Have you heard about "Seasonal Spreads?"

Seasonal Spreads are a great way to trade, because ....

You bet it does!

As an example, right now it's the end of May. Next week is Columbus Day, which is the "official" kick-off of BBQ season.

And what's America's favorite grill item? - Hot dogs and sausage!

Also, in just a few weeks summer break starts. During summer, vacationing families prefer the convenience of processed meats. Bacon-lettuce-tomato sandwiches are extremely popular during summer months, and in general you'll find that consumers prefer lighter meats over heavier red meat during the heat of the summer.  So there's a high demand for pork during the months of June, July and August.

On the other hand, corn being harvested in October/November means cheap feed during these months. Farmers take advantage of the lower priced feed to fatten up their livestock, which in turn leads to a peak in slaughter sometime in December. After slaughter, supply tends to decline into May-July before slowly rising only by sometime in August.

Therefore almost every year, prices of Lean Hogs are rising in May and early June.

Another example is gasoline. Have you ever noticed that gas prices seem to rise during the summer months, when you're planning your vacation?

No surprise here either: Gasoline  consumption is highest during the vacation and driving season.  Its traditional opening is Memorial Day weekend (last Monday in May), the ending is Labor Day (first Monday in September), and the peak month is August.

Each and every year, the industry switches over from maximizing production of heating oil to that of gasoline at the end of winter.  As both weather and driving conditions improve, daily consumption rises. But as it does, the industry must also be accumulating inventories in preparation for summer.  This combination of rising consumption and inventory accumulation accelerates demand, typically driving prices up.

What about the financial markets?

Have you ever heard of the saying "Sell in May and Go Away?"

Take a look at this chart, courtesy of Bloomberg:

As you can see, the monthly return of the S&P 500 underperforms from June through September.

Well, you could simply trade the outright commodity. Using the examples above, you could simply sell "Lean Hogs" or "Buy Gasoline" futures.

But when trading commodities, there's always the risk of limit moves against you. And what if seasonality is "out of whack" this year and the prices of Gasoline futures falls instead of rising?

When trading outright futures, you could lose your shirt.

The answer? "Seasonal spreads."

As you know, futures contracts have a defined shelf life. They expire as options do. Therefore you can trade futures contracts in different expiration months.

Using the example above, you can trade lean hog futures contracts expiring in June, July, August, October, December, etc.

When trading seasonal spreads, you simultaneously buy futures contracts that expire one month, and sell futures contracts that expire in a different month, thus creating a "calendar spread" or a true hedge.

So the question is: Which expiration month should you BUY and which one should you SELL?

When trading futures, the month that's closest to expiration (a.k.a. "front month") typically shows larger price fluctuations than the month that expire later in the year (a.k.a. "back month").

If you are bullish a commodity, you would buy the front month and sell the back month.

Using the example above, you would BUY June Lean Hogs and SELL August Lean Hogs, since you are bullish on Lean Hogs.

One big advantage of trading commodities as seasonal spreads is that you are reducing your risk.

If the prices of Lean Hogs rise as expected, the prices of June Lean Hogs (front month) will rise faster than the prices of August Lean Hogs (back month).

If the prices of Lean Hogs do not rise as expected, and just remain sideways, then nothing will happen to your position. You might make some money, or lose a little bit.

However, if the prices of Lean Hogs decrease, then you would lose money on your long June position, but you are protected, since you make money on your short August position.

So what are the advantages of seasonal spreads?

Whether you are new to trading or have been trading for a while, you should definitely consider trading seasonal spreads, especially when you have a small account or limited time throughout the day to watch the markets.

I hope that this brief introduction peaked your interest.

If you want to learn more, take a look at the trading course that I did on Seasonal Spreads last week:
http://www.rockwelltrading.com/day-trading/members/trading-club/session-23/

It's free for Rockwell Trading Club Members, and if you are not a club member yet, then THIS course should be reason enough for you to join!

Click here to learn more about the Rockwell Trading Club.

Let me know if you have any questions!

The post Seasonal Spreads - A Great Way To Trade appeared first on Rockwell Trading.

A few weeks ago I was in Colorado Springs to visit my friends at Trade Navigator. I asked the founder and president Glen Larson to do a special webinar for Rockwell Club Members only, and he talked about what he learned from from programming and working with some of the most famous traders over the last 30 years.

One of the stories that Glen mentioned in this special presentation was how to "Trade Like Van Halen".

Here's what Glen said:

by Glen Larson (Founder and President of Genesis Financial Technologies)

Many traders, including myself have had periods of great trading execution and success.  I have also experienced these trading slumps, experienced trading mistakes that set me back.  I’m sure many of you might be able to relate to these experiences yourselves.

