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XIV. Basic Trading Strategies

So here are some basics on some key trading strategies. I want to mention that it is important to read all the previous sections as all the principles I have mentioned still hold true to each of these. These strategies are meant to enhance the previous groundwork we have laid out. These are beginner basics. Keep in mind these strategies are core to what major hedge fund managers you and mastery of these is not only hard in itself but takes a lot of time and are constantly evolving with the market. Luckily again, I have done the hard work of mastering a lot of these and some of them I have tossed aside as they don’t fit my personal trading style. I have listed some I don’t use because of this, as each person is unique , so maybe where I didn’t see much success you might find a perfect fit. So just to touch briefly back on what the previous sections covered: managing your account size, trade size, emotions, your actual trade with exit points and risk management still hold true here. And as always, your timing is almost always essential for most strategies. My advanced and intermediate guides will show you how to make money regardless of your timing on some products.

  1. Trading Momentum- is a style of trading that focusing solely on the volatility of a product

    • Products are universal here. You shouldn’t really care what product it is, the basic concept is you want as much movement as possible on your product

      • Finding a volatile product is key to the success here, especially for a day trader who is in the market daily

      • Trading earnings is a form of momentum trading but not all earnings trading is momentum trading

  • Analytics are very important in this trading. You want to make sure you have good floor and ceiling indicators. This will tell you when you want to initiate a moment trade

  • Volume is also a great indicator on a trade. The more volume the more weight a move in that direction is going to carry. If you see it go your way or starting to rise at a certain price point, that might be an indication to get in

  • Risk Management is more important in this style. Your goal in this strategy is to be agile, in and out of the market quickly, lots of times, with clear exit and entry points. If you don’t stick to your guidelines and over leverage your expected value (EV) will turn negative

  1. Trading Earning- this is a strategy we touched on before, but it is basically legging into the position a few days before or day of to capture movement in an earnings report

    • First you want to take your view on an earnings report. Do you expect the company to beat the market expectations. You will want to look at what analysts are predicting the number to be and based on your research predict if it will out perform or under perform the majority of analyst reviews.

    • Products to trade are buying or selling the stock of the company you are reviewing. Or if you are looking at derivatives , I prefer using options to leg into my position. I recommend buying an option with a strike deeper in the money and getting a delta close to 1 so you can capture a strong directional move

    • Risks involved are usually either you are wrong and the earnings doesn’t go your way. The other risk is that even if the company beats expectations, the entire market was expecting the same and that news is already baked into the price of the stock. If that is the case, then that could result in no move at all or a opposite market move even though it seems counterintuitive

    • Timing is very important on this trade. In the scenario above where the price is baked in already, you might notice that kind of being a trend for most stocks. That means you will have to leg into the trade at an earlier time, possibly a few days or even a week before the earnings report. In that case it might be better to buy the stock to avoid any theta cost with buying an option

  1. Option Theta - is a great strategy where you sell options to capture the premium on the derivatives

    • Theta is the time decay on an option. It is the premium you pay for the right to hold a call or put option divided by the remaining days of expiration

    • Selling calls and options at a strike pretty distant outside the money with little time left before expiration is a great way to pick up some consistent money. You will sell a call or put and gain a decent amount of money depending on the volume

    • Risks are quite inherent when writing calls or puts. You have a fixed profit while holding an unlimited risk. A big move in the direction against you could result in heavy losses. When you write these you have to make sure to follow the stock very closely, have a reason to expect little to no volatility in the stock or expect a small move in the opposite direct

    • This is a great way to hedge positions if you are long a call or put on the same product at a different strike. It is also a great way to get a steady flow of monthly income coming in.

  1. Long term/short term views can follow a very simple guideline if you just focus on the below

    • Over sold means that the stock got hammered below your expected value from it. This could happen when news comes out about the stock and the market all reacts at once driving the price down. This could signal a good opportunity to buy as it either touches a floor or breaks through a floor without a true fundamental change

    • Over bought means that the stock has too much positive momentum and an over optimistic market outlook. This can come from an earnings pop , a new product release, or an unfounded rally . This is a good selling point on a stock as it might have double peaked and either touched or briefly passed a ceiling

  1. Range Trading- is a great day trading strategy when you find multiple ranges within a stock which signal buying and selling

    • It is important to stay nimble and be very actively watching your positions when trading this styles. You want to not get heavily leveraged and stick to small volumes and smaller moves

    • You using technical analysis and identify points of resistance and support. As well as ceilings and floors . It is important that you identity smaller points within a larger range of larger entrance/exit points. This allows you to have larger trades following a bigger trend, while scalping trades in smaller trends within one. It gives you the opportunity to be correctly positioned if a large move hits and you can quickly add to your position gaining full advantage of that change without having to worry about getting filled or getting hammered on your average position cost.

There are a lot of other strategies and more complex views on the ones I have mentioned above. I think it is important to only focus on a few things that work for you when starting out, if not for most of you trading career . Having that niche, expertise, and experience on a specific stock,product, and strategy will allow you to gather large test sub sets and fine tune your favorite strategy. However, it is still important to keep updating your overall market views and creating new market views as you go on. Sometimes the market can move in such a way that your strategy may no longer be viable.

As always , feel free to reach out with any questions or comments. Visit my other sections or guides and check out my other blogs,videos, and tips. I also have a travel guide/blog as well that is very similar.

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