In our last blog we looked at "How to Profit from Day Trade in Oversold Bearish Market". And explained - with real trade and brokerage result - how Superior Profit traders could adapt trading style to switch to Day Trade and earn income even in that confusing situation.
Why confusing? You would remember that in Bearish market a trader is not bold (or foolish) enough to take Long position. And as it becomes Oversold, she is also not confident to take Short position. She is utterly confused into inaction. And that inaction is the right thing to do. Except ...
Except if we have a robust signal that tells us - with sufficient probibility (not 100% but sufficient to attempt a Low Risk High Reward trade) - to take a trade against prevailing trend. A Long trade in Oversold Bearish Market.
In CUE charts such a signal is the Headwind Signal. And some of our traders used that to gain more than 140% profit from a single instrument within one day using Options on Bank Nifty Index; which is the Banking index in National Stock Exchange of India (Bank Nifty Futures symbols for Thomson Reuters is NBNc1).
Let us look at Bank Nifty Futures (NBNc1) daily chart through Superior Profit's powerful Hop On template.
We will see how our traders took very profitable Short trade; booked profit and reversed position to take a Long trade and again booked large profit. Confidently and easily.
We can see from the chart above that on 4th Jan, 2016 Bank Nifty bounced down from the Memory line (the automatically calculated and drawn smart trend lines in CUE charts) and signalled a Go With Flow Trend Following Short trade - we can see that easily from the magenta color Candle on this day (marked as point A in the chart). This was a clear Shorting point.
Once she Shorted Bank Nifty on 4th Jan, profit booking point would be at Lower Boundary - which was hit on 7th January (marked as point B in the chart). Using At The Money Monthly Option that trade easily yielded more than 100% profit. And she exited the trade. Without being greedy more and more. This is Superior Profit way of taking money off the table once it is there.
Now, Bank Nifty became Bearish. And Oversold. That it was Oversold could be seen from price hitting Lower Boundary and also from Stretch signal (not shown on this chart). And as we mentioned, this is not a time to take Long or Short trade ... unless ...
Unless there is a Headwind signal. Which came on 21st Jan (marked as point C in the chart). The green diamond Headwind signal indicated that downward Acceleration, Speed, Momentum were slowing and that the instrument had a chance of going up.
Stop Loss would be just below the Candle with the Headwind signal. A pretty narrow Stop Loss as you can see.
Also, on that Headwind signal day, Activty was Very High (marked as point D in the chart) indicating buyers were aggressively buying.
With all these signals aligned, our traders took a Bank Nifty Call position on the Headwind day (using Jan 15000 Call).
Next day (the last bar in the chart) Bank Nifty Opened with Gap Up. And the position had more than 40% profit. The Option was already In The Money. Our traders - well, smart traders as they happen to be (being in Superior Profit Community - we don't expect much else) - closed the entire position at 40%.
And they watched Bank Nifty Fine Tune Real Time Chart to see if they could re-enter a position again. This Fine Tune chart is shown below.
As again can be seen from the 5 Minute Real Time chart above, on Friday, 22nd Jan, marked Opened with Gap Up. That was the point our traders booked 40% proift on Bank Nifty 15000 Call.
And they watched that price did not go below Early Range Low (which would mean a potential Gap Short trade). Instead, it moved inside Early Range for a while and then went up. At this point (marked as piont A in above chart) our traders entered Bank Nifty Call Option again - however, they used higher strike of 16000 (January expiry). this Option costed about 20 INR each.
Intraday Stop Loss would be on the lower end of Early Range. Which was never touched.
As per Superior Profit guideline, our traders also put the profit taking order - and looking at the momentum of Bank Nifty (and other indexes like Nifty and Sensex - which are not shown here), they put the profit target at 100% and placed the order to close partial position (usually half position) at that profit target.
During the day Bank Nifty went up and at the peak (marked as point B in chart) the same Option sold at above 50 INR. Thus hitting our target price and booking 100% proift on partial position. Rest of the position is still being held. And it is a virtually guaranteed profitable trade from here onwards.
Thus went the result: within a span of one day, our traders could achieve profit 140% profit and actually book proift in their account using the Headwind signal and then Fine Tune Real Time chart.
Did our traders look at anything else? Yes. They also had looked at the sector wise performance of National Stock Exchange 's main Index - Nifty index - before deciding to enter/re-enter the Bank Nifty Call Option. Below is a snapshot of that.
[Note: .NSEI is the Thomson Reuters symbol of Nifty Index. ]
As you can see, Financials was the best performing sector of all.