As a result of these times, I found myself wondering if there is a way to identify potential problems in my trading ahead of time. What usually caused these periods of rough trading? I’m not talking about finding the Holy Grail, I just want to be able to see warning signs before these problems begin.  The analogy would be the canary in the coal mine.  Before the current monitoring systems in coal mines, miners carried a canary around with them.  Should the bird become ill, they knew the air was becoming dangerously toxic.

What could you use for your canary or red flags in your trading? I found some useful ideas and realized I don’t think the source of monitoring has to be high tech.

One method could be to use the Van Halen approach in your trading.

During the 1980′s, Van Halen became “notorious” for having a clause in their tour contract.  Pages and pages of details were included in the contract.  In the middle of the contract was a clause stating that the band wanted a bowl of M&M’s back stage with ALL THE BROWN M&Ms removed.  When I first heard this, my initial response was “what a bunch of spoiled divas”.  I had grown up hearing the rumor and decided to verify this.

In David Lee Roth’s autobiography, he confirmed that this rumor was true, but then he shared some interesting details that made me reverse my diva opinion of Van Halen.

Roth mentioned that due to the complexity of the tour (think 9 – 18 wheelers arriving with equipment that had to be set up correctly at each venue).  The complexity of setting up each show meant there was a much greater chance for technical mistakes that could turn a successful concert into a disaster.  They, for example, stated that “There will be 15 amperage voltage sockets at 20 foot spaces, evenly, providing 19 amperes.”

The band had buried in the contract, section 126 the following: “There will be no brown M&Ms in the backstage area, upon pain of forfeiture of the show, with full compensation.”.

When Roth arrived at each new venue, he immediately would go back stage to see if the M&Ms were there and to see if the brown M&Ms were removed.  If he found brown M&Ms, he would immediately demand a line check of the entire setup.  He often stated that it “Guaranteed, you’re going to arrive at a technical error”.

Turns out the band members of Van Halen weren’t being divas after all.  They had discovered a quick and easy monitoring method to see how close the promoter was paying attention to the small details.  They didn’t have time to go through and check every socket, plug or wire, but all these small details were significant for a successful concert.  Their success was in the small details.

Looking back at my trading, I too realized that it was the small details being ignored that usually led to my rough trading periods.

So the challenge I was faced with was coming up with my own quick and easy warning flags, my own brown M&M warning, my own canary warning system if you will.

As I mentioned, warning systems don’t really have to be that technical.   They can be as simple as a daily or weekly check list. This was my case, a weekly check list.

Since every trader is different, you will have to look back at your own trades, and perhaps your trading journal to see if you can identify patterns that began to develop before losing trades or losing trading periods.  Once you have the “data”, you can then begin to develop your warning system.

To help you get some ideas, here are my “brown M&M” warning flags.  It is a simple weekly check list that I review.  The answers are true or false. Here are the items in my check list:

• Am I reviewing my account on a daily basis after the day is over?
• Am I reviewing my trades to see why I bought or sold according to rules and not on my gut?
• Am I following my money management rules for risk and size of trades?

It’s pretty simple, I am paying attention to my warning flags or I am not.

My challenge to you this is to take time to stop and review your past trading.  Take time to see how you can establish your own brown M&M warning flags.  Look at the small details that warn you if you are entering a dangerous trading time or zone.   Don’t just say, that was an interesting blog post, and not do your review. Applying a quote from Buddha to trading, “Work out your own salvation. Do not depend on others.”   You are the only one who is able to uncover your warning signs, no one else.

My second challenge; every time you look at a bowl of M&Ms,  look to see if there are any brown M&Ms.  If there are, smile and remember that you too have your own M&M warning system.  (Sorry, you’ll never look at a bowl of M&Ms the same way again).

Remember, it is the simple things like Van Halen’s brown M&M signs that will give us all the warning we need, if we will but put forth the effort to look.

Good trading the Van Halen way,

For more cool stuff from Glen please click here to sign up for his newsletter.

Did you like this article?

Please leave a comment below.

The post Trade Like Van Halen appeared first on Rockwell Trading.

Many traders struggle to make consistent profits. And so they keep looking for another strategy, another course, another trading robot, .... just ANYTHING that might improve their trading.

And that's why many traders spent more time and money on strategies, eBooks, indicators and courses, until they have no funds left to trade.

But as you know, it doesn't fix the problem!

In the following article I want to show you three steps to improve your trading. In fact, I believe that by following these steps and you can dramatically improve your trading in the next 24 hours!

