IDENTIFYING an OPPURTUNITY

[TradingAdmin]

I will use a simple example to explain (1) how I identify an opportunity to enter the market, (2) formulate my trading plan and (3) some thoughts on strategy.

Identify Opportunity
I am a big fan of using 1-2-3's and stuff to identify potential opportunities in the markets..  You may go here - https://investdifferently.info/themarket.html - for a brief overview of my favorite "1-2-3" method. 

YOU..., on the other hand are completely different and you probably have your own way of identifying opportunities.  You may be looking at the RSI and say a MACD indicator to identify a likely buy / sell area.  Or you may use a very simple two moving averages strategy, if the short-term MA moves above the long-term MA you buy and if it drops below the long-term MA then you sell.  The method does not really matter, as long as you have SOME METHOD to identify when to buy and when to sell.  As long as I have a METHOD, I can formulate a trading idea.  Some will work and some not.  Some signals will be great and hand us a profit, and some will not, resulting in losses.  Note - SIGNALS:  the method is not at fault, the signal the method generates is - some are false signals, or lasts only for a very short time.

So this is my first step - to use my favorite method to identify an opportunity to enter.  For the rest of this example I will use MY TECHNIQUE - but note I am not trying to promote my technique, it is just my favorite way.   I tried many different methods and this one was the easiest for me to understand and quite frankly, I don't need anything more.  But note that it applies equally well to YOUR TECHNIQUE, whatever that technique might be - this is not what makes or breaks the trade, this is just used to IDENTIFY me an opportunity.

OK..., so my mentor said - "a chart is a chart is a chart"  You can look at anything that we plot over time, weather patterns, orders placed on weekends at MacDonalds, or prices for crude oil - it does not matter, one chart gives us the same picture as another chart.  The point is there is a "LAW of CHARTS" - a law that describes how charts works (Google it!) - and you can download that law - or send me a mail and I'll send you the law, its free.  (The law does not care about what kind of chart it is (bar or candlestick or line chart) or what that chart represents - it is not a law of markets - it is a law of charts)

I use that law, for it is a very simple law and I like the simplicity.

So here is a chart - of a crypo-currency, well not really a currency, a crypo coin, or a crypo token - just some arbitrary crypo thingy.  It is a line chart, that is all that is available.
 

And here I applied the law of charts over it:
 

I have a 1-2-3 and a breakout above the #2 point!  And that is an entry signal!!

This signal simply says - the market is most likely going up.
Will it continue to go up?  I don't know
For how long will it go up?  I don't know
Is this maybe a false signal?  I don't know

I don't know anything else.  All I know is there is a signal - by my chosen method - I don't know anything else about this signal, how strong it is, how long it will last, will it actually last; I know nothing more about it, only that it gave a signal that "maybe" it is now going up.  And if you used a short-term and long-term Moving Average, maybe your method also gave you a signal - it depends on the MA's you used. 

All we have here is a signal that says:  "maybe the market is going up"

[TradingAdmin]

Trading Plan

All I have is a signal.  But what I CAN DO is I can clearly identify an entry and an exit.  If that market turns around and goes down below my #3 point - then the moment that happens my entry pattern - my 1-2-3 is null and void.  It cancels.  It does not exist any more.

So I will enter NOW - buy this market!!

If the market trades below #3, I will EXIT the market.  That is as simple as it is, that is my TRADING PLAN!!

The ideal would have been to be able to enter here:


But this happened during the night, I was fast asleep.  What I have at the moment is less ideal, but I still have an entry point - little bit more risky, for I don't know how long this signal is going to last:


And then a more conservative entry would be to maybe wait and see if I can get something like this:


I don't know whether the market will do this and hand me such an opportunity - but if it does it probably means I have got a confirmation on my signal.  It is risky though for this market could run away and then I missed the boat. 

On the other hand, this market could collapse, then I'd be happy that I did not enter the market.

I can't make those choices for you, but for me, this is my plan:


 

[TradingAdmin]

Strategy:

I want to enter with THREE (3) contracts.  I'll use a CALL option for it limits my downside risk in case something catastrophic happens. 

(A more risk seeking guy may enter this market by selling three naked PUT options below the #3 point and then try to profit from the time decay.  So then even if the market does not  move higher - it can just stay level, he will still make a profit.  But I'm not going to take that chance - if I had a large account, or a bit more adventurous, I could have - but I will wait with those kind of strategies until I have got a more solid, established, trading account)

I then want to take profit on TWO (2) of my contracts the same distance away as my STOP:


The strategy is simple..  If I can take profit on 2 contracts, then for the first, I pocket the money - it is my reward for taking the risk.
For the second contract, it buys me my stop - so the profit on this contract pays me, in advance, for the stop on the remaining contract. 

My stop does not change, but the loss between my entry and my stop, has been refunded.  So I will not take a loss on this trade. 

And now I just wait - I'm letting it run - let's see how high it can go - if it is a winner I am going to make some serious money here.  If it turns out to be a loser, then I had a FREE RIDE (for my stop has been pre-paid).

Of course, if it just turns around and never hits my profit target, then I have a loss on three contracts.  Write it off as experience, we'll try again next time...

[TradingAdmin]

STRATEGY 2:

There are many strategies of course - you don't have to use options; you can trade it with straight futures as well.

But let's say this is something like Crude Oil.  And because of our east-bloc friend and his silly war, the implied volatility on Crude Oil, and therefore options prices, are exorbitantly expensive.  In that case buying three options, or straight futures, might be too much for my account.  And shorting options will require like $36,000 !!??? 

Well, now I just use a less risky strategy!!  I use a BULL CALL SPREAD.  So I buy an option ATM, and then I sell an option one strike higher OTM.   


Now my risk is only $250 per contract.  Depending on my account, maybe I'll now enter 5 contracts - for a margin requirement of $1,250

And if prices moves only slightly up - lets say in the next 2/3 days:


I am sitting on a small $50 profit.  And so now I sell four (4) of my contracts:


And this is how my remaining position looks like:
I am sitting on $250 profit overall
I can lose about $30 on this trade - but it is a long way off
I can afford to let my "potential" winner run - I can make $420 here, and only risk $30