Master Playbook PDF

THE MASTER
P L AY B O O K
A COMPLETE TRADING MANUAL
The Master Playbook
GAUGE MA RKE T PO STU RE & TRA DE B I AS

Support & Moving Secondary
Posture Trend Momentum
Resistance Averages Indicators
Minor, Pivots expanding

Price is trending up & trading near Above 13 EMA,
Very Bullish Intermediate & Major Pivots.
support
Momentum
20 SMA, 50 SMA, 200 SMA
3 or more confirm
All in an uptrend increasing
Price is trending & trading up

Equidistance between pivots & Above 13 EMA,
Bullish Minor & Intermediate Pivots in an uptrend between known support &
steady momentum 20 SMA, 50 SMA
2 or more confirm
resistance
Price is trending up but trading near Pivots compressing, slowing momen- Above 13 EMA,
Moderately Bullish Minor Pivots in an uptrend
resistance or overextended tum creates caution 20 SMA
1 or more confirm
Trendless or sideways Between support & resistance zones Convoluted

Neutral channel in a trendless market
Consolidation or sideways pivots Convoluted MA’s
Indicators
Price is trending down but trading Pivots compressing, slowing Below 13 EMA,
Moderately Bearish Minor Pivots in a downtrend
near support or overextended momentum creates caution 20 SMA
1 or more confirm
Equidistance between pivots &

Minor & Intermediate Pivots in a down- Price is trending & trading between Below 13 EMA,
Bearish trend known support & resistance
steady
20 SMA, 50 SMA
2 or more confirm
momentum
Pivots expanding
Minor, Intermediate & Major Pivots. All in Price is trending down & trading near Below 13 EMA,
Very Bearish a downtrend resistance
Momentum
20 SMA, 50 SMA, 200 SMA
3 or more confirm
Increasing
Page — 2 Page — 3
The Master Playbook
Bullish Retracement
Bullish Breakout
MASTER
TRADER CORE
TRADING
ST R AT E G I E S
The Master Playbook
Bearish Retracement
“
THE TREND IS
”
Bearish Breakdown YOUR FRIEND.
The Master Playbook
MASTER
TRADER
BULLISH
RETRACEMENT
The Master Playbook
TECHNICAL CATALYST
• Price should be trading near a technical catalyst that can help initiate change.
• Catalysts include: support/resistance zones, trend zones, moving averages & Fibonacci
retracements.
01.
REVERSAL CANDLE
• A reversal candle can signal change.

• Watch for: Doji, Hammer, Harami, Engulfing, etc... Or a closing price > opening price.
CORE PRICE &

VOLUME CRITERIA VOLUME
• Decreasing or below average volume indicates decreasing participation during the sell-off.
• Volume tends to increase near the technical catalysts as traders act & react.
UPTREND
• Higher swing pivot highs & higher swing pivot lows are what define an uptrend.
INCREASING TREND MOMENTUM

• The vertical distance in price between resistance pivots is the best measure of momentum.
• Expanded resistance is a strong indication of a strengthening trend.
CORRECTIVE RETRACEMENT
• An orderly price retracement from the swing pivot high for a minimum of 3 periods is typical
of a profit-taking sell-off.
SLOWING RETRACEMENT
• Decreasing candle range indicates that the sell-off is losing momentum.

• Decreasing vertical distance in price between candle bottoms also indicates slowing.
The Master Playbook
CHECK THE NEWS
• No news is good news. Good news can be bullish.

• Watch out for negative news.
CHECK THE FUNDAMENTALS

• Make sure that the fundamentals support the trade bias
02.
• Fundamentals become increasingly more important the longer the duration of the trade
USE THE RISK CALCULATOR & GRAPHING TOOL

SECONDARY • Study the potential risk & reward of the position(s) using the Risk Graph
CONFIRMATION & • Check the securities investor relations web-page.
ROUTINE CHECKLIST
PERSONAL RULES
SECONDARY INDICATOR CONFIRMATION
• Make sure that the security meets all of your personal trading & investment criteria.
• Secondary indicator confirmation can be helpful in identifying a bullish retracement trade. • A successful trader is a disciplined trader.
• Popular indicators include MACD, Stochastic, RSI, Money Flow, etc...
JOURNAL THE TRADE

IDENTIFY & CONFIRM THE TREND OF THE INDUSTRY & SECTOR • Log & record every trade in the Master Trader Journal.
• Make sure to choose stocks that are located in a strong bullish area of the market. • Periodically review the trading journal.
• Use Trading Software to look up charts of industry & sector Indices or ETF’s
CHECK THE EARNINGS DATE
• Be aware of the quarterly earnings announcement date and time.

• Avoid surprises by not trading during the days immediately surrounding the earnings date.
The Master Playbook
TRADABLE INSTRUMENT
GUIDE FOR THE BULLISH
RETRACEMENT
CLASSROOM STUDY GUIDE
• Master TraderTM
»» Long Stock
• Cash Flow OptionsTM
»» Long Calls
»» Married Puts
»» Short Puts
»» Covered Calls
»» Calendar Spreads
• Spread TraderTM
»» Credit Spreads
• Bull Put
»» Debit Spreads
DEBIT SPREAD
• Bull Call
»» Ratio Spreads
• Elite OptionsTM & Technical MasteryTM
»» Spreads, Condors, Combos, & Repair Strategies
»» Dynamic Hedging & Adjustments
The Master Playbook
BULLISH RETRACEMENT ORDER TYPES
I. BUY STOP LIMIT III. SELL LIMIT TARGET
R1 BUY LIMIT = FILL

@ OR BELLOW R1 SELL @ OR ABOVE
BUY STOP = TRIGGER

@ OR ABOVE
R2
R2
S1
S1
II. PROTECTIVE STOP LOSS IV. BRACKET ORDER
SELL @ OR ABOVE
R1
R1 BUY LIMIT = FILL
@ OR BELLOW
BUY STOP = TRIGGER

SELL STOP MARKET =
R2 SELL # OR BELOW
@ OR ABOVE
R2
SELL STOP MARKET =
SELL # OR BELOW
S1
S1
The Master Playbook
MASTER
TRADER
BULLISH
BREAKOUT
The Master Playbook
CONSISTENT BUYING PRESSURE

• Both pivot & candle lows must be registering higher. Higher lows are consistent with an up trend.
• Reversal patterns can be identified when price trades below pivot support zones.
01.
REMAINING RANGE
• Remember that price is not likely to exceed a typical trading range, also known as the Potential
Average Yield. Make sure that price is not overextended or overbought prior to the breakout.
CORE PRICE &

• Decreasing or below average volume indicates that participants are waiting for directional price
confirmation. Once direction is confirmed, participation tends to increase as traders act & react.
UPTREND
• Higher swing pivot highs & higher swing pivot lows are what define an uptrend.
TRADING WITHIN 1 ATR OF RESISTANCE

• Correctly timing a breakout is more likely if price is trading within one Average True Range of
the resistance zone in question.
BULLISH CONTINUATION PATTERN
• A recognizable bullish continuation pattern should be present.

• Watch for: high base, cup & handle, ascending triangle, etc...
ROOM FOR PRICE TO RUN
• Make sure that no historical support/resistance zones will interfere with a healthy run in price.
• Remember to check plenty of history on both daily & weekly charts.
The Master Playbook
CHECK THE NEWS
• No news is good news. Good news can be bullish.


02.

ROUTINE CHECKLIST
PERSONAL RULES
JOURNAL THE TRADE


The Master Playbook
TRADABLE INSTRUMENT
GUIDE FOR THE BULLISH
BREAKOUT
• Master TraderTM
»» Long Stock
»» Long Calls
»» Married Puts
»» Short Puts
»» Covered Calls
• Spread TraderTM
»» Credit Spreads
→→ Bull Put
»» Debit Spreads
→→ Bull Call
DEBIT SPREAD
»» Ratio Spreads
»» Spreads, Condors, Combos, & Repair Strategies
The Master Playbook
MASTER
TRADER
BEARISH
RETRACEMENT
The Master Playbook
TECHNICAL CATALYST
• Price should be trading near a technical catalyst that can help initiate change.
• Catalysts include: support/resistance zones, trend zones, moving averages & fib retracements.
01.
REVERSAL CANDLE
• A reversal candle can signal change.

• Watch for: Doji, Hammer, Harami, Engulfing, etc... Or a closing price < than the opening price.
CORE PRICE &

• Decreasing or below average volume indicates decreasing participation during the buy-in.
• Volume tends to increase near the technical catalysts as traders act & react.
DOWNTREND
• Lower swing pivot lows & lower swing pivot highs are what define downtrend.
INCREASING TREND MOMENTUM

• The vertical distance in price between support pivots is the best measure of momentum.
• Expanded support is a strong indication of a strengthening trend.
CORRECTIVE RETRACEMENT
• An orderly price retracement from the swing pivot low for a minimum of 3 periods is typical of
a profit-taking buy-in.
SLOWING RETRACEMENT
• Decreasing candle range indicates that the buy-in is losing momentum.

• Decreasing vertical distance in price between candle tops also indicates slowing.
The Master Playbook
CHECK THE NEWS
• No news is good news. Good news can be bearish.


02.

ROUTINE CHECKLIST
PERSONAL RULES
JOURNAL THE TRADE


The Master Playbook
TRADABLE INSTRUMENT
GUIDE FOR THE BEARISH
RETRACEMENT
• Master TraderTM
»» Short Stock
»» Long Calls
short call
»» Married Puts
»» Short Calls
»» Covered Calls
• Spread TraderTM
»» Credit Spreads
→→ Bear Call
»» Debit Spreads
→→ Bear Put
»» Ratio Spreads
The Master Playbook
MASTER
TRADER
BEARISH
BREAKDOWN
The Master Playbook
CONSISTENT SELLING PRESSURE

• Both pivot & candle highs must be registering lower. Lower highs are consistent with a downtrend.
REMAINING RANGE
01.
• Remember that price is not likely to exceed a typical trading range, also known as the Potential
Average Yield. Make sure that price is not overextended or oversold prior to the breakdown.
CORE PRICE & VOLUME
VOLUME CRITERIA • Decreasing or below average volume indicates that participants are waiting for directional price
confirmation. Once direction is confirmed, participation tends to increase as traders act & react.
DOWNTREND
• Lower swing pivot lows & lower swing pivot highs are what define downtrend.
TRADING WITHIN 1 ATR OF SUPPORT

• Correctly timing a breakdown is more likely if price is trading within one Average True Range
of the support zone in question.
BEARISH CONTINUATION PATTERN
• A recognizable bearish continuation pattern should be present.

• Watch for: low base, inverted cup & handle, descending triangle, etc...
ROOM FOR PRICE TO DROP
• Make sure that no historical support/resistance zones will interfere with a healthy drop in price.
• Remember to check plenty of history on both daily & weekly charts.
The Master Playbook
CHECK THE NEWS
• No news is good news. Good news can be bearish.


02.

ROUTINE CHECKLIST
PERSONAL RULES
JOURNAL THE TRADE


The Master Playbook
TRADABLE INSTRUMENT
GUIDE FOR THE BEARISH
BREAKDOWN
• Master TraderTM
»» Short Stock
»» Long Calls
»» Synthetic Puts (short stock, long call)
»» Short Calls
»» Covered Calls
• Spread TraderTM
»» Credit Spreads
→→ Bear Call
»» Debit Spreads
→→ Bear Put
»» Ratio Spreads
The Master Playbook
D A I LY
ROUTINE
The Master Playbook
01. 02.
CHECK THE NEWS CHECK THE
ECONOMIC CALENDAR
• Markets move on information. Information and reaction markets have to it. At this stage • There are three primary reasons the mar- • These reports drive market behavior. The
is constantly flowing in this world we live in. of the game, just try to listen in. Over time, kets move. The first is behavioral analysis of trader needs to identify the report on a daily
If you live in America, markets are open and if you check the news daily, you’ll become a the emotions of the market. Second, technical basis (sometimes there are none) and assess
trading around the world while you sleep. Eco- smarter trader, a more informed person, and analysis of trends, patterns, and support & re- how the report impacted the market. This in-
nomic reports and policy decisions may have you’ll have a better understanding of how the sistance. The third is the most important: eco- cludes analyzing the /ES and /DX, which are
been released in China which in turn triggered economy is part of everything. nomic analysis. We study economic analysis the S&P 500 and US Dollar indexes. The first
a rally in London. By the time a trader in the through the economic reporting system. Re- month analyzing economic reports is over-
U.S. gets the news and interprets it, he’ll al- • Spend five to 10 minutes, get to the core ports such as FOMC events, unemployment, whelming and confusing. The second month
ready be seeing an impact in markets. of the information, and move to the next step. manufacturing, retail, housing, consumer gets much easier.
There are many good news publications that spending and confidence, and gross domestic
• Almost every day there are reports (The are all very similar. It’s important to scan the product (GDP) are reports we receive almost • The two economic reports I use are at
Unemployment Report, The Consumer Price wire to ensure that you understand what the every month. www.tackletrading.com & www.forexfactory.com.
Index, The Producer Price Index, and many market is focused on. Don’t spend too much Some economic reports are so important that
others) that are released from government time scanning the wire or checking the news the trader may want to hedge the report.
institutions and agencies that can have an as it can get very overwhelming very quickly.
impact on markets. Can we predict the reac- Simply read a few articles that are market re-
tion the market will have? No. That’s not what lated. If you are investing in certain companies,
you’re trying to do at this step in your day. you should also read any news that is relevant
to your investments.
• Your sole job while reading the news is to
get the information and try to process it. Try • In the Trade Center tab at www.tackletrad-
to understand it. Over time, you’ll develop a ing.com, there’s a news section.
market posture, an opinion on where markets
should be heading, based on the news flow
The Master Playbook
04.
CHECK THE INDEXES
• There are dozens of indices. An index is sim- »» SPX or /ES: This is the major market in-
ply a basket of a certain kind of stocks that are dex for the US stock market. Look at this
measured as one unit. The Dow Jones Industrial daily to get a brief idea of what is happening
Average is the accumulation of 30 of the top in-
in the trend, the action in the market, and so
dustrial stocks. The Standard and Poor’s 500 is
forth. Don’t overthink it.
simply 500 of the largest US companies meas-
03.
ured through one chart. Locate the symbols »» VIX or VXX: This is a measure of implied
($INDU and $SPX for stock software users) and volatility on the S & P 500. Look at this dai-
pull up a daily chart for each of these indices
ly to help determine what strategies you’ll
each day. What are we trying to see? In gener-
al, you’re trying to get locked into the current want to focus on. When the VIX is low, op-
SCAN THE HEAT MAP trend, volatility, and action in the markets. It will tions are underpriced and you should use
positive volatility trades (long call, long put,
help you make trading decisions. Spend five to
10 minutes and move to the next step. There calendar spread, back spread). When the VIX
• Heat maps are very important to assess. They allow us to get a broad assessment of the are many other indices. For a beginner trader, is at a high or a peak, use negative volatility
market on a daily basis. simply look at the big ones as they will give you trades (short call, short put, short strangles)
a good read on the entire market.
»» UUP or /DX: The US dollar.
»» SO or /CL: Crude Oil
»» GLD or /GC: Gold
The Master Playbook
05. 06.
PORTFOLIO MANAGEMENT ENTER NEW POSITIONS:
• Manage the trades you’re in (five to 30 min- a design, rules, and to follow them. Each day,
utes). Every trade must have a plan. If you buy before you go look for that next money maker,
stock as a long-term investment, you may not take some time to make sure the positions you • Traders will base the decisions of new gle day. On the days you see a pattern to take
have much daily management. You might just have are being traded according to your rules trades based on what their portfolio needs. advantage of, though, then this step is where
look at the current profit and loss in the posi- and money management. This should take five If the portfolio is too bullish, they’ll look for you go to work to find trades. One mindset that
tion, make sure the trend and pattern are intact, to 30 minutes and then you can move onto the bearish trades, while if it’s too bearish, they’ll can work well is to think of researching candi-
and move on. If you are trading, buying with the next step. look for neutral trades. They’ll also base this dates as a process of elimination. Work through
intent to sell back to the market short-term, on their theta target. If the theta target is not the entire list and try to narrow that down to a
»» Pull the weeds first. It is more important to being hit, the trader will look at strategies that handful that you like the best.
you’ll undoubtedly have more daily checklists
to follow. You may need to adjust your s¬¬top get rid of the trades that are not working than add positive theta.
loss, check the news on the company, and make it is to take profit on trades that are working. »» Tackle Newsletter
• Only after you have checked the news,
your judgment call. The details of this step will »» Stock Report
»» Work through your positions methodi- read the markets, and managed your positions
be dependent on what strategies you are using.
In the coming chapters, we’ll give you different cally, make a decision and move on. Once should you go find new trades. Researching,
»» Options Report
you have made a decision, stop watching. decision-making, and entering orders can be
stock strategies to start with and you’ll learn the
exciting and a lot of fun. You should approach »» Commodity Report
management rules. Over time, as you use oth-
»» Manage your portfolio delta it strategically. What has the market been do-
er products such as options, futures, or forex, »» Forex Report
ing lately? What patterns are most prevalent?
you may have individual rules set up for each »» Manage your portfolio theta to ensure
What scans can you run to find candidates to
product and strategy. It is important to have theta target is on. »» Tackle 25
trade? What do you expect in markets next?
You’ll get a better feel for this as you trade, but »» Technical Scans
for now, try to find new trades and enter or-
ders frequently.
• You may not see anything specific in the mar-