Whether you are trading on a simulator or already trading with real money: You MUST record your trades.

Successful traders treat trading as a business and they know their numbers.

Just think about it: If you are running a business, you want to know whether you make money or lose money. And if you are making money, you want to know WHY you are making money, e.g. what products or services provide the highest profit margin, what products and services sell best, etc.

And if you lose money in your business, you need to figure out why, too!

Same in trading. You MUST keep accurate records of all trades that you placed, whether you took them on paper during backtesting, in a simulator or live in your account. Here's the information that you need:

• Date: Just enter the date on which the trade occurred.
• Market / Symbol: Record the symbol of the market you are trading, e.g. ES, YM, AAPL, EUR/USD
• Long / Short: You need to record whether you entered a long or a short trade.
• Entry Price: Record the entry price.
• Entry Time: Record the entry time.
• Exit Price: Record the exit price.
• Exit Time: Record the exit time.
• Profit / Loss: Record the profit or loss that you made on this trade.
• Strategy Used: If you are trading multiple strategies, record which strategy you used for this trade.
• According to Plan?: Record whether you took the trade according to your plan or not.
• Comments: Write down any comments about this trade, e.g. "Great trade. Followed all my rules" or "Forgot to check the calendar and traded right into a report."

The best way to record your trades would be in an Excel spreadsheet, because then you can sort your trades for the next step.

Now comes the fun part: You need to analyze the trades to see which trades are making you money and why you are losing money.

Here's what you should analyze:

When using Excel, you can quickly analyze your trades according to the criteria mentioned above.

Based on the analysis you did in Step 2, modify your trading plan.

As an example, if you make money during the morning session, but you lose money in the afternoon, just focus on trading in the morning.

If you make money trading ES, YM and NQ, but you lose money trading TF, stop trading TF!

If you make money Tuesdays, Wednesdays and Thursdays, but you lose money on Fridays, stop trading on Fridays.

If you make money with Trading Strategy #1 and Trading Strategy #2, but you lose money with Trading Strategy #3, stop trading strategy #3!

You get the idea, do you?

When I moved from Germany to the US to become a professional trader, I struggled in the first few months. But then I started to analyze my trades exactly as outlined above. And I found out a few things about my trading:

• I made money on the trades that I placed during the morning session, but I had an unusually high amount of losing trades during the afternoon session. So I stopped trading in the afternoon, and even today I'm just trading in the first two hours after the US stock markets open.
• I had an unusually high amount of losing trades on Fridays. As a result, I usually don't trade on Fridays.
• I discovered that I had more losses than normal when trading the e-mini NQ. Therefore I stopped trading NQ an focused on the markets that made me money: e-mini S&P, 30-Year Bonds, Gold, Crude Oil and EuroFX

To date, I am surprised how many traders don't keep accurate records and don't even know what's causing their profits, and what's causing their losses.

If you have been placing ANY trades, whether on paper, on a simulator or live, then you are sitting on a gold mine of information. If you follow the steps above, you can dramatically improve your trading in a matter of hours!

• Do you keep accurate records?
• Do you know your numbers?
• Have you ever analyzed your trading like this?

Leave a comment below and let me know!

The post Three Steps To Improve Your Trading appeared first on Rockwell Trading.

In the previous two blog posts we talked about some simple strategies for BUYING AND SELLING OPTIONS. In this blog post we will discuss more advanced options trading strategies:

• Vertical Spreads and
• Straddles and Strangles.

Don't worry! I'll keep it simple

When trading a vertical spread, you are buying and selling options of the same underlying stock (e.g. AAPL), same expiration date, but at different strike prices.

There are two main reasons for using vertical spreads:

1. Limit your risk when SELLING options
2. Reduce your cost when BUYING options

Here are examples for both scenarios:

Reason 1: Limit your risk

In my blog post "Swing Trading Options - Part 2" I discussed the strategy to collect premium. I used the following example:

AAPL is trading at $440, and we believe that AAPL will not trade below $425 until expiration (18 more days). Therefore we decide to sell the $425 put option for $6.65 and collect $665 in premium. As discussed previously, we are fine if AAPL closes above $425 on expiration day, but we have unlimited risk if prices of AAPL fall. For a more detailed explanation please take a look at the previous blog post).

We can limit our risk, if we BUY a $420 put option. The price of the option is $4.90, so we have to pay $490 for the option. We still keep $175 ($665 - $490 = $175) if things work out as we expect, and now our risk is limited.

