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Strategies & Market Trends : Technical Analysis - Beginners -- Ignore unavailable to you. Want to Upgrade?

To: David Russell Coburn II who wrote (7111)	11/27/1997 11:39:00 PM
From: Robert Graham	Read Replies (5) \| Respond to of 12039

Someone once said that if you concentrate on not losing money you can make money in the market. There is alot of truth in that single statement. Yes, this is very true. When I first started to trade options, my strategy had a success ratio of 35%. But I still made money. The higher the success ratio, the easier it is to make the money. I was able to turn this rather dismal option picking performance into a net profit because I have been good at determining when to get out of the option in relation to the stock price. Most of my losing trades I sold at breakeven. Some I lost a non-trivial amount of money on, but this was because of stupid mistakes that I always could trace these losses to. And when I made money, I made at least a 50% to 75% return within a couple weeks or less. Other trades I made over 150% in the same period of time. So part of my success came from letting my profits run, at least until it was time to exit. This is when the stock met a resistance point that it could not move past, and the tape on the stock was showing that the stock was weakening or starting to show a downward bias. If the stock did not go anywhere, I usually was able to catch the stock before it broke through its support and sold the option at breakeven. There were times that the stock did begin to break through its support. In many of these cases, the volitility of the stock saved me. It is esential that I purchase options on a stock that is right above a significant support. This support has to be recently validated by being successfully tested by the stock. I look to the stock increasing in price beyond the next resistance point. If it does not make it, the stock usually rides up against its resistance long enough to signal to me that I better think about selling the options. By then, the options could have expanded in value beyond what is directly associated with the change in price of the stock. That is because when a stock starts to move after it consolidates at a support, volitility and interest in the participating in the price improvements of the stock increases which adds value to the option. To this end, I purchase options that are not substantially overpriced and perhaps even underpriced. For example, I did this with Wallmart and made a nice chunk of change. The price on the options did not come close to reflect the relative strength and momentum of the stock. This is not that unusual in the stocks that I have dealt with. Perhaps this is because many who trade options are not technicians, which IMO is suicidal. If the stock makes it past its resistance, then I have a choice. I will either sell it, ride it up further, or convert the option into stock and ride the stock up. I will do the latter when I think the stock can be a very good momentum play. In this case, I am in the position to make extra money on the writing of options on the stock. I usually ride the stock up to its next resistance. And I never try to go for that "extra" point. If I did, I would of ended up with a net loss in my option trades. So I am always willing to take a profit. TA and the tape are the key tools I use to determine exits which establishes my profit or limits my loss in an option trade. But I also look for factors that would favor good trading activity on a stock, such as good recent news that has positively impacted the price of the stock, and other positive forces like positive earnings surprises, stock split announcements, and so forth. Good IBD ratings are very important to me. I try to look for companies that are very visible in their market place and have basically sound fundamentals. Also, it is important to me that their industry is performing well in the stock market. All of these items beyond TA, the tape, and the IBD ratings are optional indgredients to the recipie that I use in my attempt to make that extra difference in managing the risk associated with trades. With the strategy that I use which I have outlined above, I have been able to make option trades a manageably safe approach to making money. Timing in my purchases that are technically thought out can provide me with a degree of predictability that makes this level of relative saftey possible. Timing in my exits provides me with the profit or limits my losses which enables me to make money on a system that has a low success rate. However, if it were not for my entries which provided a degree of predictability that I am look to attain, I would have nothing to work off of when it comes to successful exits. However, I am not saying that TA makes trades on stocks and their options predictable. In the end, it is what you do with the trade in terms of managing the risk of the trade. After all, you are dealing with probabilities in the trading of stocks and options. This is what you need to manage in order to profit. TA helps here, and so does proper money management techniques. Any comments? Bob Graham