ket and thus may not make a trade every sin-
The Master Playbook
TYPES OF
ST R AT E G I E S
Remember for all strategies to check the earnings date and news. Never trade any-
thing live you have not practiced before in a virtual or back testing environment. Rules
will vary depending on type of trader and style of trade. These are base rules.
The Master Playbook
INVESTMENTS:
Long Stock
»» 10-20% reduction in price.
»» Stock drops below 200 SMA
»» Cover the stock by selling call options against the stock and buying put options as insurance.
»» Max risk threshold met.
BIAS TARGET:
• Slightly Bullish to Bullish (+1 or +2). When we make a long trade our expectation in that the stock will continue to
move up in value so we want to long for bullish trending stocks in strong sectors. This is a Delta based strategy SWING TRADES POSITION TRADER:
»» Bullish Retracement: »» Bullish Retracement:
ENTRY ORDER: →→ Increasing momentum target Fib Ext 100% →→ Fib ext. levels of 161 or 261
• Look for stocks to bounce off support or break resistance.
→→ Decreasing momentum target Fib Ext 61% →→ 1.5 x PAY
AFTER MARKET HOURS: →→ Potential Average Yield (PAY) »» Bullish Breakout:

When placing the order after market hours you will want to use a buy stop limit order. Place the entry order »» Bullish breakout: →→ Similar to retracement
10% of the ATR above today’s high. The stop order in the stop limit order is the lower number. We then will
add another 10% of ATR to complete the limit side of the order. To place order simply right click on chart and →→ Similar to retracement
select buy custom, scroll to OCO bracket and fill in your numbers your prepped. INVESTMENT:
»» No core target price.
DURING MARKET HOURS:
Right click on chart, scroll to buy custom and select OCO bracket. This will allow you to place your market or
limit order and also set your target and stop loss in the same order. The entry order can be either a limit (split
the bid/ask spread) or a market order.
STOP LOSS TECHNIQUE:

• Placement of a stop loss is very important for all types of trades. Stop losses allow us to control our emotions as
well as determine where we wish to get out of our losing trades. There are many strategies for stop losses.
SWING TRADES:
Below are two traditional swing trader stop loss techniques. You are not taking too much risk in a swing trade
so the stop should be closer to the stock price than in position trades.
»» X ATR below entry price.
»» 10% of ATR below the low of today.
»» 50% of ATR under first support level
POSITION TRADES:
Identify intermediate level of support and place stop ½ ATR under that level. The stop should not be more
than personal risk assessment rule.
The Master Playbook
TARGET:
Short Stock
SWING TRADES POSITION TRADER:
»» Bearish Retracement: »» Bearish Retracement:
→→ Increasing momentum target Fib Ext 100% →→ Fib ext. levels of 161 or 261
→→ Decreasing momentum target Fib Ext 61% →→ 1.5 x PAY
»» Bearish breakout: »» Bearish breakout:

BIAS
• Slightly Bearish to Bearish (-1 to -2). When we make a short trade our expectation in that the stock will continue to →→ Similar to retracement →→ Similar to retracement
move down in value so we want to look for bearish trending stocks. This is a Delta based strategy.
INVESTMENT:
ENTRY ORDER:
»» No core target price.
• Look for stocks to bounce off resistance or break support.
AFTER MARKET HOURS:

When placing the order after market hours you will want to use a sell stop limit order. Place the entry order
10% of the ATR below the low of today. The stop order in the stop limit order is the higher number. We then
will subtract another 10% of ATR to complete the limit side of the order. To place order simply right click on
chart and select sell custom, scroll to OCO bracket and fill in your numbers your prepped.
DURING MARKET HOURS:

Right click on chart, scroll to sell custom and select OCO bracket. This will allow you to place your market or
limit order and also set your target and stop loss in the same order. The entry order can be either a limit (split
the bid/ask spread) or a market order.

• Placement of a stop loss is very important for all types of trades. Stop losses allow us to control our emotions
as well as determine where we wish to get out of our losing trades. There are many strategies for stop losses.
The stop loss order is a stop order.
SWING TRADES:
Below are two traditional swing trader stop loss techniques. You are not taking too much risk in a swing trade
so the stop should be closer to the stock price than in position trades.
»» 1.1 X ATR above entry price.
»» 10% of ATR above the high of today.
»» 50% of ATR above first Resistance level
POSITION TRADES:
Identify intermediate level of resistance and place stop ½ ATR above that level. The stop should not be more
than personal risk assessment rule.
The Master Playbook
BASIC OPTION
ST R AT E G I E S
The Master Playbook
TARGET:
Long Call
»» 50% gain in the call option price.
»» Potential Average Yield (P.A.Y.)
»» Fibonacci Extensions
»» Long Stock targets
BIAS: »» Choosing target is judgment call based on price action of the stock and performance of the
• +2 to a +3 Bullish Bias industry and sector.
»» Bullish Retracements »» Can partially scale out of position after first target reached.
»» Bullish Breakouts
TYPE OF STRATEGY:
• Delta
DELTA RULE:
Closest to .60
THETA RULE:
Buy 2 months’ plus time expectancy. Identify time in trade based on PAY
»» 2+ months additional time
VEGA RULE:
Increasing volatility aids this trade.
POSITION SIZE:
• According to personal risk level

• 50% of original option value
• 50% of the ATR under first support level
• Stop loss techniques for Long Stock
The Master Playbook
TARGET:
Long Put
»» 50% gain in the call option price.
»» Potential Average Yield (P.A.Y.)
»» Fibonacci Extensions
»» Short Stock targeting techniques
• -2 to a -3 Bullish Bias industry and sector.
»» Bearish Retracements »» Can partially scale out of position after first target reached.
»» Bearish Breakouts
TYPE OF STRATEGY:
• Delta
DELTA RULE:
Closest to .60
THETA RULE:
Buy 2 months’ plus time expectancy. Identify time in trade based on PAY
»» 2+ months additional time
VEGA RULE:
Increasing volatility aids this trade.
POSITION SIZE:

• 50% of the ATR under first support level
• Stop loss techniques for Shorting Stock
The Master Playbook
TARGET:
Naked Call
»» Expiration
»» 75% net liquidation value (credit received)
ROI TARGET:
• Selling calls is a bearish cash flow strategy. You benefit as time passes, as implied volatility falls and as the stock »» 8-15% of Margin used
goes down.
• Use this strategy in one of the following scenarios: if the stock has poor fundamentals, if the stock has gapped up
in price, if the stock has implied volatility, if the stock is severely overbought (i.e. slowing momentum uptrend) or if
you just think it’s bearish.
BIAS:
• 0 to a -2 Bearish Bias
»» Bearish Retracements
TYPE OF STRATEGY:
• Theta
DELTA RULE:
Sell a call at a strike with the delta between .10 ~ .25
THETA RULE:
Sell the call option less than 60 days till expiration
»» Weeklies are available
VEGA RULE:
Decreasing volatility aids this trade. Sell when volatility is expected to fall.
POSITION SIZE:

• Exit if delta ever exceeds .40
• Exit if stock gets within ½ ATR of strike sold
• Exit if stock ever breaks resistance levels
The Master Playbook
TARGET:
Naked Put
»» Expiration
»» 75% net liquidation value (credit received)
ROI TARGET:
• Selling puts is a bullish cash flow strategy. You benefit as time passes, as implied volatility falls and as the stock »» 8-15% of Margin used
goes up.
• Use this strategy in one of the following scenarios: if the stock has strong fundamentals, if the stock has gapped
down in price, if the stock has implied volatility, if the stock is severely oversold (i.e. slowing momentum down-
trend) or if you just think it’s bullish.
BIAS:
• 0 to a +2 Bullish Bias
TYPE OF STRATEGY:
• Theta
DELTA RULE:
Sell a put at a strike with the delta between .10 ~ .25
THETA RULE:
Sell the put option less than 60 days till expiration.
»» Weeklies are available
VEGA RULE:
POSITION SIZE:

The Master Playbook
Covered Call
BREAKEVEN
Place a stop loss at your breakeven point on the risk graph. This is stock price minus the credit received upon
the sale of the option. At this point you will sell your stock and buy back the option at a reduced value, thus
• Theory: A covered call is a combination strategy in which the trader buys stock in increments of 100 shares and mitigating your loss. This technique is used for position trades
then sells a call option contract for each 100 shares of stock. The covered call strategy is used to produce monthly
cash flow. It is a great way to create passive income in traditional retirement accounts. INVESTORS
Place stop to close the entire trade under a major level of support. Typically, 1 ATR under the weekly support
BIAS: level. Buy a protective put option instead of closing the long term investment and roll into collar.
• 0 to a +2 Bullish Bias
TARGET:
TYPE OF STRATEGY:
»» Once target is met, rinse and repeat.
• Delta and Theta
»» Expiration
DELTA RULE: »» 80% net liquidation value. Once target is reached, buy back option for 20% of original value
Two leg trade and sell again.
»» Long Stock: We will buy a stock that is typically under 100. For stocks that are above $100 there are
better ways to create cash flow. The stock must be neutral - bullish when entering the transaction.
→→ Sell a call option that is 1-2 strikes OTM with a delta of .40
THETA RULE:
Sell 1-2 months of time. For best time decay sell front month expirations.
VEGA RULE:
POSITION SIZE:
• Position size according to personal position size rules for position or investment trades. Typically, 5-15% of port-
folio allocation.
The Master Playbook
Collar
• Stop Loss to technical event, under first level of support.
TARGET:
• The Collar play is an extension of the Covered Call, however, in addition to buying the stock and selling the »» Expiration
short term OTM call option we will also buy a protective put option. Legging into this position will help maximize
the return on investment. This is a Level 2 trading authority.
BIAS:
• 0 to a +2 Bias
TYPE OF STRATEGY:
• Delta and Theta
DELTA RULE:
This is a neutral delta trade.
»» Call option: Sell 1-2 Strikes OTM
»» Put Option: Buy 10% OTM put option
THETA RULE:
»» Call option: Sell 2-6 weeks of time.
»» Put Option: Buy 2-6 weeks of time
VEGA RULE:
Not applicable
POSITION SIZE:
• Position size according to personal position trade rule. The call option and put option will be equal to the number
of shares purchased.
The Master Playbook
Protective Put
• Place a stop loss 1 ATR under support on weekly chart to exit the long term investment
• Use put options to protect bearish risk while selling call options to cash flow if investor does not want to get rid of stock.
• Theory: This is a strategy used by investors to insure against a dramatic drop in price. Typically used by inves-
TARGET:
tors around earnings. Earnings can be a very uncertain event where the price of the stock will move one way or
the other. Investors do not like uncertainty; they will buy put options to insure against the increased risk. This is »» After earnings consider closing the put option as there is no reason to insure against loss. If
a Level 2 Trading Authority. the stock drops dramatically on earnings consider closing the entire trade.
BIAS:
• +1 to a +3 Bias
TYPE OF STRATEGY:
• Delta
DELTA RULE:
The put option delta will typically be close to 10% OTM. This will often be a 20-30 delta.
THETA RULE:
This trade is negative theta which means we buy more time.
»» Earnings: 2-3 months of time
»» Increase Market Risk: 4-6 months of time
VEGA RULE:
Increase in volatility aids this trade.
POSITION SIZE:
• Position size according to Investor position size rule.
»» The amount of put contracts purchased will be equal to the number of shares owned. For example, if
you own 300 shares of XYZ then we buy 3 put contracts.
The Master Playbook
Call Leap
• 50% of the ATR under weekly support level
• Theory: A LEAP is a long term option. Anything over 8 months is considered a LEAP. Traders who want to invest
TARGET:
in a particular company but do not want to put up the capital to buy the stock will look at purchasing a Call LEAP.
It is a wonderful way to reduce cost for the trader and still invest long term in a fundamentally strong stock. LEAPS »» Reversals on weekly chart
behave exactly like normal call options.
»» Fibonacci Extensions on weekly chart
industry and sector.
• +1 to a +3 Bias
»» Bullish Retracements on weekly chart
»» Bullish Breakouts on weekly chart
TYPE OF STRATEGY:
• Delta
DELTA RULE:
0.50 delta or higher.
THETA RULE:
This is a long term investment position.
»» 8-39 months of time should be bought depending on how long expected to be in investment.
VEGA RULE:
Increasing volatility aids this trade. Buy when we expect volatility to increase. However, volatility will go up
and down for the life cycle of this trade so not as important.
POSITION SIZE:
• According to personal risk level.
The Master Playbook
Put Leap
• 50% of the ATR under weekly support level
• Theory: A LEAP is a long term option. Anything over 8 months is considered a LEAP. Traders who want to short
TARGET:
a particular company but do not want to put up the capital in margin to short the stock will look at purchasing a
Put LEAP. It is a wonderful way to reduce cost for the trader and free up capital for other trades. LEAPS behave »» Reversals on weekly chart
exactly like normal put options.
»» Fibonacci Extensions on weekly chart
industry and sector.
• -1 to a -3 Bias
»» Bearish Retracements on Weekly chart
»» Bearish Breakouts on Weekly chart
TYPE OF STRATEGY:
• Delta
DELTA RULE:
0.50 delta or higher.
THETA RULE:
This is a long term investment position.
»» 8-39 months of time should be bought depending on how long expected to be in investment.
VEGA RULE:
Increasing volatility aids this trade. Buy when we expect volatility to increase. However, volatility will go up
and down for the life cycle of this trade so not as important.
POSITION SIZE:
The Master Playbook
Protective Call Write

• Stop loss to a technical event.
• Option stop loss contingent on stock moving to breakeven point.
• Roll down and out.

