method-2. Having a relatively constant R between trades allows us to intelligently plan our trading over time. Each of us has a trading batting average, i.e., the percentage of the time we’re right, and an average reward to risk ratio for an average trade. If you take those two elements and combine them with “R” and a financial trading objective over some time-period, it’s a simple process to plan how many trades you need to place in a week or a month to achieve that $-goal. Within this scheme, we apply this methodology to plan activity for different trade styles, i.e., scalps, intraday and swing trades.
To arrive at the wiggle-room amount we start with 10% of the standard daily ATR (dATR). Once we have our basic stop-out point based on the core principle/trading strategies we use, we then add on 10% of the dATR or an adjusted fraction of that. Our rule-of-thumb is that the additional cushion should be no greater than 20-25% of the initial stop-out amount. So if you’ve got a “basic stop” of $0.50 and 10% of the dATR is $0.20, we add on $0.10-0.12 to the trade beyond our core stop, since those amounts are 20-25% of $0.50.
We’ve found this methodology works very well for us and enhances our P&L. To evaluate its potential for what you do, over the course of a month or two, be mindful of the instances when you’re stopped out and determine:
  • If the trade truly crashed and burned, or
  • whether you got stopped out, price didn’t move beyond the stop-out point, and then the trade (almost) immediately turned out around and did exactly what it was supposed to do. If your find that this happens more than infrequently, look at your stop-outs and assess the ratio of crash-&-burns vs the quick turnaround scenario just described. At that point you’ll be able to run the numbers and get an idea of what we describe here might aid be worth introducing to your process.
This works here for us because we have clearly defined price zones where our trade is working, and once it goes beyond that zone we’re stopped out. At that stop-out point we build in the little extra room that we’ve found over time definitely improves our P&L versus the “basic” stop. Your mileage may vary.
Give it some thought!
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Routine vs Improv

2/8/2018

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Some beginning and intermediate traders have learned chart patterns, gained an understanding of trend, and can create trade setups based on a “reasonable” methodology. But success eludes them because they can’t “put it all together.” A core market principle, a strategy and tactics is only step one. Next is process and execution. You can have all the theory down, but you then need to put it into practice.

Key to this is the emotional discipline to employ appropriate risk management, admit you’re wrong in a trade, and not letting hope, fear and greed permeate what you’re doing.

Successful traders who look back on their progress know that mastering the charting Xs and Os was only one piece of the puzzle. The other was psychology, discipline and a commitment to always do the right thing. The fascinating thing is that when one commits to both mastering the Xs and Os and becoming self-aware about trading psychology, one reinforces the other.

Efficiently learning a core principle and then applying it to a sound strategy and simple tactics gives you the confidence to obey rules and do the right thing all the time because what you’re doing is structured, rules-based, simple and intuitive. In comedy terms, you’re trading from a routine, not doing improv.

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The Dangers of Leveraged ETF's

2/6/2018

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In the past decade ETF's have become popular investment vehicles for traders and investors alike. Leveraged ETFs are a type of ETF that track a benchmark or underlying index and use leverage to maximize the performance of the underlying benchmark (typically an index or commodity). They are offered in the form of 2x (ultra) or 3x (pro) leverage and can be either bullish meaning long the underlying asset or inverse, meaning short the underlying asset. For example a popular 3x leveraged crude oil ETF is UWTI. If the price of crude oil goes up 2% the price of UWTI should go up 6%. Some other popular leveraged ETF's include:
  • SSO - 2x Ultra S&P500
  • AGQ - 2x Ultra Silver
  • NUGT - 3x Daily Gold Miners Bull Shares
  • DWTI -  3x Inverse Crude Oil
  • YANG - 3x Daily China Bear Shares
These instruments have quickly rose to popularity and have seen huge inflows amid the recent volatility in commodities. Despite they're growing popularity, few retail investors and traders truly understand the dangers associated with these complex products. This lack of understanding is concerning considering their growing popularity. CEO of BlackRock, Larry Fink has even publicly commented on the systemic risk they pose to our financial system by saying "leveraged exchange-traded funds contain structural problems that could "blow up" the whole industry one day." This is an alarming statement seeing as Fink's company BlackRock is the largest ETF provider!

Leveraged ETFs allure retail traders with huge daily price swings. Especially inexperienced traders who are looking for investments with big returns to help grow their portfolios. In addition to offering big returns they also offer traders leverage without needing a margin account. It's normal to see these ETF's move 5% or more in a day. Wild daily price swings like these have traders licking their chops and many impulsively jump right into them without fully understanding how they work.

One of the biggest mistakes people make with leveraged ETFs is buying and holding them as long-term investments rather than using them as short term trading vehicles. The intended purpose of these products is to take advantage of daily price movements. Therefore, the appropriate way to use leveraged ETFs is to day trade them. The reason they pose a greater risk when holding for a longer time frame is because every night these funds go through rebalancing where the fund manager has to re-allocate the funds assets to accurately track the underlying index or commodity.

Rebalancing every night causes price decay known as beta slippage. The longer the time they are held for the greater the potential for slippage. To learn more about leveraged ETFs and the math behind slippage check out this video. 


Another quality of leveraged ETFs that make them potentially dangerous is that they are often difficult to analyze. Many retail traders don't realize that typical technical analysis and charting doesn't work well on leveraged ETF charts due to the daily rebalancing. Instead you must analyze the chart of the underlying asset.
Leveraged ETFs can be useful for day traders looking to leverage their position without using margin however things like rebalancing are things people need to consider before using these products. In addition, management fees and slippage are two main characteristics of leveraged ETFs that should make them unattractive to long-term investors. 

​If you do decide to trade these products, it's imperative that you have a thorough understanding of some of the risks that are associated before using them.



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110 Wall Street 
New York, NY 10005

"Mitch was very thorough with everything and helped me for a strategy for my budget" -- Jack Z


"If it wasn't for Mitch, I wouldn't be trading today. I'm applying everything he taught me and I'm making money" -- Bob 

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