Trading Tips

Shorting Stocks:
12/3/00......We're in a bear market. The buy and hold routine does not work in a bear market. We have already seen many of the former high fliers (especially Internet stocks and Telecom stocks) collapse. There will definitely be rebounds in this bear market, but you will find that you can make the most money by shorting stocks. You gain while the stocks falls. If you are not familiar with shorting stocks, you had better start reading. 

Using Limit Orders to Buy Options: 
More often than not, putting an order to buy an option at the market will result in a bad price. The tell-tell sign that you're going to get a bad fill is when the spread between the bid and ask is more than 1/8 or 1/4. For example, if you wanted to buy an OEX call option, and the bid was $6 and the ask was $6 1/2, you would see right away that you might get a bad fill price. Even in fast markets, it's sometimes beneficial to place a limit order between those two prices. Putting an order in at $6 1/8 would be a good idea, while putting one in at $6 1/4 might be better if the market was moving fast. Just remember that more often than not, you will get a bad fill on an option contract.

Money Management:
One of the hardest things when dealing with stocks and options is figuring out how much to invest. In stocks, it's best to trade only a few  (unless you are investing over a million dollars). In options, it's much more difficult. If you invest all your money (let's say $10,000) in one option, you risk losing it all. Thus, you are out of the ballgame for a while. 

Real-time:
Make sure to get real-time STREAMING quotes if you trade often. The quotes should automatically update themselves. You should also be able to see bar charts that show at least five minute intraday price action. Example

Use major indexes:
Make sure that you know what the overall market is doing. Check out the SPX and the DOW industrials charts for a good idea of where the market is headed. If we are looking for the market to rise that day, and there is a sudden down turn that we were not expecting, we will reevaluate the situation. Maybe bad news came out. Remember that most stocks are effected by the general mood of the market.

Be a chartist:
Make sure to at least familiarize yourself with the Charting Basics page. That way you can identify key turning points in the market and the underlying stock you want to buy the option on. Although most people do not have the time to day trade, a quick glance can tell you if it's a good time to buy or not. Also, if you notice that the stock you want to go long on is falling, at least wait for it to start climbing back up before buying it. By the way, there is much more to charting than what is listed. 

Stops:
Using trailing stops has its good and bad points. They're great for keeping losses to a minimum, or to lock in profits. However, there are a few drawbacks that you must be aware of. First of all, market are known to gap up or down, and a stop loss can be triggered at the worst price. Second, market specialists know where the stops are located, and will occasionally take them out on purpose to make extra gains for themselves. It's kind of like showing your poker hand when you place an order. However, this is usually only done in stocks with lower trading volume. When possible, we like to use mental stops. Mental stops prevent some of the problems, but you must be actively trading in order for this to work. If you're on vacation, you might want to use real stops.

Using Stops to Exit a Trade: When investing with either stocks, options, futures or spiders, many traders prefer to use the trailing stop method to exit a trade. Basically, after making a trade, you can immediately set a sell stop order. As the trade moves up (or down if short), you increase/decrease the stop as you go. Note: It's better to use mental stops since market makers can see your stops, and take them out. This is very easy to do with most brokers; especially online brokers (Note that some brokers will not let you use stops with index options). Many traders find that in the heat of battle, they do not exit a trade in time, or they just wait it out until their profit turns into a loss. If that has happened to you, then by all means use trailing stops. There is no exact percentage to use with trailing stops. It is really a function of how much you have gained, or how much you are willing to lose. We can say this: If a stock is above a 10% gain, it is good to tighten stops to within a few percent -- especially if the stock's goal is close. With options, any gain over 50% should be locked in for profit. Don't get greedy. If the option goes above 100% profit, sell half, and ride out the rest. With index futures, it's not so simple. You see, futures are so easy to trade because the difference between the bid and ask is almost negligible. If you have time to follow it, you could use a 5 point trailing stop to exit. If the goal is still far away, you might reenter the future contract after it stops falling (This is tough to know, but it can be done...wait for the book). For everyone else that can not be in front of a computer all the time, you can use a trailing stop of 10 points after the future contract has moved 30 or more points. When the contract is near its goal, you can adjust that down to 5 points. A measly 5 points is $250 for an e-mini contract, $1250 for a regular S&P future. Please note that trading e-mini's is different from other types of trading. There is no such thing as stop or market orders using this system. To enter or exit a trade, you must use limit orders and adjust them manually. Some brokers will let you use 'stops', but they must manually enter limits.

Make sure to check back for more tips.

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