• Theory: The Protected Covered Write is a modification of the regular Covered Write in which the trader buys
the stock and then sells the short term Call option which is ITM rather than OTM. Level 1 Trading Authority.
TARGET:
BIAS: »» Expiration
• 0 to a +2 Bias
»» Max profit of extrinsic value
»» Bearish Retracements on Weekly chart
»» Bearish Breakouts on Weekly chart
TYPE OF STRATEGY:
• Delta and Theta
DELTA RULE:
Select a strike price that is slightly ITM.
»» Select the strike that is close to first level of support
»» Select a strike that is 1 ATR ITM.
THETA RULE:
Sell 2-6 weeks of time.
VEGA RULE:
Rise in volatility hurts this trade
POSITION SIZE:
• Position size according to personal position size rules for position or investment trades. Typically, 5-15% of port-
folio allocation.
The Master Playbook
Bear Call Spread


• Theory: Selling a call option and buying a higher call options in the same expiration month is a bear call vertical
spread. This is a bearish cash- flow strategy and is also bearish on implied volatility. Because you’re spreading the
options you are diminishing the speculation on direction, volatility and time somewhat but you also gain a struc- TARGET:
tured risk and margin amount.
»» Expiration
BIAS: »» 75% net liquidation value (credit received)

• 0 to a -2 Bearish Bias
ROI TARGET:
TYPE OF STRATEGY:
• Theta »» 70% ROID or higher
»» 10% of Spread sold

DELTA RULE:
Lower deltas will have higher probability and less ROI.
»» Sell delta .25 or lower and above Resistance
»» Buy next strike price higher. Consider widening the spread if less than 5 point spreads.
THETA RULE:
Sell less than 2 months of time. Back testing has proven 4-6 weeks of time is best combination of theta decay
and range from stock price to strike sold.
»» Sell less time if desire is to capture higher decay
»» Sell more time if desire is to maximize ROI and Range.
VEGA RULE:
POSITION SIZE:
The Master Playbook
Bull Put Spread

• Exit if stock ever breaks support levels

• Theory: Selling a put option and buying a lower put option in the same expiration month is a bull put vertical
spread. This is a bullish cash- flow strategy and is also bearish on implied volatility. Because you’re spreading the
options you are diminishing the speculation on direction, volatility and time somewhat but you also gain a struc- TARGET:
tured risk and margin amount.
»» Expiration
BIAS: »» 75% net liquidation value (credit received)

• 0 to a +2 Bullish Bias.
ROI TARGET:
TYPE OF STRATEGY:
• Theta »» 70% ROID or higher
»» 10% of Spread sold

DELTA RULE:
»» Sell delta .25 or lower and below Support
»» Buy next strike price lower. Consider widening the spread if less than 5 point spreads.
THETA RULE:
and range from stock price to strike sold.
VEGA RULE:
POSITION SIZE:
The Master Playbook
A DVA N C E D
OPTION
ST R AT E G I E S
The Master Playbook
Bull Call Spread

• 50% loss on cost of trade
• Stop loss principles based on swing or position trading Master Trader techniques
• If cost of Bull Call is within risk limits, then no stop loss is needed. Simply risk what you paid.
• Theory: The Bull Call Spread is generally used when we anticipate profiting from a moderate rise in a particular
stock or asset while maintaining a lower risk profile than owning the stock or a straight call option. The structure
involves BTO lower strike calls while at the same time STO an equal number of higher strike calls with the same TARGET:
expiration date.
»» Stock hits the strike price sold.
BIAS: »» 50% gain on cost of trade

• +1 to a +3 Bullish Bias »» Master Trader targeting techniques
»» Bullish Retracements →→ PAY (Potential Average Yield)
»» Bullish Breakouts →→ Fibonacci Extensions
TYPE OF STRATEGY:
• Delta
DELTA RULE:
»» BTO ATM or ITM delta between .50 and .60
»» STO OTM delta that beings the net delta at or above .25
THETA RULE:
Time expectancy plus 2 months. We need to buy more time as theta decays faster the last two months.
VEGA RULE:
Positive: rise in volatility aids this position
POSITION SIZE:
• Position size according to risk
• Enter so the maximum cost is < or equal to 40% of the spread (distance between strikes).
The Master Playbook
Bear Put Spread

• Stop loss principles based on swing or position trading Master Trader techniques
• If the cost of the bear put is within risk limits, then no stop is needed. Simply risk what you paid.
• Theory: The Bear Put spread is generally used when there is anticipation of profiting from a moderate drop in a
particular stock or asset while maintaining a lower risk profile as opposed to shorting the stock or BTO a straight
put option. In simple terms, it involves, simultaneously BTO higher strike put options while STO the same number TARGET:
of lower strike put options with the same expiration month.
»» Stock hits the strike price sold.
BIAS: »» 50% gain on cost of trade

• -1 to a -3 Bearish Bias »» Master Trader targeting techniques
»» Bearish breakdowns →→ PAY (Potential Average Yield)
»» Bullish Breakouts →→ Fibonacci Extensions
TYPE OF STRATEGY:
• Delta
DELTA RULE:
»» BTO ATM or ITM delta between .50 and .60
»» STO OTM delta that beings the net delta at or above .25
THETA RULE:
Time expectancy plus 2 months. We need to buy more time as theta decays faster the last two months.
VEGA RULE:
Positive: Rise in volatility aids this position.
POSITION SIZE:
• Position size according to risk
• Enter so the maximum cost is < or equal to 40% of the spread (distance between strikes).
The Master Playbook
Straddle
• Often no stop loss is used
• Theory: The Straddle is generally used when we anticipate profiting from a strong movement in a particular
stock or asset over a short period of time. The structure involves BTO calls while at the same time BTO an equal
number of puts with the same expiration date. This can also be an earnings trade where we often see an increase TARGET:
in implied volatility the prior 4-6 weeks before the expiration.
»» Earnings:
»» Earnings: Look for stocks that are trading over 30.00 a share and have a history of increasing volatility
prior to earnings and move at least 15% up or down, 30 days prior to earnings. Identify the past 4 earnings →→ Pull trade off prior to the earnings announcement when expected move in price or volatility
to ensure proper expectation on volatility and price movement. Enter the position 4-6 weeks prior to the is achieved. If you hold through earnings you will give back all implied volatility achieved. Only
earnings announcement. hold through earnings if expected gap on earnings is more than the expected market maker
move (MMM).
BIAS: »» Gamma
• No technical Bias →→ Pull trade off after the economic report is released
TYPE OF STRATEGY:
• Vega
DELTA RULE:
»» BTO ATM Call/Put
»» Delta’s will be close to .50
THETA RULE:
»» Earnings: Buy 3-4 months of time
GAMMA RULE:
»» Less than 14 days. Only trade this as a hedge on credits or a gamma play on economic reports.
VEGA RULE:
»» This is a volatility based trade where we buy the straddle when implied volatility is low and historically
rises prior to the earnings announcement.
POSITION SIZE:
• Position size according to risk rules.
The Master Playbook
Strangle
POSITION SIZE:
• Position size according to risk rules.

• Often no stop loss is used
• Theory: The Strangle is generally used when we anticipate profiting from a strong movement in a particular
stock or asset over a short period of time. The structure involves BTO calls while at the same time BTO an equal • 50% loss on cost of trade
number of puts with the same expiration date. This can also be an earnings trade where we often see an increase
in implied volatility the prior 4-6 weeks before the expiration. This trade is very similar to the Straddle with the
only difference the strike prices purchased. TARGET:
»» Earnings: Look for stocks that are trading over 30.00 a share and have a history of increasing volatility »» Earnings:
prior to earnings and move at least 15% up or down, 30 days prior to earnings. Identify the past 4 earnings
→→ Pull trade off prior to the earnings announcement when expected move in price or volatility
to ensure proper expectation on volatility and price movement. Enter the position 4-6 weeks prior to the
is achieved. If you hold through earnings you will give back all implied volatility achieved. Only
earnings announcement.
hold through earnings if expected gap on earnings is more than the expected market maker
BIAS: move (MMM).
• No technical Bias
»» Gamma
→→ Pull trade off after the economic report is released

TYPE OF STRATEGY:
• Vega
DELTA RULE:
Due to the strike prices purchased the strangle will lower the cost of the trade in comparison to the strangle.
»» BTO Call option OTM with a delta of > .25
»» BTO Put option OTM with a delta matching the call option.
THETA RULE:
»» Earnings: Buy 3-4 months of time
»» Gamma: Less than 14 days. Only trade this as a hedge on credits or a gamma play on economic reports.
GAMMA RULE:
»» Less than 14 days. Only trade this as a hedge on credits or a gamma play on economic reports.
VEGA RULE:
»» This is a volatility based trade where we buy the straddle when implied volatility is low and historically
rises prior to the earnings announcement.
The Master Playbook
Short Strangle
POSITION SIZE:
• Position size according to risk. Typically, we will only trade this on low dollar stocks as the margin requirement is
high, similar to a naked put. On higher dollar stocks the Iron Condor can be used.

• Because options are inherently overpriced before earnings release we look to sell both a call and a put on the • The delta on either leg goes beyond .40 per contract
same stock at low delta strike prices to collect a credit. This trade is mostly based on Implied Volatility. When IV is
high (pre-earnings) options are more expensive, after earnings IV drops and makes options less expensive. This is • There is significant risk in the market, sector or stock you have the position on.
why we put this trade on. It’s a basic trade on time passing, volatility falling and the stock acting normal in regards
to direction. TARGET:
»» 50% net liquidation 1-2 days after announcement
BIAS:
»» 80% net liquidation 3 weeks after trade
• Earnings based strategy so no technical Bias
»» Expiration
TYPE OF STRATEGY:
• Vega and Theta
DELTA RULE:
Use strike prices that are under .20 delta.
ID one of the following and sell delta on the call and put strike price that is twice the amount of the expected
move. This will typically be in the 10-15 delta range.
»» ATM front expiration straddle
»» Market Maker Move (MMM)
»» Average gap range percentage over last 4 earnings reports
THETA RULE:
Unlike the Iron condor, which is a very similar trade, the short strangle is a pure theta trade where nothing is mitigated.
»» Earnings Trade: 1 Week to 1 month depending on range
»» Normal Theta Trade: 1 – 3 months of time
VEGA RULE:
»» All earnings are volatility based trades. When volatility is at its highest is immediately before earnings.
After earning we see the volatility crush. To take advantage of this we sell the short strangle immediately prior
to the earnings announcement to make it as neutral as possible
The Master Playbook
Call Ratio Back Spread

POSITION SIZE:
• Position size according to risk rule.

• This trade does not have a defined stop loss as many other strategies do.
• Theory: The Call Ratio Backspread is generally used when there is anticipation of profiting from a strong in-
crease in the price of a particular stock or asset while maintaining a lower risk profile as opposed to owning the • Consider getting out of the trade if first or second level of support is broken and the direction of the stock changes.
stock or buying straight call options. In simple terms, it involves simultaneously STO 1 call while BTO 2 or more
calls of a higher strike price for the same expiration.
TARGET:
• +2 to a +3 Bullish Bias
»» Master Trader Technical Targets
»» Bullish Breakouts
»» Event Based: Exit after the event
»» Bullish Retracements
TYPE OF STRATEGY:
• Theta and Delta
DELTA RULE:
Keep this as a net credit
»» STO ITM Calls with a delta of .60-.90
»» BTO ATM or slightly OTM Calls of .20-.50 •
→→ BTO more calls than you STO
→→ 1:2 ratio, 1:3 ratio, 2:3 ratio
→→ Buy the strikes based on your technical target
THETA RULE:
Two months plus Time Expectancy
»» Typically, 3 plus months of time.
VEGA RULE:
»» Positive: Enter when volatility is expected to rise.
The Master Playbook
Put Ratio Back Spread

POSITION SIZE:
• Position size according to risk rule.

• This trade does not have a defined stop loss as many other strategies do.
• Theory: The Put Ratio Backspread is generally used when there is anticipation of profiting from a strong de-
crease in the price of a particular stock or asset while maintaining a lower risk profile as opposed to shorting the • Consider getting out of the trade if first or second level of support is broken and the direction of the stock changes.
stock. In simple terms, it involves simultaneously STO 1 put while BTO 2 or more puts of a lower strike price for
the same expiration.
TARGET:
• -2 to a 13 Bearish Bias
»» Master Trader Technical Targets
»» Event Based: Exit after the event
TYPE OF STRATEGY:
• Theta and Delta
DELTA RULE:
Keep this as a net credit
»» STO ITM Puts with a delta of .60-.90
»» BTO ATM or slightly OTM Puts of .20-.50
→→ BTO more puts than you STO
→→ 1:2 ratio, 1:3 ratio, 2:3 ratio
→→ Buy the strikes based on your technical target
THETA RULE:
Two months plus Time Expectancy
»» Typically, 3 plus months of time.
VEGA RULE:
»» Positive: Enter when volatility is expected to rise.
The Master Playbook
Diagonal Call
POSITION SIZE:
• Position size according to risk. Typically, 1-4% of the portfolio.
Calendar Spread STOP LOSS TECHNIQUE:

• There is not a specific stop loss technique on this trade as there is structured risk and we only allocate 1-2% of
the portfolio.
• Consider exiting if the trade moves outside the breakeven point on the risk graph.
• Theory: The Diagonal Call Calendar Spread is generally used when there is anticipation of profiting from stagna-
TARGET:
tion or a small rise in the price of a particular stock or asset. In the simplest terms, is involves simultaneously BTO
call while STO another call of a higher strike price for a different expiration. »» Expiration:
→→ If the short call is OTM then let it expire worthless and sell the next month if the long call
BIAS: still has enough time, typically more than 4 months remaining.
• 0 to a +1 Neutral to a Slightly Bullish Bias
→→ If the stock is at the short strike on expiration, then BTC the short call and consider
TYPE OF STRATEGY: →→ Selling more calls in the next month
• Theta and Delta →→ Close the long call
→→ Let the long call run as a single if technical analysis supports the decision.
DELTA RULE:
→→ Net Liquidation: consider close the trade at any point if the net liquidation value of the short
»» Long Call: BTO slightly ITM Call option with a delta of .60 or higher.
call is 50% or more.
»» Short Call: STO slightly OTM Call option. The result of the sold option should be at least 10% return
on the ITM call option bought.
THETA RULE:
»» Long Call: Buy 3-9 months of time.
»» Short Call: Sell less than 1 month of time.
VEGA RULE:
»» Positive: increase in implied volatility will aid this trade. If taking advantage of earnings implied volatil-
ity, enter this trade 4-6 weeks prior to earnings. Never hold through earnings.
The Master Playbook
Diagonal Put
POSITION SIZE:
• Position size according to risk. Typically, 1-4% of the portfolio.