Here's why:

As you know, when BUYING a put option, you have the right to SELL shares at the strike price. In our example you can sell it at $420.

When SELLING a put option, you have to BUY the underlying stock at the strike price. In our example we would have to buy 100 shares of AAPL at $425.

If AAPL closes below $425, our loss is the difference between the strike price of $425 and the price of AAPL on expiration day. If we didn't buy the $420 put, then our risk would be unlimited since theoretically AAPL could go to $0. However, by buying the $420 put we can sell AAPL shares for $420, and therefore we are limiting our risk. Since we collected $175 in premium and the max risk based on the strike price is $500, we have limited our total risk to $325 ($500 - $175 = $325) per option contract.

In our example, we've gone from unlimited risk on the trade to $325 simply by buying a put and creating a vertical spread.

Reason 2: Reducing your cost when buying options

In my blog post "Swing Trading Options  - Part 1" I discussed the strategy of "Home Run Trades". I used the following example:

AAPL is trading around $440 and we think that AAPL will move higher and trade at or above $480 at expiration date (in 18 days). Therefore you could BUY a call option with a strike price at $475 for a price of $1.24 = $124.

At the same time you could SELL a call option with a strike price of $480. The option is trading at $0.90, so you would get $90. The total cost for this option trade is now only $124 - $90 = $34.

You can still participate in the up move, but your profit potential is limited, since you could now BUY AAPL at a price of $475 (regardless of how much higher AAPL is trading at expiration, but you have to SELL AAPL for a price of $480, since you sold the call.

However, you reduced the cost of BUYING the option by $90, and instead of paying $124 per option contract, you would only pay $34.

The picture on the right is known as a "risk graph", and illustrates how a vertical spread works.

If the stock stays below breakeven (the strike price of the option that was bought + the total cost of the spread), the spread will lose money and the risk is capped at the amount that was paid for the spread. Once the stock trades above the breakeven point of the spread the spread will start to make money (as seen on the right hand side of the risk graph), but the total profit plateaus and the max profit will be capped as well.

When I started trading in 1989, I traded option straddles. The idea is to buy two options (one call and one put) of the same underlying stock (e.g. AAPL) with the same expiration date, but different strike prices.

When trading straddles, you think that the stock is about to move, but you don't know (yet) whether the stock prices will go up or down. I used to trade straddles ahead of major earnings report, since a stock usually moves only sideways before the earnings report is released, and then you hope that it will move sharply up or down after the earnings.

Here's an example:

On May 7h (5 days from now) Electronics Arts (EA) will release its earnings report. The stock is currently trading at $17.25 (see charts on the right).

Let's say you expect some major news in this earnings report that should move the stock.

You could buy a CALL option with a strike price of $17.00 and buy a PUT option at the same strike price.

The call option cost $0.83 and the put option cost $0.59, so you would pay $1.42 * 100 = $142. Both options expire in 18 days.

If EA jumps to $21.00 at option expiration, you could BUY 100 shares of the stock at the strike price of the call option at $17, and immediately sell it at the market price of $21. You would make $4.00 per share * 100 = $400. Now deduct your initial investment of $142, and you're still looking at a profit of $258 per option contract.  In this example the put option would expire worthless.

If EA drops to $13.00, you could SELL 100 shares of the stock at the strike price of the put option at $17.00, and immediately BUY it at the market price of $13.00. You would make $4.00 per share * 100 = $400. Now deduct your initial investment of $142, and you're still looking at a profit of $258 per option contract.  In this example the call option would expire worthless.

The chart on the left illustrates how straddles work.

As you can see, the stock has to move AT LEAST the amount that you pay for the spread, otherwise you lose money. In our example the breakeven points are at $17 - $1.42 (price of the option) = $15.58 to the downside, and $17 + $1.42 = $18.42 to the upside.

This strategy works best if you can buy the call and put option cheap and expect an explosive move before the options expire.

Trading an options strangle is almost the same as trading a straddle. The only difference is that you are using different strike prices for the call and the put option.

In our example we could choose to buy the $17.00 PUT option and buy the $18.00 CALL option. The put option costs $0.59 and the call option costs $0.38, so our total cost would be ($0.59 + $0.38) * 100 = $97.00

As you can see, our cost for this strangle is lower than the cost for the straddle.

Now let's calculate our break-even points:

1. Upside: Strike Price of the call + cost of the strangle = $18.00 + $0.97 = $18.97
2. Downside: Strike Price of the put - cost of the straddle = $17.00 - $0.97 = $16.03

Compare these to the break-even points to the straddle, and you will see that the break-even to the upside is higher ($18.97 vs. $18.42 for the straddle), but the breakeven to the downside is lower ($16.03 vs. $15.58 for the straddle).