Similar strength of Financials was displayed both on Headwind day (Thursday) and also on Friday. This gave our traders more confidence to take and re-take the Bank Nifty Call Option trades.
This real life example illustrates that once a trader learns how to use the Superior Profit signals, they can take a profitable Low Risk High Reward trade in almost any market condition. In other words, Superior Profit provides trade setup for all market conditions based on unambiguous color coded signals and and easy to follow rule book.
The Signals and Rule Book are available in the complimentary bookset in the Education Center.
One more note. When watching that Financials was the stronges sector on Thursday, our traders also drilled down (they are a curious lot !) to see which stock inside Financials was worth taking a position in - if any.
They had found Bank of India to be the most appealing stock to take a Long position and had in fact entered that trade as well. As is common for a true Superior Profit trader, once a clear signal comes, she does not hesitate to take a position.
Result? On Friday Bank of India went up by 5.7%. Pretty good profit in a day for a stock investment !
As you may see, be it using Stock or Futures of Options, once we identify the direction of an instrument. We are able to profit from it. In a consistent manner.
Does your investing system allows you to do the same?
For Swing Traders Oversold Bearish market provides its own unique set of challenges.
The trader is simply confused into inaction. This is why:
The clear Bearishness in the market tells the trader that she should not take a Long position. At same time, the Oversold condition tells the trader that she should not take a Short position either. What should she do?
It is best to stay away from Swing trade at such times UNLESS the trading system provides robust signal to take a reversal trade. CUE charts Headwind signal is such a robust signal that we use to take reversal trade in Oversold Bearish Market. More on this on the next blog.
For now, let us see how how to make profit in such market condition even if the Headwind signal is not there.
This may be done by switching the trading style from Swing Trade to Day Trade.
Within a day market invariablly moves up and down. And with proper signal we can often take a Long or Short trade (or on some days, both Long and Short trades) and come out as winner. Let us illustrate this with real life trade examples.
Attached is the daily chart of QQQ NASDAQ ETF (Thomson Reuters symbol QQQ.O) using CUE Hop On template.
After moving up-down for several days in December 2015 and then early Jan 2016, on 7th January QQQ decisively came into downtrend (point 1 in Hop On chart above). Falling below all the Direction lines. On that day it had gapped down at Open and fell further.
In subsequent days it continued to fall. and the Bearishness increased. All along price stayed at or below the Lower Boundary line - showing that QQQ was oversold.
This is confusing times for Swing traders.
But worry not. We could still take profitable day trades. For the actual Day Trades we look at 19th Jan (point 2 in the chart above) and 20th Jan (point 3 in chart above).
On 19th Jan QQQ Opened with Gap Up and fell down. And on 20th QQQ Opened with Gap Down and went down further in the beginning - later on recovering somewhat. Our CUE charts allowed us to exploit both days' market movement to take profitable Day Trades.
First, let us look at 19th Jan QQQ chart using Fine Tune Real Time 5 Minute chart as shown below.
Soon after Market Open with Gap Up as marked in the chart above, price fell below Early Range Low with a magenta color Candle indicating entry point for Gap Short Day Trade (marked as point A in chart). At that time our traders took Short trade on QQQ using Put option (QQQ Put 100 expiring on 22nd Jan).
[To learn more about Gap Day Trade, you may read the complimentary books available at our Education Center.]
Stop Loss point would be above the Early Range High (which was Day's High in this case). That Stop was never triggered.
Instead, QQQ fell. At the right side of the chart (marked as point B) Activity picked up to Extreme level (marked as point C). Sudden Extremely level of Activity "may" indicate price reversal. We had good profit. And we wanted to protect that profit.
The trade was closed with 45% profit (shown on the brokerage chart as point D). This was indeed a very profitable Gap Short Day Trade.
Let us now look at 20th Jan Fine tune chart on the same symbol QQQ.
As can be seen from the chart above, soon after Opening with Gap Down, QQQ fell further below Early Low price level. Therefore, we did not have any set up to take a Gap Long Day Trade.
We waited patiently. At the point marked as A in the chart, QQQ displayed a Bullish Stretch Release signal while at same time Activity was Bullish and much higher than the several previous Bearish bars (shown as point B in chart) and also, Relative Performance (white dashed line super imposed on the Candle chart) tilted up - showing that QQQ was starting to be stronger than broad market. Other market ETFs were also starting to strengthen (those charts are not shown here).
Our traders took a Stretch Release Long Day Trade using QQQ 98 Call (expiring on 22nd Jan). Stop would be at the Low of the Day which was never triggered.