• There is not a specific stop loss technique on this trade as there is structured risk and we only allocate 1-2% of
the portfolio.
• Consider exiting if the trade moves outside the breakeven point on the risk graph.
• Theory: The Diagonal Put Calendar Spread is generally used when there is anticipation of profiting from stagna-
TARGET:
tion or a small decrease in the price of a particular stock or asset. In the simplest terms, is involves simultaneously
BTO put option while STO another put of a lower strike price for a different expiration. »» Expiration:
→→ If the short put is OTM then let it expire worthless and sell the next month if the long put
BIAS: still has enough time, typically more than 4 months remaining.
• 0 to a -1 Neutral to a Slightly Bearish Bias
→→ If the stock is at the short strike on expiration, then BTC the short put and consider
TYPE OF STRATEGY: →→ Selling more put options in the next month
• Theta and Delta →→ Close the long put
→→ Let the long put run as a single if technical analysis supports the decision.
DELTA RULE:
→→ Net Liquidation: consider close the trade at any point if the net liquidation value of the short
»» Long Put: BTO slightly ITM Put option with a delta of .60 or higher.
put is 50% or more.
»» Short Put: STO slightly OTM Put option. The result of the sold option should be at least 10% return
on the ITM put option bought.
THETA RULE:
»» Long Put: Buy 3-9 months of time.
»» Short Put: Sell less than 1 month of time.
VEGA RULE:
»» Positive: increase in implied volatility will aid this trade. If taking advantage of earnings implied vola-
tility rise, enter this trade 4-6 weeks prior to earnings. Never hold through earnings.
Page — 100 Page — 101

The Master Playbook
Horizontal Call
POSITION SIZE:
• Position size according to risk rule

• If the price moves outside your breakeven points look to exit the trade.
• If the Stock breaks out of the range we are trading, exit the trade.
• Theory: The Horizontal Call Calendar Spread is generally used when there is anticipation of profiting from
TARGET:
stagnation in a particular stock or asset. In the simplest terms, it involves simultaneously BTO longer term calls
while STO an equal number of near term calls with the same strike process and different expirations. We can also »» Expiration if short call is OTM.
structure the trade at a strike price where we believe the stock will rise in value.
→→ Set a profit target based on 3 weeks of time passing and the assumed IV build you expect
in the stock.
BIAS:
• 0 to a +1 Neutral to Bullish Bias
TYPE OF STRATEGY:
• Theta
DELTA RULE:
»» Use the same strike prices
→→ BTO ATM or slightly OTM call option
→→ STO ATM or slightly OTM call option
THETA RULE:
»» Long Call: Buy 4 plus months of time
»» Short Call: Sell 1 month or less of time.
VEGA RULE:
»» Only trade this strategy during low implied volatility.
Page — 102 Page — 103

The Master Playbook
Horizontal Put
POSITION SIZE:
• Position size according to risk rule

• If the price moves outside your breakeven points look to exit the trade.
• If the Stock breaks out of the range we are trading, exit the trade.
• Theory: The Horizontal Put Calendar Spread is generally used when there is anticipation of profiting from
TARGET:
stagnation in a particular stock or asset. In the simplest terms, it involves simultaneously BTO longer term puts
while STO an equal number of near term puts with the same strike process and different expirations. We can also »» Expiration if short call is OTM.
structure the trade at a strike price where we believe the stock will fall in value.
→→ Set a profit target based on 3 weeks of time passing and the assumed IV build you expect
in the stock.
BIAS:
• 0 to a -1 Neutral to Bearish Bias.
TYPE OF STRATEGY:
• Theta
DELTA RULE:
»» Use the same strike prices
→→ BTO ATM or slightly OTM put option
→→ STO ATM or slightly OTM put option
THETA RULE:
»» Long Put: Buy 4 plus months of time
»» Short Put: Sell 1 month or less of time.
VEGA RULE:
»» Only trade this strategy during low implied volatility.
Page — 104 Page — 105

The Master Playbook
VEGA RULE:
Iron Condor Spread

Decreasing volatility aids this trade. Sell when volatility is expected to fall. This strategy can be used as an
earnings based strategy
»» Earnings Play: Place trade 1-2 days prior to earnings announcement to capture the volatility crush
after earnings.
→→ Assess the MMM (Market Maker Move) or the expected gap and sell twice the expectation.
→→ Consider closing immediately if market moves more than expectation after earnings announcement
• Selling both the bull put and a bear call on the same stock and same expiration is the Iron Condor. This is a or 75% of net liquidation value.
neutral based cash-flow strategy and is also bearish on implied volatility. Because you’re spreading the options
you are diminishing the speculation on direction, volatility and time somewhat but you also gain a structured risk
and margin amount.
POSITION SIZE:
BIAS:
• -1 to a +1 neutral Bias. STOP LOSS TECHNIQUE:
TYPE OF STRATEGY:
• Exit if stock gets within ½ ATR of strikes sold
• Theta
• Exit if stock ever breaks support/Resistance levels
DELTA RULE: • If the Stock breaks out of the range we are trading, exit the trade.
»» Bull Put: TARGET:

→→ Sell delta .15 or lower and below Support »» Expiration
→→ Buy next strike price lower. Consider widening the spread if less than 5 point spreads. »» 75% net liquidation value (credit received)
»» Bear Call
→→ Sell delta .15 or lower and above Resistance
→→ Buy next strike price higher. Consider widening the spread if less than 5 point spreads
THETA RULE:
and range from stock price to strike sold. Whereas the vertical credits have a directional component to it, the
Iron Condor does not. Consider selling front month (first month) or weekly expiration to maximize time decay.
Page — 106 Page — 107

The Master Playbook
Butterfly Call Spread

POSITION SIZE:
• Cost = max risk. Suggested position size would be 1- 4% of your portfolio but not exceed your max risk tolerance.

• None. You exit manually if the trade is losing and you do not believe it will stay in the range. If the stock price
exceeds your break evens from the risk graph you should consider exiting.
• A butterfly Call Spread is used by a trader who believes a stock will stay neutral and in a range over time. The
trade is a cash flow trade that benefits from time passing. Volatility is largely neutralized by the long and short op-
tions but will slightly benefit if volatility rises. It’s built by selling 2 options at the money and then simultaneously
TARGET:
buying 1 option in the money and 1 option out of the money. It is a 3-legged trade. The long options should be
equal distance up and down from the options you sell. »» 2-3 weeks of time and between 5-15% ROI based on your total cost.
• A trader will look for stocks that are range bound and expected to stay between two prices over time. Implied
volatility is preferred to be at the lower end of its range. It’s best if you do not hold through earnings.
BIAS:
• -1 to a +1 neutral Bias.
• Using a butterfly trade will produce a profit if the stock stays neutral over time. It will lose money if the stock makes
a sharp move up or down.
TYPE OF STRATEGY:
• Theta
DELTA RULE:
Sell options near .50 delta. Buy an option near .25 delta and .75 delta.
THETA RULE:
Positive. Use options between 15 and 75 days out. 45- 60 days is best.
VEGA RULE:
Positive. Increasing volatility aids this trade.
»» Earnings: avoid earnings. You can enter this trade before earnings to benefit from the volatility rise
prior to earnings. But you will exit before the earnings occur.
Page — 108 Page — 109

The Master Playbook
Inverted Butterfly
POSITION SIZE:
• Small relative to your account. 1-2% would be appropriate as this is a strategy labeled a non-core trade.
Call Spread STOP LOSS TECHNIQUE:

• None. You will manage the position manually as it develops. After the earnings is the most important day to check
the trade and make a decision if the stock has moved into your profit zone, is on the way into the profit zone and if
you feel comfortable enough to stay with the position.
• A trader uses an inverted butterfly spread when they believe a stock will move up or down a long way but don’t
have a directional bias. This is called a bi-directional trade. A profit will materialize if the stock moves up or down TARGET:
into the profit zones. A loss will occur if a stock stays in the middle of the range.
»» 50-90% of your total credit received.
BIAS:
• -2, -3 or +2, +3
• Theory: This trade will make money from a move in either direction. It’s appropriate to trade this strategy before
earnings where stocks might make a big move in price as a result of the event.
• Technical Bias: Bi-Directional
TYPE OF STRATEGY:
• Vega
DELTA RULE:
Buy 2 options at or near .50 delta and then simultaneously sell 1 option at .25 delta and sell 1 other option
at .75 delta. The construction of 1 unit of a trade will have a -1/+2/-1 relationship between the strike prices.
THETA RULE:
Negative at the outset of the trade. Negative if the trade stays in the middle. Theta will become positive if
the trade starts to develop a profit. Use options 1 week and up to 8 weeks until expiration to build the trade.
Shorter term options will be more sensitive to price swings. Longer term options will be slightly easier to
manage in comparison.
VEGA RULE:
Negative. Falling volatility will generally help this position. Volatility is largely hedged from the strikes them-
selves – as one strike will offset the other to a large degree – and the volatility impact will change as the trade
moves above or below your breakeven points.
Page — 110 Page — 111

The Master Playbook
Bull Call
POSITION SIZE:
• 1-5% of your trading portfolio but not exceeding your risk tolerance.
Diagonal Spread STOP LOSS TECHNIQUE:

• None. You will take the trade off on a loss if it breaks below technical support on the chart.
• A bull call diagonal spread is a combination of 2 options in separate months at separate strikes. We use this
strategy when a stock is bullish and we believe it will rise over time. TARGET:
• Trade Identification: Bullish Patterns »» 10% - 20% of your total cost. If you spend 2.00 per contract for the spread your profit target
would be set up to 2.40.
BIAS:
• +1 or +2
• Theory: Best used on bullish stocks where a trader wants to benefit from upward price movement as well as time passing
• Technical Bias: Slightly Bullish
TYPE OF STRATEGY:
• Delta and Theta
DELTA RULE:
Buy your option between .50 and .75 delta. Sell the other option between .20 and .50 Delta. The delta differ-
ence should be greater than .20.
THETA RULE:
The long option should be purchased 2 to 4 months out.
»» The short option should be sold with 1 week to 2 months of time remaining in the option contract. The
difference between the two options should at least be 1 month so if you buy the 3rd month out you should
sell the 1st or second month out.
VEGA RULE:
Increasing volatility will help this trade. It’s better to enter bull call diagonal spreads on stocks with low vola-
tility that you believe will start to rise over time.
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The Master Playbook
Bear Put
POSITION SIZE:
• 1-5% of your trading portfolio but not exceeding your risk tolerance.
Diagonal Spread STOP LOSS TECHNIQUE:

• None. You will take the trade off on a loss if it breaks above technical resistance on the chart.
• A bear put diagonal spread is used by a trader that believes a stock will drop in price over time and also wants
to benefit from time passing. TARGET:
»» 10% - 20% of your total cost. If you spend 2.00 per contract for the spread your profit target
BIAS: would be set up to 2.40.
• -1 or -2
• Theory: This strategy is best used on stocks that are dropping in price. If a stock is dropping very quickly you may prefer
another strategy. This is a moderately bearish position that will benefit from time passing as well.
TYPE OF STRATEGY:
• Delta and Theta
DELTA RULE:
Buy your option between .50 and .75 delta. Sell the other option between .20 and .50 Delta. The delta differ-
ence should be greater than .20.
THETA RULE:
The long option should be purchased 2 to 4 months out.
»» The short option should be sold with 1 week to 2 months of time remaining in the option contract. The
difference between the two options should at least be 1 month so if you buy the 3rd month out you should
sell the 1st or second month out.
VEGA RULE:
Increasing volatility will help this trade. It’s better to enter bear put diagonal spreads on stocks with low vol-
atility that you believe will start to rise over time.
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The Master Playbook
Diagonal
POSITION SIZE:
• 1-5% of your portfolio and not exceeding your risk tolerance.
Iron Condor Spread STOP LOSS TECHNIQUE:

• None. Most advanced options spreads don’t use hard stop losses but rather require management by the trader.
Exit the trade if you hit your pre-determined max loss based on your risk rules.
• A Diagonal Iron Condor Spread is used by a trader who believes a stocks implied volatility is low and will start
to rise over time. It’s a combination of calls and puts. TARGET:
»» 10-30% profit target based off your original cost. If the total debit is 10.00 and you’re tar-
BIAS: geting 30% your target will be set at 13.00.
• -1 0 +1
• Theory: It’s important to find a stock that you believe Implied Volatility will rise over time.
TYPE OF STRATEGY:
• Vega and Theta
DELTA RULE:
Buy a Call at or near .30 to .40 delta and a put at or near .30 to .40 delta.
Sell a Call and Put at or near .50 delta and just out of the money on both sides.
THETA RULE:
The long bought options will be near 6 months out in time. The short sold options should be 1 month or less in time.
VEGA RULE:
You must believe Implied Volatility will rise to put this trade on.
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The Master Playbook
Call Ratio
POSITION SIZE:
• 1-5% of your portfolio and not exceeding your maximum risk tolerance.

• Exit if the stock is no longer bullish. You will need to develop a plan based around the chart.
• Call Ratio Calendar Spreads are built by buying more long term options than you sell of short term options. All TARGET:
options will be at the same strike and all options will be call options. It’s a directional trade that will profit if the
»» This is an aggressive trade so your target will be higher than the other strategies. You will
stock moves up and will lose if the stock moves down. By selling the short term options you are reducing the time
determine a target based on a risk graph but you may target anywhere from 25% to 250% return
decay impact of the overall trade.
or more. It depends on how much time you buy and how bullish the stock is.
BIAS:
• +2 or +3
• Theory: Bullish Directional trade used by a trader who expects the stock to rise over time. The idea behind this trade is to
use a few short options that are high in time decay to reduce the impact of time passing on the long options.
TYPE OF STRATEGY:
• Delta
DELTA RULE:
Buy options at the money near .50 delta. The options should be call options. Generally, you’ll buy 3 call
options in the longer term options relative to every 1 call option you sell in the short term. The short term
options will be sold at the exact same strike as the long options you bought.
THETA RULE:
The options you buy should be 4 months or more in time out. Generally, buy more time than you think you
need. The options you sell should be around 1 month or less in time.
VEGA RULE:
Implied volatility is not the main focus of this trade, but because you are buying more options than you are
selling you will prefer volatility to rise over time.
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The Master Playbook
Put Ratio
POSITION SIZE:
• 1-5% of your portfolio and not exceeding your maximum risk tolerance.