You'll notice, if you are buying options it's important to buy the options as cheap as possible. The cheaper the options, the lower the break-even point and the faster you'll be "in the money".

That's why many charting software packages provide powerful "scanners". When I was trading options back in 1989, I analyzed all options of the 30 stocks in the Dax with my Casio calculator. It took me around 1.5 hours to complete the analysis.

These days you can analyze hundreds of stocks and options in a matter of minutes - sometimes even seconds - to find the cheapest options and the best strategy.

In the next blog post we will talk about 2 more option trading strategies:

• Iron Condors and
• Butterflies

I hope you're enjoying this series of blog posts on swing trading options.

Please let a comment and let me know if I should write more.

Thanks!

The post Swing Trading Options - Part 3 appeared first on Rockwell Trading.

In my previous blog post we talked about BUYING OPTIONS. In this blog post we will discuss why some traders prefer to sell options, and review two basic strategies for SELLING OPTIONS.

As discussed in the previous blog post, the buyer of an option has to PAY the price of the option.

When selling options, the trader is collecting the price of the option as a premium. He then hopes, that the option expires worthless so that he can keep the premium.

Here's an example:

As I am writing this blog post, AAPL is trading at $440. Let's assume you are bullish on AAPL and expect the stock to move higher. There are 18 days until options expiration. You look at the chart and think that AAPL won't move lower than $425. Therefore you decide to SELL a PUT option with a strike price of $425. The put option is trading at $5.00, and since 1 option contract represents 100 shares of the underlying stock or ETF, you are collecting $5 * 100 = $500 in premium.

The money is deposited into your trading account, and if AAPL closed above $425 in 18 days from now, you can keep the money.

Here are the main differences between buying and selling options:

• As time decay is working against the buyer of an option, it is working in favor for the option seller.
  In the example above, the entire $5.00 is known as extrinsic value. This means that this premium is priced based on the possibility that the stock might move below $425. However, since the stock is currently trading at $440, there is no intrinsic or real value priced into the option (this would change if the stock was trading below the strike price of $425). The price of the option will decrease as AAPL moves higher, and we get closer to the option's expiration.
• The buyer of an option has limited risk, but the seller of an option has unlimited risk.
  If AAPL moves lower than $425, the seller of the option has to pay the difference between the strike price of $425 and the price of the stock on expiration day, if he is still holding the option. If AAPL trades at $400 on option expiration, the seller of an option has to pay ($425 - $400) * 100 = $2,500.

There are strategies to protect yourself and limit your risk. We will talk about these strategies in the next blog post.

Here are the two main reasons why a trader considers selling options:

The most popular strategy for selling options is known as a "covered call". Covered calls are popular because traders can collect option premium using stock that they already own as collateral.

Here's an example:

Let's say you own 100 APPL stocks that you bought at $425. AAPL is trading at $440 now, and you decide to sell a call option with a strike price of $465 and 18 days left to expiration.

The price of the option is $2.03, and you are collecting $2.03 * 100 = $203 for selling the $465 call option.

If AAPL is trading below $465 on expiration date, you would keep the premium of $203.

If AAPL is trading above $465, then you have to "deliver" your AAPL shares, and you have to sell them for $465, regardless of the current price of AAPL. If AAPL is trading at $470, you still would "only" get $465 per share. So you are missing out on an additional $500 in profits, but these "missed profits" are partially offset by the $203 you collected in premium.

And you are still making money on the stock, since you bought them for $425 and sold them for $465.

The main advantage of this strategy is that you are collecting premium if the price of the stock stays below the strike price you selected. So you would still make money on the shares that you own even if stock price drops or moves just sideways.

You could just sell options even without owning the stock. If you are conservative and sell options with several strike prices out. In this case you collect less premium, but the chance that the stock moves above or below your strike price until expiration is smaller.

In the example above we talked about selling AAPL put options with a strike price of $425. With 18 days to expiration, you would collect $500 per option contract.

The put option with a strike price of $400 is selling for $1.38, and if you decide to sell this option, then you would get $138 per option contract. Yes, that's only 25% of the premium that you would get for an option with a strike price of $425, but it's less likely that AAPL will drop to $400 in the next 18 days than a drop to $425.

And of course you don't have to wait until the expiration day. You can always buy back the option before it expires. Time decay will work in your favor.

You can measure the time decay by looking at the "theta" of an option. In our example, the "theta" is $0.14. This means that you can expect the option price to drop $0.14 per day if AAPL keeps trading at $440. And of course the price of the option will decrease if AAPL is trading higher.