[To learn more about Stretch Release signal, you may read the complimentary books available at our Education Center.]
Soon after entry, at point C, the trade had 20% proift. as shown on the brokerage chart at point D.
The Market was Bearish and there was a possibility of price reversal from Early Low price level. Instead of risking our 20% profit, our traders clsoed the trade at 20% profit. Again, a very good profit for a Day Trade.
These are two examples that illustrate that with the right Trading System (we use CUE trading system) one can take a Low Risk High Probability trade in almost any market conditions. And come out winner. Not on every trade. But enough times to have a net proiftable investment result.
And this also shows how a Superior Profit trader using CUE charts may switch from Swing Trading to Day Trading when market is Bearish and Oversold and continue to earn income from the Market.
Does your trading system and rules allow you to do the same so easily?
Market is volatile. Oil has plunged to multi multi year low.
Amid all calls of Oil hitting 20 $, it is actually stronger y'day. Now, if Oil goes up, that means inflation is higher. All across the world. And then interest rate will go up faster. If so, then market will collapse even more.
If that is a possible scenario, will Oil Long and Market Short be a good trade?
I am not suggesting to trade this. Just musing ....
Now, why will Oil may go up? There may be few reasons. One is that it is at historic low and is showing (at least temporary) support for now. And some world market big traders are making transactions that point to potential strenght in upcomng months.
Now, if Oil actually continues falling, what will happen? Probably it will lead to sevearl bankrupcies of heavily debted companies. Which are plentiful. If that happens, In turn, that will lead to another crisis of sort. How much it will impact broad market is an unknown. However, it will probably lead to deflation. And US Central bank has almost zero interest rate. It cannot cut rate any more to fight it out !
In either case of Oil scenario, it does not look good for broad market. Is it becoming like a double edged sword?
However, that does not mean market will necessarily collapse. As there are many other factors influencing broad market than only Oil ! Too many to comprehend and assimilate.
Yet, once we know the potential playing out of Oil market AND keep an eye on CUE charts (or whatever system you use) on Oil as well as broad market, there may be some very interesting investments and trade ideas that could unfold. Rather, already unfolding?
It is indeed interesting time.
Invest safely. Keeping risk management at the forefront. More so now than ever in this volatile market.
Netflix (NFLX.O) announced it expansion in 190 counties. That gives access to potentially large number of additional clients.
Immediately upon announcement NFLX shoot up - as seen in the very long bullish Candle in Daily chart below (the 3rd Candle from left in Daily chart).
Note that Netflix has earnings later in Jan 2016.
Does your system show any potential trade in Netflix where risk is limited and higher relative to risk? Which direction - Long or Short? And using which instrument - Stock or Option?
Well, hoestly, it is not the story of the Forty Thieves. But rather of Superior Profit invetors. Alibaba is still there - and is the main character you might say. And there is certainly a lucrative profit potential.
Here is our investment in Alibaba - taken on 31st Dec 2015 as the last year was passing by.
Alibaba (Thomson Reuters symbol BABA.K) Business Summary:
Alibaba Group Holding Limited is a holding company. The Company is principally engaged in online and mobile commerce through products, services and technology. The Company provides retail and wholesale marketplaces available through both personal computer and mobile interfaces in the PRC and internationally. Retail marketplaces and services operated by the Company include the China online shopping destination (Taobao Marketplace); the China brands and retail platform (Tmall); the China group buying site that offers products by aggregating demand from consumers through limited time discounted sales (Juhuasuan), and the global consumer marketplace targeting consumers around the world (AliExpress). Wholesale marketplaces operated by the Company include the online China wholesale marketplace (1688.com) and the online business-to-business marketplace that focuses on global trade among businesses from around the world (Alibaba.com).
Superior Profit Analysis:
Note: The stock and option analysis diagrams below were prepared after market close of 31st Dec 2015 whereas the position was taken during the trading hours of 31st Dec.
I used CUE Background template to look at Alibaba’s Weekly chart first. That is, starting my analysis by taking a step back to see the stock’s entire price movement since inception.
After a well publicized IPO in September 2014 (A), Alibaba stock went to 120 in Nov (B) same year. And then went for a sharp downfall. By September 2015, within one year of IPO, Alibaba had reached a Low of 57.2 (C). That was a drop of more than 52% from Alibaba’s peak price. This shows that even a company with strong (apparent) business model does not guarantee that it will be a good Buy and Hold candidate.
Then in late Sep/early Oct of 2015, Alibaba displayed a Bullish Headwind in Weekly chart (C ) and since then it has been going up. Taking a Long position using this Headwind signal would be extremely profitable at that time.