• Exit if the stock is no longer bearish. You will need to develop a plan based around the chart.
• Put Ratio Calendar Spreads are built by buying more long term options than you sell of short term options. All TARGET:
options will be at the same strike and all options will be put options. It’s a directional trade that will profit if the
»» This is an aggressive trade so your target will be higher than the other strategies. You will
stock moves down and will lose if the stock moves up. By selling the short term options you are reducing the time
determine a target based on a risk graph but you may target anywhere from 25% to 250% return
decay impact of the overall trade.
or more.
BIAS:
• -2 or -3
• Theory: Bearish Directional trade used by a trader who expects the stock to fall over time. The idea behind this trade is
to use a few short options that are high in time decay to reduce the impact of time passing on the long options.
TYPE OF STRATEGY:
• Delta
DELTA RULE:
Buy options at the money near .50 delta. The options should be put options. Generally, you’ll buy 3 put
options in the longer term options relative to every 1 call option you sell in the short term. The short term
options will be sold at the exact same strike as the long options you bought.
THETA RULE:
The options you buy should be 4 months or more in time out. Generally, buy more time than you think you
need. The options you sell should be around 1 month or less in time.
VEGA RULE:
Implied volatility is not the main focus of this trade, but because you are buying more options than you are
selling you will prefer volatility to rise over time.
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MASTER TRADER
NOTES
B Y M AT T J U S T I C E
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The Master Playbook
MISTAKE #4
01. COMMON MISTAKES The Stars and Moon. There will be many rules and guidelines presented to you to help you identify
good trades. But it is true that you can’t wait for the stars and moon to align before you make a
trade. Learn to identify what is critical and what is nice to have. You don’t need 15 different indica-
tors pointing in the same direction before you make a trading decision. Refer back to mistake #1.
There will be sometimes that a given trade set-up gives you 90% of the criteria you’re looking for.
If the reward in the trade is bigger than the risk you should probably still pull the trigger.
MISTAKE #1
Not Pulling the Trigger. The most common mistake new traders make is they fail to implement what MISTAKE #5
they learn. Many new students will take a course, study a strategy, attend classes, review content
and even discuss with their coaches and friends – but they do not do much trading. The fastest Letting Past Mistakes Prevent You From Moving Forward. We’re presenting some common traps
path to comprehension is through doing what you are being taught. It will be important that as you that beginners can get them into. But always look forward! The next trade is in front of you not
study the material that you follow up with the exercises and homework that will be presented. If behind you. You will win. You will lose some. That’s part of the trading business. But you must keep
you want a thorough understanding of how to trade you must use the information you are being moving forward.
taught and pull the trigger on some practice trades. Even if you have never traded before, you need
to move forward boldly into this new business in your life and start to trade. Emotion drives the market: Fear and greed drive the market. For example, both fear and greed
are driving the current market. Fear of inflation in not only the U.S. but around the world, faith in
the rebounding economy, national debt, and the devaluing of the U.S. dollar, recession indicators,
MISTAKE #2 as well as the situation in Europe, to name just a few. People want to buy and they hope that the
economy and market are not only stabilizing but that we are out of the recession. Whether this
Live Trading before You Know What You’re Doing. Ask any seasoned trader and they’ll tell you is the case or not is not the issue of this class but it is important to point out what is driving the
up-front ~ make sure you know what you’re doing before you risk live funds. You can trade for market. Fear and Greed not only move the market as a whole but can cause us traders to make
decades and one thing is true: you will be presented with new ideas and new market conditions many mistakes. Most of which it is the decisions to 1) get in, 2) get out or 3) do nothing. That is
frequently. In the future it’s possible that you will use trading strategies that haven’t even been why it is important to analyze the market from a technical perspective. This allows us to (as best as
thought of yet. Anytime you learn a new strategy you need to test it out, make sure you know it possible) control our emotions. One of the challengers we all face is controlling our own emotions
thoroughly, and see success with it before you use it with your hard earned money. and focus on the price action. Take a look at the chart below. With all the news in the marketplace
every day we can become overwhelmed. That is why I like making trading decisions based on tech-
nical analysis because it takes in all information and it is reflected in the market chart. We have
MISTAKE #3 zero control over what the market will or will not do. We cannot and should not try to predict the
market. Trade with the trend and trade with your eyes.
Not Asking For Help. Have you ever been lost in your car? All of us have. When you get lost in
your car and can’t find the destination you are aiming for what do you do? Do you stop and ask
for directions? Go to your GPS system and let the technology show you the way? Or do you just
wander around random neighborhoods hoping you’ll just luckily find the place you’re looking for?
In this endeavor…. you need to be reliant on the systems in place, the people you know and ask for
help. You will inevitably have questions. Questions will arise on how to enter an order, how to use
the software tools you have and what the concepts mean that you are studying. Ask for help! If
you want to truly succeed you need to develop the ability to ask people for guidance. Your coach-
es, contacts, network, stock broker, trading group, study partner and many others can be good
resources for you to go to when you need them. Don’t be shy…. you don’t have to be in this alone.
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The Master Playbook
02. PRACTICE MAKING PERSONAL RULES
GOAL SETTING • Review your personal trading capital

• Practice making money management rules
• Determine both:
»» Maximum asset allocation per position
Goal Setting is very important to everyone, not just traders. However, to be a structured trader we
need to set goals that are realistic and attainable. Forget the $$$ signs and start thinking about →→ In % first then convert into $
percentages. There are two types of goals you need to set, personal and financial. Personal goals
could be anything from spending more time with the kids to taking a vacation to Hawaii next year »» Maximum risk tolerance per position
to retiring early. Personal goals are all about freedom to act. To do as one wishing as long as it is →→ In % first then convert into $
within the “social contract” for all you philosophical and historical minded individuals. Financial
goals are the goals that allow you your freedom to act so to speak and these can be very different • Calculate these numbers and write them down.
for everyone. Regardless, make sure you set realistic goals regarding the capital you are starting • Be sure to express the values in both % and $
with in the trading career. Goal setting is also the beginning point of your trading plan. This is re-
garding to 1) Asset Allocation and 2) Risk Assessment. While there is no defined specific on either
one as everyone is different a good rule of thumb is 10- 20% asset allocation and under 4% risk.
Both are pertaining to your entire portfolio. MAXIMUM ASSET ALLOCATION PER POSITION
Asset allocation is regarding the amount of capital dedicated to each position. This is regarding
stock trading as options will be a little different. This is a maximum and thus in an individual trade % $
can be less than the maximum.
Risk Profile is the maximum of risk you as a trader are will to take in each trade. According to the MAXIMUM RISK TOLERANCE PER POSITION
Risk of Ruin a good rule of thumb is less than 4%. Anything higher than that you run the “risk” of
blowing up your account.
% $
This is especially important with new traders as according to many high level brokers I have spoken
with new traders on average last between 2 and 4 months depending because typically they risk
too much and allocate too much to each position. This is especially true in the options market. Not
to mention they are uneducated, not structured, and do not work within a WRITE DOWN THE REASON WHY YOU CHOSE THOSE NUMBERS
System. Luckily, each of you is working diligently to offset each of those disadvantages.
Print, frame, and hang up your goals. Have a constant reminder each and every day as you begin
your routine of why you are taking on this journey of becoming a trader and investor. It is easy to
lose momentum and thus become disheartened when you lose a trade but remember this is nor- % $
mal for all traders of every experience level.
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The Master Playbook
03 .
Now what kind of order will you use to enter? Depending on
the product, the strategy and what time of day you trade you
may use a variety of different kinds of orders. These could in-
clude markets, limits, stops and/or stop-limits. Further along
in this course we will have a detailed examination of each of
THE STEP BY STEP these orders and what purpose they can serve.
Planning and Prep is an important stage. Over time it will be-
come second nature. When you’re new it will feel like more
SURVEY THE MARKET work. The important thing is to have a plan. Know where your
entry is, know what order you’ll use, know how much money
Everyday a trader needs to assess the market conditions. As part of your daily routine you will be you’ll commit, identify where you’ll place your stop and target
looking at financial news and reading market indexes. and then execute your trade according to your plan.
Surveying the market allows you to develop a market posture – a general feeling on what the condi-
tions will be moving forward. Developing a market posture allows you to research and make trades
that are in line with what you believe will happen in markets. While surveying the market you can EXECUTE THE TRADING PLAN
just look at the Standard and Poor’s 500 ($SPX) or you can look at many different indices including
the Dow Jones Industrial Average ($INDU), Russell 2000 ($RUT) or Nasdaq Composite ($COMPQ). Years from now looking back over the numerous trades
that you’ll have made there is no doubt that you will see a
theme. When you stick to your plans you are more in con-
trol than when you do not. Trading in the market should
CHOSE THE TRADABLE INSTRUMENT not feel like a road trip with your college friends…. where
you might stop and stay anywhere along your path. It needs
The market has many different products that you can buy and sell. You can use stocks for trading to be planned, structured and then executed accordingly.
– shares of ownership in a company. You can use options contracts – derivatives that represent Don’t vary from you plans often. There will be very few
rights and obligations. You can use futures contracts – leveraged instruments that can be bought times that this is a good idea – especially for beginners.
and sold. Or you can use forex pairs – groupings of two currencies that can be bought and sold. For Over time you’ll learn to tweak and adjust your techniques
most beginners it is smart to start with stocks. Stocks are simple, straight-forward, liquid and easy to to increase profitability. But the bottom line for now is
understand. 1 share represents a small part of the company you are trading. You can buy and sell that you need to stick to the script.
them with any broker. This course will teach you principles and techniques that can be applied to any
product the market offers. The reason to buy and sell a stock will be very similar to how and why you
would buy and sell a futures contract. The specifics of those contracts are important to understand SUPERVISE THE TRADE
so before you use anything other than stock make sure you take a course specifically designed to
teach you that product. In the earlier section where we taught you about your daily
routine you’ll remember that each day you need to man-
age the positions you are in. Each trade will have a game
plan. Part of that plan is to make adjustments as the trade
CAREFULLY PLAN & PREP THE TRADE develops. For example, you may buy a stock at $50.00 and
set an order with the broker called a stop loss that will au-
Once you’ve found a stock to trade now comes the planning. Planning out a trade involves several tomatically exit if it drops to $47.00 making sure that if you
important components. First, you need to decide how much money to use. This amount of capital lose the maximum you will lose is $3.00 per share. What if
determines your position size. It is smart to have a pre-determined position size for each of your the stock goes up to $55.00? Should we keep our risk at
strategies. For example, if you trade a breakout maybe you’ll use 6% of your account. Maybe you $47.00? Or would it be wise to move our stop loss up and
have a larger account and only want to commit 2% to the trade. Make these decisions for your trades enter it near $52.00? The answer is that many times you’ll
and stick to it in the planning stage. do this very thing. Moving stop losses, taking profits, and
generally supervising your trade is a part of your daily rou-
tine as a trader.
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The Master Playbook
STOCKS
SYSTEMATICALLY JOURNAL AND REVIEW A stock is a unit of ownership in a company. Every com- Stocks are the product that is most used by begin-
pany has their own unique number of shares available ners. One great thing about stock is that it’s straight
Keeping records can be very helpful to you as a trader. Over time you’ll notice things you’re doing and at their own individual price. When you purchase forward. The value of the stock is whatever is listed
right, some things you may be able to change and get better at. One of the best ways to identify stock you will do it through an online broker, who is pur- in your brokerage account when you’re entering the
these areas of strength and weakness is to keep a journal and trade log. Some traders have advanced chasing it for you from an exchange. The most impor- order. Your profits and losses are a direct reflection of
spreadsheets and exotic journaling techniques. Others just take a day once a month and review their tant person you need to learn to communicate with is the stock going up or down. Stocks can pay dividends
brokerage account statements. Your personality will determine which general approach you take. your broker. For the online trader, this is done through as well. A dividend is a small payout to the owner of
What is important is that you do periodically look back and do a self-assessment of your skill sets, using order forms that will tell them what we want to do. the stock at planned points in time. Dividends won’t
strengths and weaknesses. Now remember, even if your broker takes most of their be a big part of a trader’s income, but they don’t hurt.
orders online that doesn’t mean you can’t call them. Lo-
cate the customer support numbers for your broker and
write them down somewhere you can access easily if
MARKET MECHANICS you ever need to contact them via phone.
Trading is an exciting business. Markets seem to be the domino in the big picture that both starts and
is a result of events in politics, economy, war, international relations, and natural disasters and pretty
much anything you can think of. The “market” is a broad concept that includes things such as the
OPTIONS
ownership of a company, the cost of a barrel of oil, the interest rate on a 30-year bond and various A significant part of the markets has evolved in the volatility of the stock and the contract strike price
other products. Being so vast, it can be intimidating. Don’t worry; you don’t have to master all of it. form of derivatives. Stock options are an exciting way are the main components that define the value of an
Your focus will be to become proficient in the areas you need to know and leave the rest for another to leverage your money in the market. When you pur- option. Many investors use options to speculate but
time. We are not going to examine every part of the market – just those that matter to the student chase options you as an investor own the rights to they also can be used as insurance products as well.
taking this course. either buy or sell the underlying security at a set price It will be wise to learn how options work and in what
on or before some specified date. Options are traded capacity they fit your investment objections.
in contracts and usually represent or equal 100 shares
We will not be covering options strategies in this
of stock per contract.
course. But the basics of pivot points, candlesticks,
Options are a form of derivative. Their value and price momentum, entry point and planning would apply to
is derived mostly from the characteristics of the un- any product stocks and options included.
derlying security. In the case of a stock option, the
price of the stock, time until expiration of the option,
FUTURES
The futures markets are also comprised of derivatives. in futures contracts carry obligations rather than rights.
Futures have spent most of their history being thought Traders usually bypass this obligation by simply exiting
of as “commodities”. The most widely traded futures to- the contract before expiration to avoid assignment.
day are in the financial markets though. There are fu-
Derivative products can be scary to a new investor.
tures contracts on
There’s a lot of serious language about delivery, obli-
a wide array of underlying securities ranging from the gations and assignment. There is no doubt that they
10-year, S&P 500 index and even commodities such as can be wonderful tools for your master plan though.
corn and soybeans. Plan on making a commitment to learning how these
products work and determining how they fit your own
Futures contracts are used as speculative tools as well as
investment objectives.
insurance products. The major difference between op-
tions and futures contracts is that the buyers and sellers
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The Master Playbook
In the year 306 Constantine secured control of the Ro- you either long or short the stock and make or lose mon-
FOREX man Empire and removes the old currency from circula- ey based on the entry price to the exit price. It is the
tion and replaces it with the Solidus whose weight and largest, most liquid market in the world and one where
Why Forex? A few years back one of my mentors told of electrum, a naturally occurring blend of gold and
purity remained unchanged for the next 700 years. In everyone participates in it, even if they do not know.
me that it did not matter how much money I made in silver. The Chinese at some point during this same
313 Constantine adopted Christianity, and following his
trading options or in business. He went on to suggest era also developed coins made of low value base met-
conversion proceeds to confiscate the enormous treas- For example, when James Bond travels from London
that if I did not protect that money I would have noth- als. In the 5th Century BC the use of coins spreads
ures amassed in the pagan temples within the borders of to New York he will have to exchange his currency, the
ing left. While I did not understand the gravity of his from Lydia to Greece.
the Roman Empire, and as a result, Rome and the Catho- GBP, for the USD to buy goods and services in the Unit-
words the thought of losing everything I had worked
lic Church accumulate massive amounts of gold bullion. ed States. This is the same thing we all do when we
so hard and spend so much time on made me want to During the next several hundred years, the Persians
Even though Constantine stabilized the Solidus he con- travel from any country to a foreign country. The fo-
learn. I decided to learn how to trade forex. I now and Greeks use this newly established and highly
tinues to produce coins from debased silver and copper rex market is the exact same thing, we simply take one
understand why my mentor said what he did as I now portable form of currency to wage war on each other.
called Denarii, despite having plenty of bold bullion to currency and exchange it for another currency. Profit
understand we are going through a historical change Romans show up to the party a little late and are still
produce higher quality and more valuable coins. As a or loses are made from the entry price to the exit price
in the currency market. using heavy and cumbersome bars or bricks of bronze
result, over the next 20 years’ inflation for the Denarii depending if the currency goes up or down. It is also
and other precious metals until midway through the
rises 300% and creates huge disparity between the rich important to note that you can buy or sell any currency.
The earliest economies in human history were based 3rd century BC. The use of coins was adapted by
and the poor. Finally, in 410 Rome falls to the Visigoths,
on very simple and crass bartering systems wherein Rome by the second Punic War between Rome and
and the Roman banking system fails. Roman banks and One thing that is different is that currencies are not
one valuable commodity or good was traded directly Carthage from 218 to 201 BC; the demand for coins
coinage are abandoned until the crusades began near- traded as a single currency but as a currency pair as
for another. Livestock and crops were most likely to pay for troops was so high rulers decide to debase
ly 600 years later and stimulated the re-emergence of you are exchanging one currency for the other curren-
the earliest currency believed to be established be- the purity and weight of the coins in order to stretch
banking in Western Europe. cy. There are major pairs, cross pairs, and exotic pairs.
tween 6,000 and 9,000 years ago. The basic barter- the available supply, and as a result, Inflation is born.
We primarily focus on major pairs as those pairs in-
ing system; however, is very limited and problematic
Although many historians believe the reserve system clude the USD as it is currently the reserve currency of
by nature due to terrible inconsistency and general During the 1st century BC Julius Caesar invades Brit-
dates back to the ancient Greeks with the issuing of the the world. However, we will also trade cross pairs as
difficulty in establishing and maintaining fair and eq- ain and Celtic tribes also adopt the minting of coins.
silver drachma, it was the Romans the widely moved there are some good carry trades involving the JPY due
uitable trade. In fact, the Expansion of the Roman Empire helps
it into and international system. The definition of a to its long standing low interest rates and current Abe-
proliferate the use of minted coins all throughout Eu-
reserve system is “A foreign currency held by central nomics policies, a popular carry trade is to sell the JPY
Necessity being the mother of invention, more effi- rope. Sometime shortly after Julius Caesar uttered
banks and other major financial institutions as a means and buy AUD as the Australians typically have higher
cient systems would be established very early in our the Phrase “et tu bute” Caesar August reformed the
to pay off international debt obligations, or to influ- interest rates than Japan.
history using anything from rocks to seashells as cur- struggling roman monetary and tax systems and is-
ence their domestic exchange rate. A large percentage
rency. There is strong evidence that around 3100 sued the first known coins of differing monetary val-
of commodities, such as gold and oil, are usually priced The value of a currency is largely based on pure sup-
years BC around the same time the dating of the ue. Precious metals were used including pure gold,
in the reserve currency, causing other countries to hold ply and demand, making it a true market with smaller
earliest human writing systems discovered in ancient silver, bronze, and copper.
this currency to pay for these goods. Holding currency manipulation that other markets such as the stock and
Mesopotamia the banking industry was established.
reserves, therefore, minimizes exchange rate risk, as the bond markets. Typically, the value is based on the fun-
Valuable goods such as grains, livestock, and pre- For the next 300 years the Romans continued to
purchasing nation will not have to exchange their cur- damental strength or weakness of the home nation’s
cious metals are deposited for safe keeping around tinker with money by altering and manipulating the
rency for the current reserve currency in order to make economy, central bank monetary policy and in the case
temples and palaces. Around 2200 BC Cappado- weight and purity of the coin. Increasing and de-
the purchase.” In essence what the reserve system does of Canada and Australia it can be based on the value of
cian rulers guarantee the quality of the weight and creasing the amount of precious metals used to mint
is force other countries to hold the reserve currency to basic materials due to their nation’s strong reliance of
purity of silver ingots. Around 1750 BC during the the coins could alter perceived value of the coin. Di-
aid debt and trade in the international; markets. While producing raw materials.
reign of Hammurabi in ancient Babylon, the written luting the amount of precious metals used debased
there have been many reserves in history such as the
code of Hammurabi literally documents in stone first the value of the coin in two different ways: increasing
Greeks, Romans, Byzantine, Arabian Dinar, Florence Major Currencies: There are currently seven major cur-
known laws that govern money and banking opera- inventory, and reducing the quality. Because of this
Fiorino, the Gulden, Spanish Dollar, it was the British rencies, these include USD, EUR, JPY, GBP, CHF, CAD,
tions. During the ensuing millennium various models manipulation inflation levels fluctuated and at times
Pound in the 19th century that started the traditional and AUD. These are listed in order of most widely used
and methods of currency are adopted throughout the soared leading to rebellions and revolutions.
system we use today where central banks started issu- in international trade as reserve currencies. Let’s take
world. Until according to Herodotus around 687 BC
ing debt that could be converted into gold. a look at a few of the currencies a little closer.
the first crude “coins” are invented in Lydia and the
first retail shops are established. By the close of the
The forex market is what we call a directional market,
6th century BC the first true coins are minted in Lydia
this is also known as a speculative or delta based market
which is located in Asia Minor. The coins were made
as well. It is similar to that of the stock market where
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CURRENCIES
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The Master Playbook
01. 02.
USD - UNITED STATES DOLLAR EUR - EURO
The USD is the home currency of the United States This pegged the sale of oil, the world’s largest com- The EUR was established in 1995 and accepted as However, due to the economic problems in the Eu-
but is also the world’s largest reserve currency as modity, in USD which meant 90% of the world’s oil a traded currency in international markets in 1999. rope, debt problems, and disagreements between
it is the most widely used currency in international market was sold in USD. In 1999, led by Russia and Currencies that are pegged to its value are the GBP member nations, many have moved away from this
trade. The USD was create along with the United China, nations started making separate internation- and the CHF. It is the currency of the 17-member na- belief. The European Central Bank (ECB) is very simi-
States Central Bank, known as the FED, in 1913. It al agreements with the Middle Eastern countries tion European Union or Euro Zone and is used by over lar to the United States Central Bank (FED) in that it is
was names the worlds reserve currency in 1944 dur- to sell oil in non-USD transactions. Currency, the 550 million people worldwide in the local communi- responsible for monetary policy in the issuing of bank
ing the Bretton Woods act along with the IMF and USD has no complete commodity backing. How- ties including millions in Africa. For years, many in the notes as well as the determination of interest rates.
World Bank. At this point, it was pegged to the val- ever, as the world’s reserve currency the USD has world including China wanted the EUR to replace the
ue of gold, known as the Gold Standard. In 1971 the substantial value in the international trade market. USD as the world’s leading reserve currency.
Nixon Administration and primarily Henry Kissinger The USD is directly exchanged with other curren-
removed the gold standard and replaced it with the cies in what is known as Major pairs, examples are
Petrodollar in a deal first created with the Saudi Ara- the USD/JPY or the EUR/USD.
bia in 1973 and the rest of OPEC in 1975.
03.
JPY - JAPANESE YEN
The JPY was established as far back as 1885 and it This allows banks, institutions and professional trad-
widely used in international trade in Asian nations. ers the ability to sell the JPY and buy other curren-
Japan is home of the second largest economy and cies in emerging markets or the AUD as they will have
third most liquid currency. However, due to 3 dec- higher interest rates. This allows market participants
ades of economic stagnation, the JPY and economy to make money on the declining JPY as well as carry
is under tremendous pressure. The JPY is also widely the positive interest rate. The carry trade is by far the
used in carry trades as it traditionally has very low most popular trade in the world due to the ability to
interest rates in an attempt to spark inflation. carry positive interest rates.
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DEFINITIONS
CURRENCY QUOTE
»» First currencies are not listed like stocks; they are traded in
pairs. The currency pair has two currencies listed such as the
EUR/USD or the USD/CAD. The first currency is the base cur-
rency. The base currency is what we make the initial transaction
and is also what the chart represents.
»» (Fig 01)
»» The chart on next page (Fig 01), is the EUR/USD. The chart
LOT SIZE:
is in a bearish downtrend which means the EUR is depreciating
against the USD while the USD is appreciating against the EUR. »» While you can place whatever you want into a currency trade, typically we thing in terms of a Lot Size.
The USD is the second currency listed in the currency pair and This is similar to a contract in the options market or shares in a stock trade. There are three types of forex
is called the counter or quote currency. Simply put, you are accounts: Micro, Mini, and Standard. Micro accounts trade in increments of 1000, Mini are traded in incre-
exchanging one currency for the other, if you buy the EUR, you ments of 10000 and standard in increments of 100000. Typically most forex trader’s trade mini’s while larger
sell the USD and if you sell the EUR, you are buying the USD. In accounts of 25000 or more might trade Standard lots sizes. Once again, you don’t have to place a ton in a
essence, it really does not matter which one is listed first. trade to control a lot.
LEVERAGE AND POSITION SIZE