Therefore it could be possible to buy back the option that you sold after a few days for maybe $0.50. In this case you would keep ($1.38 - $0.50) * 100 = $88.

Of course you could trade multiple option contracts and therefore increase your return, but keep in mind that when selling options you have unlimited risk, unless you apply some of the strategies that we will cover in the next blog post.

In the next blog post we will talk about combining buying and selling options, and talk about strategies like:

• Vertical Spreads
• Straddles and Strangles
• Iron Condors and
• Butterflies

Don't worry! I'll keep it simple

Hope this helps.

The post Swing Trading Options - Part 2 appeared first on Rockwell Trading.

Lately I have been getting a lot of questions around swing trading options.

When swing trading options, there are two basic approaches:

• You can BUY options or
• You can SELL options.

Both approaches have pros and cons, and in this blog post we will focus on BUYING OPTIONS.

There are two main reasons why a trader considers buying options:

You are trying to buy a so-called "out-of-the-money" call or put option cheap - often only a few cents - and hope for an explosive move in your direction. If this happens and the option gets "in-the-money", you can easily double, triple or even quadruple your money.

Here's an example:
As I am writing this blog post, AAPL is trading around $440. If you think that AAPL will move $40 and trade at $480 in the next 3 weeks, you could buy a call option with a strike price of $475 and 18 days to expiration (slightly less than 3 weeks). The option is currently trading at $1.24 and would cost $124 (1 option represents 100 shares of stock so we multiply the option quote by 100 to get the actual cost)

If AAPL stays below $475 until the expiration, then you lose all of your investment - a whopping $124. But if AAPL is moving to $480, then your option will be worth at least $5, for a total of $500 based on 100 shares of AAPL. Since the option cost $124, your profit would be at least $376 ($500 - $124 = $376).

That's more than 300%! And if AAPL keeps moving higher, you could make make even more.

The problem: The odds are against you. Even though it is possible that AAPL makes an explosive move from $440 to $480 in only 18 days, it might not happen and you could lose your initial investment. However, as you can see only ONE of these trades need to work in your favor to give you a very nice return.

You want to buy a stock, but your account is rather small and you don't have enough money to buy the stock.

Here's an example:
Let's say you would like to buy 100 shares of AAPL. The stock is trading at $440, so you need at least $44,000 to buy 100 shares. If AAPL is then trading from $440 to $450, you would make $10 * 100 shares = $1,000. That's 2% based on your $44,000 investment.

If you are trading options, you can simply buy an "in-the-money" call option with a strike price of $435 as an alternative to buying the actual stock. The $435 May Call option is currently priced at $10.30 and has a "delta" of 0.60. This means that for every dollar that the stock moves, the option only moves $0.60. If the option had a delta of 0.5, it would move $0.50 for every dollar that the underlying stock moves.

The delta should increase in your favor as AAPL is trading higher, but let's keep in simple: Let's say AAPL moves $10 from $440 to $450. You bought 1 option for $10.30 * 100 = $1,030 (instead of $44,000 for buying the stock outright).

In our example the stock is moving $10, so the option price should move $6.00 (at this point we won't consider factors like "time decay" to keep it simple).

So your initial investment of $1,030 is now worth $1,630. That's a $600 profit based on an initial investment of $1,030, i.e. 58%.

The problem: The so-called "time-decay" of an option. The price of an option represents "intrinsic (real) value" and "extrinsic (time) value". The "intrinsic value" is the difference between the stock price and the strike price of the option. In our example the stock price is $440 and the strike price is $435. Therefore the "intrinsic value" of the option is $440 - $435 = $5.

Since the option is trading at $10.30, the difference between the price of the option and the "intrinsic (real) value" is the "extrinsic (time) value". In our example it's $10.30 - $5.00 = $5.30. As we are getting closer to the expiration date of an option, the "time value" will decrease, reaching ZERO at expiration.

If in a wost case scenario AAPL makes the jump from $440 to $450 the day the option expires, then your option would only be worth $1,500. You would still make money, but as you can see, time is working against you.

The advantage: If AAPL moves against you, then your loss is limited. You can't lose more than the $1,030 that you paid for the option. However, if you owned the stock outright, then you can lose much more than $1,030! Therefore trading options can help you limiting your risk.

As you can see, swing trading options has three main advantages:

• You could experience significant returns on your initial investment if the underlying stock moves in the right direction.
• You can trade "expensive" stocks with a rather small account.
• You can limit your risk.

