Trade Like a Pro Founded in 1 0'(, John Wiley & Sons is the oldest independent publi sh - ing company in the Cnited States. With offices in North America, Europe, Australia and Asi a, W il ey is globally committed to developing and mark et - ing print and electronic products and services for our customers' prof es- sional and personal knowledge and understanding. The Wiley Trading series features books by traders who have survived the market's ever changing temperament and have prospered- some by reinventing systems, others by getting back to basics. Wheth er a n Ovic e t rader , professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well in to th e fu ture. For a list of available titles, please visit our Web site at w' vw. Wil ey Finance.com. Trade Like a Pro 15 High-Profit Trading Strategies NOBLE DRAKOLN ~ WILEY John Wiley & Sons, Inc. Copyrig ht © 2009 by Noble DraKoln. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means , electronic, m ec hanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyrig ht Act, wit hout either the prior written p er: mission of the Publisher, or authorization through payment of the appropriate per-copy fee to t he Copyright Clearance C ent e r, In c. , 222 Rosewood Drive, Danvers, MA 0192 3, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright. com . Requests to the Publi she r fo r permission should be a ddr essed to the Permissions Department, John Wil ey & Sons, Inc., 111 River Street , Hoboken, NJ 07030, (2 01) 748-6011, fax (201) 748-6008, or online at ht tp://www.wiley.com/go/per:mission s. Limit of Li abilitylDisciaimer of Warranty: Willie the publisher and author have used their be st efforts in prepar ing this book , they make no representations or warranties with respect to the accuracy or compl eteness of the cont ents of this book and specifically disclaim any implied warranties of merchant ability or fitness for a particular purpose . No warrant y may be cre at ed or extended by sales repr esentatives or written sales materials. The advice and strat egies contained herein ma y no t be suitable for y our situation. You should consult with a prof essional where appropriate. Neither the publish er nor a uthor shall be liable for any loss of profit or any other commercial darnages, including but not limited to special, incide nt al, consequential, or other damag es . For general infor:mation on our other produc ts and services or for technical support , please c ont act our Customer Care De partm ent within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (3 1 7) 572 -4002. Wiley also publishes its books in a variety of electronic formats. Some content that appe ars in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley. co m. Library of Congress Cataloging-in-Publi cat ion Data DraKoln, Noble. Trade like a pro : 15 high-profit trading strategies I Noble Dr aK oln. p. cm. - (Wiley trading series) Includ es index. IS BN 978-0-470-28735-4 (cloth) 1. Investments. 2. Inv estment analysis. 3. Financial l isk management. 4. Stoc kbr okers. I. Titl e. HG4521.D698 2009 332.6 dc22 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 2008036346 To my friend, Mike Moone Altlwugh you're gone, your wisdom and presence are stiUfelt. Thanks for aU your support when you were here and the good word you have been putting in for me in the hereafter. Contents Preface xi Acknowledgments xiii PART I Designing the Trade t CHAPTER t From Retail Trader to Professional Trader 3 Transitioning from Retail Trader to Professional Trader 5 Successful Professional Traders 16 Tightening Up Your Approach to the Markets 22 CHAPTER 2 Markets and Margin 25 Exchanges 27 What Does This Mean for the Market? 34 Daisy Chain Effect 37 Global Markets 42 Becoming a Sophisticated Trader 45 What Do These Changes Mean for Your Trading? 46 CHAPTER 3 Some Essentials of Trading 47 Three Different Types of Traders 48 A Trader's Focus 52 Essential Trading Concepts 56 Using This Book to Its Fullest Potential 63 vii P- \R'I' I( Basic Strategies CHAPTER 4 Holding the Bull and the Bear by the Tails Straddle, Strangle, and Execution Getting the Right Options for the Job Option Tutorial Sample Straddle and Strangle Write-Up Sheets Conclusion CHAPTER 5 Precision Trading at Its Finest CONTENTS 65 67 68 75 78 89 89 91 What Is Hedge Trading? 91 Precision Trading Ground Rules 92 Identifying Market Trends 96 Conclusion 101 CHAP1'ER 6 Tl'ading with Hard Stops 103 Stop Loss Order 104 Options as an Alternative to the Stop 106 Conclusion 110 CHAPTER 7 The Markets on a Leash 113 Collar 114 General Collar Pitfalls 122 Day Traders 123 Conclusion 126 CHAPTER 8 Replacing Traditional Options with Synthetic Options 127 Synthetic Option versus Standard Option 128 When to Use a Synthetic Option 133 Conclusion 141 CHAPTER 9 Everything in Its Season Spread Opportunities Conclusion 143 144 151 Contents ix CHAP'I'ER 10 Gunning for Premiums with Covered Options 153 Problems with Selling Options 1 54 Covered Option Trading 156 Conclusion 167 CHAPTER 11 Outnanking the Market Frontspreads and Backspreads Trading Backspreads Conclusion PART III Advanced Strategies 169 170 172 179 18t CILAPTER 12 Exposing Yourself to Loss 183 Synthetic Futures, Long-Short 183 Primary Drawbacks 188 Intercommodity Spread 188 Primary Drawbacks 193 The Bull Call Spread and Bear Put Spread 193 Primary Drawbacks 195 Conclusion 196 CHAPTEll 13 Advanced Option Selling Strategies 197 Do 90 Percent of Options Expire Worthless? 