PIP:
»» Currencies are highly leveraged tradable instruments. In the
»» This stands for percentage in point or more commonly referred price interest point. The PIP is the lowest
United States they are leveraged at 50-1 which is one of the low-
denomination a currency will trade and is typically the 4th decibel listed in the currency quote. In the EUR/
est in the world. This means if you place a $1000 dollars into
USD it will be listed as 1.2539 with the 9 being the PIP. In the USD/JPY pair it will be listed as 1.15 with the
a trade, you actually control 50,000. Leverage can be a great
second decibel being the PIP. Outside the USD/JPY pair, all majors are traded in a 4th decibel. The value of
way to reduce your cost dramatically, however, it can be a double
each PIP is dependent on the contract value.
edge sword. To control the risk of leverage we place less than
2% of available capital into short term trades. You simply do not
TICK VALUE:
need to place more than that to effectively trade currencies. In
longer term trades such as carry trades you can place up to 4%. »» the value of each PIP is relative to the contract value.
CONTRACT SIZE
ACCOUNT CONTRACT VALUE POSITION SIZE PIP VALUE
»» The total amount of money controlled in the trade is known
as the contract size. This includes the amount borrowed as well Micro 1000 $ 20 .10 PIP Cents
as the amount placed in the trade. If we place a $1000 into the
trade, we borrow $49,000 and control a total of $50,000. Mini 10000 $ 200 $1
Standard 100000 $ 20000 $ 10
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The Master Playbook
To understand how this works, let’s analyze a swing trade on the USD/CHF
THE FOREX CYCLE
One of the reasons I love the forex market is due to the consistent daily cycle that we can utilize as a trader. The
market cycle is primarily utilized by day traders but swing traders will use it as well. A market cycle is a patter¬n in
the market that much like a bike wheel will go round and round and round.
There cycles in many things in the market, such as:
1) ENERGY:
This sector as specifically stocks such as COP and XOM will typically start moving up in Feb and March while they
will start to top out coming into the summer months.
LONG USD/CHF .9583
STOP LOSS: .9520
TARGET .9900
CONTRACT SIZE POSITION SIZE TARGET
317 pips equal a

100,000 $2000
gain of $3170
2) ECONOMIC GDP:
One of the most vicious cycles in the market is the one based on the GDP vs. Technical Analysis. As the economy is
growing at the top end of a cycle the market is starting to top off. The reason this is so disastrous to consumers is
due to the mindset. First, they simply do not understand the mindset of the traders and due to the economy grow-
ing they think it is finally time to get into the market. They finally have enough evidence to get back in and then
the market starts going down but the economy is growing. Second, they fail to see why the economy will start to
decrease in the future due to the correlations of the dollar and foreign markets slowing their purchasing of American
made goods. As the economy now tops out and corporations start to move to an area of safety including layoffs, the
market will start to bottom out and go up while the consumer starts to panic. What it means, consumers buy at the
top and sell at the bottom. This is the exact opposite of what the consumer should do.
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The Master Playbook
01. BANK OPENS

When a bank opens up there is a lot of movement in the forex market for the currency that is related to the
market that is opening up. There are four major opens related to the four major banks, Sydney, Tokyo, London,
and New York. There are two trades based on the bank open. The first is the standard bank open. For exam-
ple, the AUD/USD opens up at 5:00 pm EST, as you can see in the example below on the immediate open the
AUD/USD pair starts heading down and then gets into a standard trend. We would simple sell the AUD, place
a stop above Resistance and check the trade before we go to bed to either adjust the stop or pull off the trade.
3) TECHNICAL CYCLES:
Another example is the USD/JPY pair. The Tokyo bank opens up at 7:00 pm EST. At the open tonight the USD/
Traders understand how far stocks typically move in motive waves. Once the stock moves into a similar range JPY trade immediately starts to sell. With this trade we would sell the USD/JPY, place a stop and go to bed. I
that in the past the trader will start to lock in profit. This drives the stock back into support where they will start started calling this trade the Go to Bed (GTB) trade after one of my forex mentors told me to stop managing the
trade and simply go to bed. I typically do it on the EUR/USD pair as I am a little bit of a night owl but for many
buying again. This is called potential average yield or PAY. For example, if the stock moves 10 points in a prior
in the United States it would be the USD/JPY pair. In the morning you simply wake up and close the trade. In
motive wave once it moves 10 more points the traders will start to lock in profit as the trader will not hold past
my experience, this trade has about a 65-70% probability of success and about an average of 25 pips return after
what I call “the point of probability” draw downs. The reality is that unless something else comes out to impact the trade in Europe or the open of
the New York bank, the trade will fade in the same direction that it started. This is due to momentum in the pair.
•••
The forex daily cycle is no different. Everything has a cycle or a pattern that repeats, you just have to recognize
the cycle and then trade the cycle. In the forex market the cycle revolves around three things.
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The Master Playbook
The Bank open is an easy trade as it is simply a visual identification trade. If it opens up we will be buyers of
the base currency and if it opens down, we sell. 03. NEWS BASED EVENTS
The news based trade is what I call the Roller Coaster trade as it is fun, volatile and sometimes leaves you will a sick
stomach. The number one reason most markets move is due to economic reports. This is why we discuss economic
reports in our newsletters and in the Forex Report along many other things the coaches put out on Tackle Trading.
You must understand the economic reporting system even if you never trade forex as it impacts all markets. Eco-
nomic events are dominated by High Frequency Traders as they program the numbers into their systems.
There are two numbers that are important to an economic report, the first is the Market Expectation which is already
build into price action. This is called the efficient market theory in that everything known is embedded in price ac-
tion. We know the expectation, what we do not know is the actual number which is often times wrong. The actual
number upon the announcement will be immediately embedded into price. Two decades ago, the new number
•••
would take days to place into price, in 2014 it takes less than two hours.
If you are going to trade the Roller Coaster you must be in front of the computer and understand standard move-
ment’s vs non-standard movements. In the Trade Center there is a economic calendar
02. BANK CLOSED THE MOST VOLATILE TIME IN THE MARKET IS AROUND NEWS EVENTS .
• Unemployment • Retail Sales