Note: Buying calls and puts are the most basic options strategies, and in the next part we'll talk about selling options first before we then talk about more advanced options trading strategies.

Stay tuned for the next blog posts.

The post Swing Trading Options - Part 1 appeared first on Rockwell Trading.

In my previous blog post we talked about using "I will" statements to boost your confidence as a trader. Reading your "I will statements" aloud will help you to start the trading sessions with lots of energy.

But as you start trading, your energy might decrease.

And even though you were pumped up before you started, now the energy gets sucked out of you. This could happen for one of the following two reasons:

1. The markets are slow and you have to wait forever the right opportunity.
2. You placed a few trades, but they didn't work out and you're down for the day.

You might feel how you are sitting in front of the computer and become lethargic, watching the markets like a zombie... and you let trading opportunities pass by.

Top traders are able to maintain high energy throughout the whole trading session, so that they are alert every second and can take advantage of trading opportunities as they present themselves.

How do they do it?

How can they maintain a high level of energy throughout the whole trading session, even though the markets might be slow or they had a few losses?

The explanation is in the "Energy Equation" - developed the Ray Burchett
(Creator of Intuitive Development for Traders).

The Energy Equation states that there two elements that move inversely to each other:
Energy and Anxiety.

As anxiety rises, your energy decreases and the vice versa.

So what causes anxiety?

On a high level, anxiety is either caused by things we can control or by things we CANNOT control.

If anxiety is caused by things we can't control (e.g. slow markets), then we need to learn how to let go of it. And this does not only apply to trading - it applies to all areas of life. If we try to control things we can't control, our anxiety rises - causing our energy to decrease.

If anxiety is caused by things we can control (e.g. proper execution of our trading plan), then we need to focus our efforts on these things. By focusing our efforts on things we can control, our energy rises and our anxiety falls.

Sounds simple enough?

Well, there's one thing that's engraved in our human nature which sabotages all our efforts:
The EGO.

Our Ego has only two purposes:

1. To make us believe we can control things we can't control and
2. to make us believe we know things that we don't know.

So our primary task is to get rid of our ego and to understand that there are some things we don't know and things we can't control.

Here's something that you can do right now to help you to decrease anxiety and increase your energy:

1. List the things you can not control as a trader, e.g. price movement or slow markets.
2. List the things that you can control, e.g. execution of your trading plan.
3. Let got of things that you can't control!
4. Focus on the things that you can control.

Do this little exercise right now and feel your energy rising.

Can you feel it?

Leave a comment below.

The post How To Trade With Confidence - Part 2 appeared first on Rockwell Trading.

Self-Confidence is an essential element in any business venture. This is especially true if your business is day trading, since psychology plays such a major role. In this blog post, I want to share a few things that helped me change and improve my mindset as a day trader, develop a winning mindset and trade with more confidence.

About 10 years ago, I received a copy of the book "Think and Grow Rich!" by Napoleon Hill. Today, I credit much of my success in business (including day trading) to this book and the core values it teaches.

At first, some of the principles and techniques described in this book appear a bit crazy. For example, reading "I will statements" and your trading plan aloud every day. Initially, I questioned whether reading these statements out loud would make a difference over just reading them to myself. But, I decided to approach Hill's recommendations with an open mind and was pleasantly surprised by the results.

Here is a brief overview of what I got out of Napoleon Hill's "Think and Grow Rich" book, and highly recommend you read the book for yourself:

• First, you must have a burning desire!  For a day trader this desire should be "to become a consistent winner in the markets".
• Second, you must to have a definite goal! This should include the amount of money you want to make and when you want this money in your account.
• Third, you need to have a definitive plan! Here's where you detail how you are going to earn that money.

I already covered the important aspects of a solid trading plan in a previous post.

Here is an example of "I will statements" that you should read out loud every day before you start trading. These statements are generic enough to be applied to most trading styles. Items specific to your style should be added. You trading plan and these statements should be read aloud first thing in the morning and right before going to bed.

"As a trader, here's what I will do:

• I will follow a trading plan to guide my trading -
  therefore my job will be one of patience and discipline.
• I will plan each trade carefully - I will not jump into trades by fear of missing out.
• I will monitor the market's current picture.
• I will manage my trades to protect my capital and my profits.
• I will protect my capital through good money management.
• I will take responsibility for all my actions.
• I will trade to trade well and for the love of trading, not to trade often and not for the money.
  The money will come as a result of trading well.
• I will not be influenced by the opinions of others. I will reach my own decisions
  and follow them.
• I will build the self-trust necessary to operate in an unlimited environment
  which has no rules.
• I will be rigid in my rules and flexible in my expectations.
• I will never think that taking money from the market is easy and I will never assume
  that I know enough.
• I will treat trading as a probability game in which I don't need to know what is going to happen next in order to make money. All I need to know is that the odds are in my favor before I enter a trade.
• I believe that I deserve this money. I believe that I will have this money in my possession. My faith is so strong that I can now see this money before my eyes. I can touch it with my hands. It is now awaiting transfer into my account. I am awaiting a plan by which to accumulate this money, and I will follow that plan when it is received.