198 What to Expect When Selling Options 200 Strangles, Straddles, or Naked Options 202 Sell Straddle 203 Sell Strangle 207 Naked Option Selling 212 Conclusion 21 5 CHAP1'ER 14 Retreat, Recovery , Opportunity 217 Manipulating the Strategies 219 Conclusion 242 x CHAPTER 15 Analyzing Charts and Strategies S&P 500 Euro Gold Corn Oil Conclusion CHAPTER 16 Applying These Strategies 'lUh Stocks Stocks Strategies Conclusion About the Author Index CONTENTS 243 244 246 249 251 253 255 257 258 261 266 267 269 [...]... transition is your ability to change a buy-and-hold mentality to a buy-and-hold-as-Iong-as-I-need-to mentality The second transition is to make the leap from approaching the market like a retail trader to approaching the market like a professional trader Let's tackle the first transition Investopedia defines a trader as "an individual who engages in the transfer of financial assets in any financial... you a professional From Retail Trader to Professional Trader 5 In each one of these public debacles it is clear that the "traders" working for these companies were far from professional when it counted the most Their motivations, financial attitude, and psychological makeup made them operate more like amateurs with access to a lot of money, as opposed to professional traders with a strict agenda and... plan These problems were further exacerbated by the lack of basic corporate checks and balances In this chapter we explore what it takes to transition from a retail trader to a professional one We gain insight into professional traders' motivations, financial savvy, and the psychological differences from most retail traders Successful professional traders are supposed to operate with constraint and... responsibility that professional traders feel, retail traders can accurately assess their strengths and limitations while developing the necessary attitude it takes to trade in this increasingly competitive market environment By taking a proactive role in acting like a successful professional trader, you can make a realistic assessment of whether you should be trading or if you should hire a professional trader... was manageable The young banker had no response The partner tells the young banker that he could have put the company in serious jeopardy, and then reveals a secret to him He had been watching the young banker all along and had already put the necessary protective From Retail Trader to Professional Trader 17 trade in place, so that what looked like a 1 million pound loss for the young banker was actually... traders that are simply not true First, they assume that almost every trade that professional traders pick is a winner Second, they assume that it takes a lot of money to be a professional trader Finally, they assume that professional traders are secretly doing something that can't possibly be done by retail traders None of these assumptions is correct and in fact we see time and time again that it isn't... their arsenal, From Retail Trader to Professional Trader 21 professional traders are light years ahead of retail traders in protecting their day-to-day survival The great news is that the techniques that professional traders use easily found and, in fact, if you ask them nicely, they will give you the documents necessary to see behind the scenes in their programs Then it is a matter of incorporating what... our psyche up and be both the young banker willing to take a chance and the managing partner able to see the devastating results that a potentially big loss can have on us and our account Professional traders, CTAs, are required by law to be disciplined at all times in their trading They must operate as the managing partner 2417 because of the obligations that they have taken on CTAs who are disciplined... trade like a professional trader, you have to take a different approach to what the markets mean to you in relation to the capital you put in and what you hope to achieve From Retail Trader to Professional Trader 13 Demo Trading As a trader sometimes there is a need to reboot Professional traders are never afraid to reinvent themselves They will come up with new systems or new trading tactics when... The easiest way to find a balance is to come up with a strategy to adjust the leverage when you are trading as a way to reflect your actual trading streak and to help you retain your profits as you trade along There are different ideal account amounts bandied about in the trading world They range from 5 to 10 percent of your overall investments to as little as a few hundred dollars The old adage used . mentality. The second transition is to make the leap from approaching the market like a retail trader to approach- ing the market like a professional. trading capital available to professional traders is what separates them from retail traders, then we wouldn't see so many so-called professional