These trades are easy…. don’t do them. When a bank is closed, there is little activity and thus the trends go
neutral. Your profit potential is always better and the trader has higher probability when the bank is open vs a • FOMC events/speeches • Consumer Confidence
bank being closed.
• GDP • Manufacturing
• Inflation
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The Master Playbook
DEFINITIONS INDUSTRY GROUPS

»» Industries are further broken down into Industry Groups. Some of the Industry Groups are broken
down even further into sub-groups. The Internet Industry, for example, includes the Internet Information
Providers, Internet Service Providers, and Internet Software and Services Industry Groups.
EXCHANGES
»» In today’s trading environment, many exchanges exist. The INDICES

exchanges are facilitators of buyers and sellers who want to con-
»» An Index or Indices is simply a basket of stocks designed to track the performance of a broader
duct business through the exchange. Another piece of the puzzle
market. Indices have ticker symbols just like individual stocks. For example, the biotechnology index
is the brokerage firm who will help to place orders from you and
includes 17 different biotechnology stocks. The Dow represents a view of the broad market and con-
make sure those orders go through an exchange. The four major
sists of 30 different stocks.
stock exchanges are: the American Stock Exchange (AMEX), the
NASDAQ Stock Exchange (NASDAQ), the New York Stock Ex-
change (NYSE) and the Over the Counter Bulletin Board Stock ETF ’S
Exchange (OTC.BB). »» One fairly new product has been created for the investor who wants to trade the indices, sectors and
»» Each day, millions of shares of stock and options contracts are specific groups. Exchange traded funds are equities that have been created to track the performance of
traded via these exchanges and on other exchanges throughout some underlying group of assets. Shortened as ETF, an exchange traded fund can be a great way to buy or
the world. Most of the trading today is done through electron- short an entire are of the market such as energy, financials and indices.
ic means while some exchanges still rely on the “open outcry”
method in a “pit.” The efficiency of either method is remarkable
ORDER ENTRY
considering the millions of transactions occurring each day.
»» Learning how to use an order form correctly is a vital step for a beginner. It’s important to spend time
SECTORS in your virtual trading account so you can practice these different orders many times until your confidence
begins to grow. Below is a description of 4 of the most common order types and how they work.
»» Each stock that is listed on the various exchanges is organized
into Sectors. Sectors are broad divisions of the companies that
make up the markets.
SHORTING
»» Shorting is the borrowing of a security and selling it to someone else. We are taking something we do
»» Examples include the financial sector, the technology sector,
not own and selling it for a credit. The credit is not realized until it has been bought to close.
and so on. The Sectors are further divided into Industries.
»» Short price – Purchase price = Profit or Loss. Example. MTJ Company is shorted at a price of $100.
INDUSTRIES When it drops to $90 and we buy it back we realize a profit of $10. Not all stock can be shorted. Your bro-
ker must have the security in inventory for you to be able to short the stock. If there is a question, please
»» Industries are more specific than Sectors and usually fit consult your broker. Most stocks you could name me can be shorted. Stocks under $5 and penny stocks
within a Sector. For example, the Banking Sector is broken typically cannot be shorted.
down into the Banking, Financial Services, Insurance, and Real
→→ Non-liquid stocks many times cannot be shorted.
Estate industries.
→→ You will need a margin account to short stocks.
→→ Another strategy you could employ instead of shorting stock is buying put options.
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The Master Playbook
ORDER
MARKET ORDER
»» A market order is simple and straight forward. You are

telling your broker to just do it. On a buy order it will buy
TYPES for the next available price. On a sell order it will sell for
the next available price. Market orders are used by trad-
ers who want to take action now and aren’t concerned
about the price.
LIMIT ORDER
»» A limit order is an order that behaves differently on a

buy and sell transaction. In simple language limit would
mean “maximum” for a buy order and “minimum” for a
sell order. If you enter a buy limit at 38.00 then you’re
telling your broker to buy the stock only if it is below
38.00 and not a penny more. If you order a sell limit at
25.00 then you are telling your broker to sell the stock
for a minimum 25.00 and not a penny less.
STOP ORDER
»» A stop order is a triggering order that you will use a

great deal. Stops can be entered as buy stops or as sell
stops. A buy stop order tells the broker to get me in only
if the price goes above a certain number. A sell stop order
tells the broker to get me out when the price falls below
a certain number.
STOP -LIMIT ORDER

»» A stop-limit order is a combination of the two orders.
It gives you a lot of control over what price you pay. A
stop-limit order creates a window for the broker to fill
the transaction. On a buy stop-limit order the stop price
is the price you’re telling the broker to enter whereas the
limit price is where you’re telling him your maximum is. It
will reverse for a sell stop limit order
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TECHNICAL SYSTEMS CHART TYPES
IDENTIFY TRENDS There are 3 chart types that we traders primarily use. Candlestick charts are widely used through Legacy Edu-
cation. We use candlestick charts for a few reason but it really boils down to they are visually easier to recognize
»» I want to identify the trend to know which type of trade to bullish/bearish singles and patterns. These charts also do a fantastic job at capturing the battle of supply and
look at. This is in reference to either bullish or bearish trades. I demand and the indication of momentum within specific candles and patterns.
also want to identify the strength of the short term and inter-
mediate trends. WESTERN BAR CHART
»» A style of chart used for technical analysis. It consists of a vertical line at the top, which indicates the
»» This helps me identify how strong my bias is. The trade I high for the period a security traded at during the given time period, and the bottom represents the low.
select must match the bias in the trend. For example, buying a The close/last is displayed on the right side of the bar, and the open is shown on the left side of the bar
call option is an extremely bullish trading strategy. The bias in
the trend must match the bias in the strategy.
IDENTIFY PATTERNS
IDENTIFY PATTERNS »» There are many technical patterns. In broad terms simply identifying retracement, continuation or reversal
pattern is appropriate. This also helps me identify the bias as well as what type of trading strategy to employ.
»» There are many technical patterns. In broad terms simply
identifying retracement, continuation or reversal pattern is ap-
LINE CHART
propriate. This also helps me identify the bias as well as what
type of trading strategy to employ.
»» A style of chart that is created by connecting a series of closing prices, from given time frames, to-
gether with a line. This is the most basic type of chart used and it is generally created by connecting a
IDENTIFY MULTIPLE AREAS OF series of past prices together with a line.
SUPPORT AND RESISTANCE
»» There are many technical patterns. In broad terms simply CANDLESTICK CHART
identifying retracement, continuation or reversal pattern is ap-
propriate. This also helps me identify the bias as well as what »» Method of drawing stock (or commodity) charts which originated in Japan. Requires the presence of
type of trading strategy to employ. Open, High, Low and Close price data to be drawn. There are two basic types of candles, the white body
and the black body. As with regular bar charts, a vertical line is used to indicate the periods (normally
daily) high to low. When prices close higher than they opened a white rectangle is drawn on top of the
SELECT STRATEGY high-low line. This rectangle originates at the opening price level and extends up towards the closing
price. A down day is drawn in black. The combination of several candles results in patterns (with names
»» The strategy that you select needs to match up with your like “two crows” or “bullish engulfing pattern”) which give insight into future price activity. For other
technical analysis. Too often traders attempt to shove the Japanese charting approaches also see Renko and Kagi charts.
square peg in the round hole. While that is appropriate for my
→→ Narrow Body Candles: show indecision, loss of momentum and can be good indicators of support
two-year-old, it is not for you. It is important to match strategy
or resistance depending on where they occur on the chart.
selection with technical analysis.
→→ Wide Body Candles: show momentum moving into the candle. This is especially nice during break-
outs or after retracement occurs.
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VOLUME
»» The number of shares or contracts traded in a security or an entire market during a given period of time. It is
TRENDS
simply the amount of shares that trade hands from buyers to sellers as a measure of activity. If a buyer of a stock
»» There are 3 lengths of trends and thus there are trends within trends. A trend is simply put the general di-
purchases 1000 shares from a seller, then the volume for that period increases by 1000 shares based on that
rection of the chart. Each length of trend will represent opportunity to different types of traders. Trends can be
transaction. Minimum level of volume is 500k shares traded daily. Volume is an indicator of supply and demand.
identified by drawing a line connecting 2 points of support or 2 points of resistance.
Volume is especially important during retracements and breakouts.
→→ Short Term: 2-6 weeks
»» On the retracement we would like to see a decrease in volume as we do not want momentum increasing dur-
• Day charts
ing a retracement. On a breakout we would like to see an increase in volume indicating momentum moving into
the stock. An increase in volume indicates that the breakout is legitimate thus making the breakout to be more →→ Intermediate: 1-3 quarters
probable.
• Day and Weekly charts
→→ Primary: Maximum of 2 years
• Weekly and Monthly charts
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BULLISH
CANDLESTICKS
Hammer Inverted Dragonfly Bullish Hanging Shooting Graves
Hammer Doji Spinning Top Man Star Do
Doji Spinning Top

CANDLESTICK
Marubozu
Technical analysis is a very in depth subject with discussions on trends, PATTERNS

patterns, support/resistance, momentum, probability, indicators and
many more topics. This can lead to a vast degree of confusion with Bullish Bullish Bullish Piercing Tweezer Bearish Bearish Bearish Da
Kicker Engulfing Harami Line Bottom Star Kicker Engulfing Harami
even the most seasoned technicians debating and disagreeing in deter-
mining the future movement on a chart. One of the concepts techni-
cians use in projecting immediate movement is candlesticks.
Candlesticks are a helpful tool at quickly identify changes in stock price.

You want to set your charts as candlestick charts. In the above diagram
Morning Bullish Three White Three Line Morning Doji Three Three Bearish Three Black Eve
you see two candlesticks: a white and red. The white candlestick on a Star Abandoned Baby Soldiers Strike Star Outside Up Inside Up Abandoned Baby Crows Doj
chart denotes an upward moving price where the price has closed high-
er than where it started. A red candlestick denotes a downward moving
price where the price has closed lower than where it started. The tail of
the candlesticks shows you quickly the highest and lowest point that
the stock was traded at during the period. In the following section we
will discuss a few key candlesticks.
Hammer There areDragonfly
Inverted
Hammer
dozens and dozens of
Bullish
Doji Spinning Top
Hanging Shooting Gravestone Bearish BEARISH
Hammer Inverted Dragonfly Bullish
different kinds of candlesticks. These are some of the more important Man Star Doji Spinning Top
ones that we look for when doing technical analysis. Doji Spinning Top Marubozu
CANDLESTICK
After looking at the examples you will see that even simple candlestick Hammer DojiPATTERNS
Spinning Top
identification can help you pick the direction that a stock may be moving.
Bullish Bullish Bullish Piercing Tweezer Bearish Bearish Bearish Dark Cloud Tweezer
Kicker Engulfing Harami Line Bottom Star Kicker Engulfing Harami Cover Top
HIGH HIGH
UPPER
SHADOW
CLOSE/LAST OPEN
Morning Bullish Three White Three Line Morning Doji Three Three Bearish Three Black Evening Evening
Star Abandoned Baby Soldiers Strike Star Outside Up Inside Up Abandoned Baby Crows Doji Star Star
BODY
Hammer Inverted Dragonfly Bullish Ha