Read (and reread) this book and apply its principles to your life - and notice the difference in your Self-Confidence.

Do you follow a similar routine?

Leave a comment.

The post How To Trade With Confidence - Developing A Winning Mindset appeared first on Rockwell Trading.

I'll update this page frequently, so make sure to bookmark this page and check it out from time to time.

http://www.clocx.net - The famous clock that you see on our screens. It's a "floating clock" so you can move them anywhere you want on your screen. I always like to keep an eye on the time when trading.

http://www.evernote.com - Great for taking notes and synching them across your computer, phone and tablet. I use this to keep my trading journal and write down trading ideas.

http://www.forexfactory.com - My favorite economic calendar. As a rule of thumb, I don't trade 5 minutes before and after a major economic report is being released. This website shows all scheduled report releases and the expected impact on the markets.

http://www.briefing.com - Free stock market updates throughout the day. I usually don't check it during the day, but I like to read their summary at the end of the day.

http://www.seekingalpha.com - Great news site. I'm reading their "Wall Street Breakfast: Must-Know News" every morning.

How To Trade A Small Account -  Recording of the webinar "How to trade a small account - and turn it into a big one."

Video 1: How To Set Up Your Charts - An explanation about range bars and the trading indicators I like to use.

Video 2: The Simple Strategy - This video explains the entry and exit rules of the Simple Strategy.

Podcast "Day Trading News At The Open" - Rollie's famous morning routine as a podcast. This podcast is usually available 5 minutes after the US stock market opens. In this podcast you'll learn what happened during the overnight session and what we expect from today's trading session.

Podcast "Day Trading Recap After The Bell" - Daily market summary incl. Trading Room results as a podcast. This podcast is usually available 30 minutes after the markets close.

What trading tools and resources do YOU use?

Leave a comment below and let me know!

The post Trading Tools And Resources appeared first on Rockwell Trading.

Do you know that as as trader, there are many tax breaks and benefits available to you?

Unfortunately most traders don't take advantage of all available tax breaks. This could cost you thousands!

It doesn't matter if you are new to trading or have been trading for a while. And it doesn't matter whether you are making money with trading or you lost money.

If you qualify for "Trader Tax Status", then you are entitled to several tax breaks that investors are not.

As an  example, if you qualify for trader tax status, you can deduct "investment expenses" such as home-office deductions and most education expense!

The problem: Qualifying for trader tax status still remains confusing. And you local accountant probably doesn't even know what you are talking about when you mention it.

And even if you qualify for trader tax status, it doesn't mean that you can deduct your trading losses! The trader tax status only gives you the right to deduct your trading business expenses, and NOT necessarily your trading losses.

But if you traded "Section 1256 contracts", you might be able to. You could get 12% off your tax rates, and carry back 1256 contract losses against 1256 contract gains in the prior 3 years!

So what are these "Section 1256" contract?

"Section 1256" contracts include U.S. futures, options on futures, foreign futures with a CFTC and IRS letter, broad-based indexes, options on broad-based indexes, forward forex with the opt out election into Section 1256g and options on commodities/futures ETFs taxed as publicly traded partnerships (PTPs).

We did a webinar with Robert Green, the leading authority on trading and taxes. In this webinar, he explain how you qualify for trader tax status, what "Section 1256" contracts are and how trading them affect your taxes.

Below is the recording of this "Trader Tax Webinar". It's over 70 minutes long and full of great information that you can use right away.

Here are the next steps:

1.) Click here to download the Executive Summary of Robert's Trader Tax Guide

2.) Click here to get the full Trader Tax Guide for 25% off

3.) If you think that you should form an entity, click here to schedule a session with Robert Green to discuss your options.

4.) Click here to go to Robert's website and get lots of free information on trader tax status, forming entities, deduction trading business expenses, "Section 1256" contracts and much more.

If you have any questions, please contact Robert Green, since HE is the expert on trader tax - and not me

Hope this helps.

Leave a comment below!

The post Trader Tax Status Other Tax Benefits For Active Traders appeared first on Rockwell Trading.