At the right side of the chart (D), BABA has entered a sideways Triangle formation in Weekly. For more than two months it has failed to make new High.
Now that BABA is clearly not going up, I decided to zoom into Daily chart using Hop On template to see what we I could infer from there.
Hop On chart further reinforced the sideways movement of BABA. It moved up-down within a narrowing Triangular formation bouncing from at E, F, G, H, I and J; every time making a Lower High and then a Higher Low.
Looking at Weekly Backdrop and Daily Hop On charts as explained above I concluded that BABA was moving sideways. However, at the right edge, the Triangle has narrowed significantly and a breakout is highly likely in either direction. Therefore, I decided not to go for an investment based on continued sideways movement (which could be taken with Iron Condor or other Option set ups or by Shorting the stock at peaks and Buying the troughs).
Instead, I wanted to look deeper (or broader !) in the Index to which Alibaba belonged. In this case, it was NYSE Acra China Index. For this index, I was interested only in the price bar movements. This is seen below through Hop On template.
I noticed from this chart that, interestingly but not surprisingly, NYSE Acra China Index made a top at same time that Alibaba made a top in Nov 2015 (M). And since then moving sideways with a very slightly Bearish bias.
Now, armed with the sideways movement in BABA, a narrowing Triangle in BABA that might lead to a breakout in either direction and the fact that the broader China Index was also struggling to go up, I decided to try to find out a limited risk position with Bearish bias. A Bear Put Vertical would allow such a trade setup. I wanted to buy an In The Money Put leg and sell and Out of The Money Put leg provided the leg I was selling was more expensive than the one I was buying (this “expensiveness” being visible in Implied Volatility). I found from the Option Chain (not shown here) that BABA January (15th) 82/78 Put Vertical gave me such a trade set up. The Put 82 (In The Money) leg had Implied Volatility of 29.6% whereas the Put 80 (Out of The Money) leg had Implied Volatility of 32.6%. These two legs are marked as levels K and L in the BABA Hop On chart shown earlier.
Next step for me was to find out the potential Reward Risk Ratio and theoretical probability of win. I found that out from the Option Analysis diagram below.
As you may see, the Vertical had about 30% theoretical chance of closing below 78 at expiry (N) and at that point the position would have about 93% profit on initial debit amount.
Also, the Max Profit Potential was 269 (per contract) and max Loss Potential was 131 per (per contract) - giving a Max Reward Risk Ratio of about 2.
Now, initially, the 30% probability of winning might look less of a probability to risk investor’s money. However, that is based on simple statistical volatility and does not take into account the directional bias that I had based on the CUE charts analysis that I did above. So, when I considered the directional bias I had, I was fine with this level of theoretical probability and Reward Risk Ratio.
Why did I go for Put Vertical instead of going for simple Put? Several reasons for that, One is that I wanted to reduce the purchase price of the Put. I was anyway going to close my position and book profit on the Put by the time BABA went to 78. So I decided to Short that leg - it would be still Out of The Money when I close my position. And my Long leg (82 Put) would be very much In The Money. Giving me a benefit of good reward while reducing my cost base.
There is another reason for which I choose the Vertical - that will be clear in the Next Step explained below.
Based on the above analysis, I have taken a Bearish position in BABA with the Jan 82/78 Put Vertical on 31st Dec 2015.
BABA already went down on entry day and the position is in some profit.
I have placed a Good Till Cancelled profit booking order on the vertical. So it will close atomically when the profit target is reached. I do not need to do anything else.
Now, what is to be done if BABA goes up instead of going down? That is indeed possible - BABA is inside a Triangle shape in Daily chart at present …. This is where the Vertical may come of use (instead of using simple Put). If BABA were to indeed go up, I would wait for it to start to go down again (assuming some time it starts to go down after going up). At that (peak) point, the Short leg will be losing most if not all of its value. And I would prefer to buy it back. Leaving me with only the Long Put leg. And any subsequent down move would result in considerable profit on the Long Put (compared to what would have been achieved with the Put Vertical). This is another reason I choose the Vertical instead of simple Put.
Note that if BABA was in clear downtrend giving me a Go With Flow Short signal, I might have chosen simple Put instead of choosing Vertical. This way, using Options gives us many creative ways of structuring our investment - using the structure that matches our view on the stock’s next probable move most closely.
We - as is customary in Superior Profit Way - will let this investment play out now. Planning the trade and trading the plan - as we always say !
Citizen of Main Street.