Hammer Doji Spinning Top M
OPEN CLOSE/LAST NEUTRAL Doji Spinning Top Marubozu
LOWER
Bullish Bullish Bullish Piercing Tweezer
Hanging Shooting Gravestone CANDLESTICK
Bearish
SHADOW
LOW LOW
Kicker Engulfing Harami Line Bottom
Man Star Doji Spinning
PATTERNS Top Bullish
Kicker
Bullish
Engulfing
Bullish
Harami
Piercing
Line
Tweezer
Bottom Star
Bear
Kick
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THE DOJI PIERCING LINE
»» Doji candlesticks form when a security’s open and close are virtually equal. The length of the tail above and be- »» The piercing line candle is a very powerful candlestick and a reversal candle pattern. Unlike the doji, the pierc-
low can vary, and the candlestick will look like a cross, plus sign or inverted cross. Doji’s convey a sense of indeci- ing line has two candles to form the pattern. The first one is a wide body bearish candle following immediately by
sion or a battle between buyers and sellers over which direction the price should move. If they occur at a strategic the wide body piercing line candle that starts within the bearish candle body. Bears have lost all momentum and
point in the chart – support, resistance or a retracement – they can be a signal that a change in direction is coming. buyers are now dominating. This is a buyer’s candle. The bearish formation happens at Resistance and is called
the dark cloud cover.
»» In the example below you will see that ACT has been forming a bullish retracement at support level of 300.
This is a buy zone. However, over the past two weeks ACT has been going down and I do not want to buy the
stock or call options if the stock is going down. I only want to buy once it starts going up. The doji helps me
understand that the stock is starting to slow momentum at support as buyers are coming back offsetting the past
two weeks selling. This is a signal that the stock may be heading back north. I do not buy on the doji, it simply
prepares me to take action once I see confirmation.
THE HAMMER
»» Hammers are candlesticks that occur after a stock has moved significantly lower through the day, but then re-
verses and closes at or near the high of the day. It is a strong bullish signal – especially when it forms near support
or a presumed pivot point after a sell-off.
HANGING MAN »» The inverted hammer occurs at resistance levels and is a sell signal. The last hour in the trading day is very impor-
tant as it is a signal to what the traders think about tomorrow. If it sells into the close and finishes at the bottom end
»» Hanging Man candlesticks form when a security moves significantly lower after the open, but rallies to close of the trading range a hammer could form, signaling the traders do not like tomorrow.
well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candle-
stick forms during a decline, then it is called a Hammer.
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ENGULFING CANDLESTICKS
»» There are two types of engulfing candles, the bearish and the bullish engulfing candle. They are two of the strong-
est reversal candlestick patterns with complete domination by the buyers or sellers, depending on where the candle
forms. The candle formation involves two candles with the second candle completely engulfing the prior candle.
These candles are a technicians dream as we will take action immediately once that candle forms.
»» Bullish Engulfing is a reversal candlestick where the entire body of the candlestick is bigger than the previous can-
dlestick. When it occurs after a downward move it can signal that the stock will start to rise moving forward.
»» Bearish engulfing a reversal candlestick where the entire body of the candlestick is bigger than the previous can-
dlestick. When it occurs after an upward move it can signal that the stock will start to fall moving forward.
»» In the figure above, you see the stock Home Depot (HD). In this single chart we see two bullish engulfing candle-
stick patterns. Engulfing patterns are more significant when they occur after the stock has trended in one direction for
PIVOT POINTS
some time and can signal a change in direction.
»» The price of a stock moves based on simple supply and demand. When there is demand for stocks – willing buyers
who are purchasing as the price moves up – the stock is generally bullish. When supply overwhelms demand – buyer’s
interest slows and sellers start to pick up steam – the price of the stock falls and is generally bearish.
»» Pivot points are the place where supply meets demand and changes direction. In a chart it is vital to be able to
identify pivots and understand them. Using candlesticks signals from the previous section we can better identify pivot
points as they are developing. But it is also important to look back at pivots historically to help identify the nature of
the trend, the momentum of the trend, and the historical behavior of the price of the stocks. Traders make decisions
from pivot points. Good traders will identify a pivot as its occurring and take action. In the following section we will
explain how to identify pivots and how to combine candlestick analysis with pivot point analysis.
»» Pivot points also define where support and resistance occur in a chart. By identifying pivots you are also identifying
these areas at the same time. When a stock develops a pivot at the same place more than once then you are confirming
HARAMI the support or resistance zone. If you have rising pivots then you have rising support zones and by definition are in an
uptrend.
»» The bullish and bearish harami are reversal candle stick formations where the prior candle engulfs the current can-
dle. It is similar to the engulfing candles but opposite. The prior candle is typically a wide body candle with the second
candle staying within the wide body candle. This is a slowing momentum candle stick pattern. Due to the slowing
momentum, it is important to wait for confirmation before placing the trade.
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PIVOTS
Pivots also have time frames much like trends. They also represent possible triggers for buying or selling depending once
again on whether or not the pivot occurs at support or resistance.
»» Minor: A minor pivot has a minimum of 3 candlesticks and is used as support or resistance in a short term trend.
»» Intermediate: Intermediate pivots help identify short term and intermediate trends and once again represent buy-
ing/selling triggers.
»» Major: Major pivots represent support and resistance in primary and intermediate trends. A minor pivot can even-
tually change into intermediate and major pivots depending on what future action dictates. For example, the trending
chart above. The pivot of R1 is a minor pivot, however, if the market proceeds to change direction it can change into
an intermediate or major pivot.
VOLATILITY
Pivots start out small with minor changes in sentiment. It might be a doji candle, or a bullish engulfing. To technically define Volatility is the measure of price movement over time. To understand how much a stock moves on a daily basis simply take the
a change in direction as a pivot you must have a minimum of three (3) candlesticks to have been moving in one direction. ATR and divide it into the price of the stock. This can help us understand if a stock is too volatile for our personal risk profile.
When pivots occur after a series of candles they can produce a swing in direction and a change in trend.
»» Low Volatility: Low percentage movement in price over time.
»» High Volatility: large percentage movement in price over time.
SUPPORT
Support is a historical price point where prices start to rise. It’s where demand meets supply and where buyers overpower
sellers. By correctly identifying pivots you will also learn to recognize where support is on a stock chart. Support can vary
in strength and significance. When you are in an uptrend a support zone may only form once (minor support) as the stock is
entering higher lows and continuing its trend. When the stocks starts into a sideways move support may develop several
times over several different time periods (major support). The more times that a stock establishes the same support zone
the stronger and more significant it becomes.
In the example above you see a stock in a clear bearish downtrend. When pivot points develop at lower highs throughout
the chart you can clearly define the stock as being in a downtrend. One good exercise is to draw a small line at each of the
pivot points when you are charting a stock. This will help you as a beginner with trend identification and finding support
and resistance zones.
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The importance of mastering technical analysis lies in what Allen Iverson loves, practice, practice, practice. Like many new
concepts we learn throughout life learning new languages, techniques, and concepts can be confusing and frustrating. Al-
though you will not master the art of technical analysis overnight everyday it will get easier and easier. I have been studying
charts for over 9 years, have sat with individuals like John Bollinger and Steve Nison, went to countless webinars, and still
learn things new all the time. That is a great thing about learning and education…it never ends. However, as discussed at
the end of this course and over the next couple months it will start to get easier and easier.
Support is a historical price point where prices start to rise. It’s where demand meets supply and where buyers overpower
sellers. In the previous chapter you learned how to identify pivot points. By correctly identifying pivots you will also learn to
recognize where support is on a stock chart. Traders use support zones to help understand the nature of the trend, where
buying and selling opportunities may exist and to generally read the stock.
Support is a historical record of demand. It’s where buyers came in to buy. In the above example you see the stock SPY
and a significant support zone at
$112.00 on the intraday 5-minute chart. Over the last few days this stock has fallen down near $112.00 several times and
risen off of that zone every time. This is the psychology of support. Traders start to pay attention to this price and recognize
that buyers are more in control and willing to buy at this price. What if support failed and the price fell drastically below
$112? That is a breakdown and can be a significant signal to sell stock. Identifying support can give us information about
the past; help us make decisions on the positions we’re in and also allow us to prepare for changes in trend.
As a trader, you will start to recognize support instinctively. As a beginner you may want to draw the support lines when-
ever you open up a stock chart. This is a great exercise in helping you identify support zones, recognize patterns and trend.
Support can vary in strength and significance. When you are in an uptrend a support zone may only form once (minor sup-
port) as the stock is entering higher lows and continuing its trend. When the stock starts into a sideways move support
may develop several times over several different time periods (major support). The more times that a stock establishes the
same support zone the stronger and more significant it becomes.
In the above example you see a diagram of two different trends and how support is present in both of them. In the uptrend
on the left the support and pivots moved higher and then into a sideways range. Support in this kind of pattern becomes
strong – and significant – if support fails and price drops below that zone it may be the signal of a new downward move in
the stock. In the picture on the right of example 2.1 you see a stock that was entering lower support zones and then one
higher support zone. Rising support is a sign that demand is increasing and that a trend may be developing.
In this example you see the stock OIH. As you can see from the chart the stock had been in a downtrend and then moved
into a clear sideways trend. By identifying support zones a trader would see the change in trend and then be able to change
their approach to the stock. Clear support zones like this are a signal that there is demand for the stock and buyers are
starting to commit money. A breakout of the range could signify future price will be up trending.
Support doesn’t always happen at the same decimal point over and over again.
In fact, many times support is thought of as a “zone” where price action moves up. By recognizing that support can occur
more in a range a trader can adjust their expectations in regards to how price should behave around support zones.
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RESISTANCE
Stock prices rise and fall. When a price hits a high point and falls back it is thought to have hit a resistance zone. Resistance
is a price point where supply overcame demand. It is where sellers overcame buyers and put pressure on the price. By cor-
rectly identifying resistance zones you can learn to see trend changes, momentum changes, and entry points.
In the following section you will be shown many examples of how resistance can form in a stock chart and pattern. As a
trader you will want to learn to recognize resistance. Remember that support and resistance are historical pricing points
that are used to help understand the stock. Depending on the pattern and the characteristics of resistance it may be telling
us many different things. Some resistance patterns just help identify an uptrend, others may represent a barrier to change
and be used as entry points.
Traders use resistance and support to identify these patterns and entry points. It is important to learn to recognize them,
identify the information it is telling you and then act on that information. In the next two chapters we will teach you some
guidelines on how to trade from breakouts and breakdowns from support and resistance zones. These concepts are at the
foundation of all technical analysis. Spend some time studying charts, drawing your lines and practice your support and
resistance recognition.
In the above example you see four different examples of resistance patterns. The top left picture shows a clear up trending
stock where minor resistance zones are forming higher and higher. These areas are resistance zones and pivot points.
Minor resistance is exactly what it sounds like. It’s there but not as critical as other resistance zones that may be in con-
junction with previous zones. In the top right example, you see a stock in an ascending triangle pattern. Resistance rep-
resents a barrier to change. When patterns like this occur traders see the resistance as an opportunity. What if the stock
rose above that resistance point? It would be a powerful breakout and would be a tradable signal to buy that stock. In the
bottom left of the diagram you see a stock in a clear sideways move. The longer that a stock develops a resistance the more
important it becomes. It is strong – and significant. On the bottom right you see a stock that was developing lower resist-
ance points until at the end of the graph it started to move sideways. Changes in the relationship each resistance has with
each other can help us understand the trend, the changes in trend, and spot when momentum is shifting. As was stated earlier, resistance doesn’t always happen at the same number over and over again. Especially on volatile
stocks, you will see that resistance may be more of a zone rather than a specific decimal point. The key for us as a tech-
Using resistance can be a powerful tool for the technical trader. Remember, it’s not just historical information. It tells the nical analyst is to try and understand the psychology behind resistance. What happens to form a resistance zone? Well,
story of the stock. It describes where sellers and supply came in and drove the stock lower. price had been moving higher. Traders recognize this and stop buying and start selling. When price turns over resistance is
Take a look above and you see the stock OIH again. We looked at this stock earlier. This screenshot is off-set about 3 formed. What if the previous resistance zone was $22.00 like in example 2.6? When price was at $21.75 would you start to
months into the future from where we looked at it previously. Resistance is an important pricing point. When price breaks wonder if it was going to hit its head and fall? What if you were trading a stock and looked back at price and saw resistance
resistance as it did in April that is a strong upward signal and can be the first sign of a developing uptrend. Each minor pivot/ at $22.00, $21.75 and $22.25 respectively? Well, most traders would start to change their posture whenever price moved
resistance point moving forward is at a higher price. This is confirmation of an uptrend. anywhere near that zone of prices. This is how resistance can form a price. It’s a psychological phenomenon. It’s where
buyers get nervous and wonder if we’re going to break out.
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USING SUPPORT AND RESISTANCE
Stock prices rise and fall. When a price hits a high point and falls back it is thought to have hit a resistance zone. Resistance
is a price point where supply overcame demand. It is where sellers overcame buyers and put pressure on the price. By cor-
rectly identifying resistance zones you can learn to see trend changes, momentum changes, and entry points.
In the following section you will be shown many examples of how resistance can form in a stock chart and pattern. As a
trader you will want to learn to recognize resistance. Remember that support and resistance are historical pricing points
that are used to help understand the stock. Depending on the pattern and the characteristics of resistance it may be telling
us many different things. Some resistance patterns just help identify an uptrend, others may represent a barrier to change
and be used as entry points.
Candles and Momentum: Momentum works very similar in candlesticks as they do in patterns and trends. When we trade
MOMENTUM the breakout pattern we would like to see candles increase (wide-body) as opposed to retracements where we would like
to see a decrease in activity resulting in narrow body candles. Candles and momentum are very important around support
Increasing & Decreasing: The vertical distance in price between resistance pivots is the best measure of momentum. Ex-
and resistance zones as they tell us the story behind supply and demand which will increase the probably of retracements
panded resistance is a strong indication of a strengthening trend. In the example below you see two different examples of
and breakouts being successful.
momentum. The example on the left shows a trend with increasing momentum. The range on the upward price swings is
increasing. This is what you want in a trend. If it is consistent then you can go ahead and trade bullish retracements as well.
In the example on the right you see a trend with slowing momentum. »» Reversal Patterns »» Continuation Patterns
When momentum is slowing demand is slowing. Buyers are becoming less willing to push price to new highs. This is an →→ Bullish:
→→ M for Murder
expression that supply is slowly overcoming demand and the trend may soon reverse. Technical analysis is the historical • Bullish Retracement
record of price over time. The subtleties like momentum and pattern are conditions that a technician looks for to better →→ W for Win
• Bullish Breakouts
understand supply and demand. When we see characteristics that make us believe the trend is slowing – like momentum, →→ Head & Shoulder
reversal candles and certain volume patterns – then we avoid those situations for certain types of entry points. • High-Base
→→ Inverted Head & Shoulder • Cup & Handle
• Descending Triangle
• Symmetrical Triangles
→→ Bearish
• Bearish Retracements
• Bearish Breakouts
• Low-Base
• Inverted Cup & Handle
• Descending Triangle
• Symmetrical Triangles
→→ Volume and Patterns:
• Breakouts: Increase in volume above

the average.
• Retracement: Decrease in volume be-

low the average.
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INDICATORS
REVERSAL CHART PATTERNS
Our goal in this section is to gain an understanding of the basics of an indicator, identify how we will use them in our own
trading and go into depth studying the Moving Average Convergence Divergence (MACD) indicator.
In the above example you see a chart that looks like a jumbled mess. That’s because it is! This would be a miss-use of indica-
tors. You see seven different indicators built into one chart. There are hundreds of indicators available to traders. Should we
use them all? No, definitely not. One of the first things you will want to do is keep your charts simple. Only add indicators
and tools to your charts if you know exactly why you’re doing it.
Have you ever made a soup or stew? Any cook will tell you that making a soup can be an easy or very complicated pro-
cess depending on your ingredients and your experience using those ingredients. Some of the best soups are built from
basic ingredients and just put together simple and perfectly seasoned. Charting can be like making a good soup. Think of
indicators as the spices. Adding that exotic spice might just be the component to make your soup delicious and put a big
smile on your families face…..or it could wreck the whole thing. Don’t add spices (indicators) unless you know what they
measure, what their role is and how it will blend with your other components (candlesticks, trend, and pattern and entry
point). For now try to identify a few indicators to use and stick to them until you have mastered them. In other words, keep
the ingredients simple.
Why Do We Use Indicators?
Traders use indicators as secondary tools. They’re added to charts to help measure things like momentum, trend, and
changes in price and volatility. The role of an indicator is to help you as a trader in interpreting the data in a simpler and
clear manner. They are not meant to over-ride the chart analysis. You need to be able to analyze charts from a bare stand-
point without indicators.
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»» Indicators will not replace your need to identify trend, support, resistance and
pivot points on your own. What they can do is help confirm your readings, give you
signals for entry and help explain the conditions of the chart.
»» Indicators are measured specifically from the chart settings you’re using. If you
have a daily chart up the indicators will produce readings specific to that chart time
frame. If you change the time from to 5 minutes per candlestick then the indicators
will now measure their readings from that chart. Learn to use this information.
→→ Strengths of Indicators
One of the greatest strengths an indicator can bring is its utility. It can make
»» In this example you see a blank screenshot of how most oscillators will look. They will have a zone at the
it simpler to see complex readings in the stock. Is momentum changing?
top that is considered overbought a zone at the bottom considered oversold and then a range in the middle
Certain indicators will show you this clearly. Is the trend strengthening or
that is neither overbought nor oversold. When the lines on an oscillator move into the overbought zone then
weakening? The use of indicators can aid you in seeing this, sometimes be-
price may have moved high enough to start slowing down and developing a resistance zone. When the lines
fore your technical analysis picks up on it from candlestick patterns alone.
on an oscillator move into the oversold zone then price may have moved low enough to be slowing down and
Indicators are powerful tools but they also have some inherent flaws.
start developing a support zone.
→→ Weaknesses of Indicators
One of the weaknesses of indicator analysis is that it is by definition lagging.

All indicators are lagging indicators. They measure data that has already MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD)
happened. That’s how they produce their graph. They pull information from
the history of candlesticks, price, moving averages and volatility and create Another powerful indicator is the Moving Average Convergence Divergence (MACD). MACD measures changes in mo-
a reading from it. This is old information – still valuable – but old. mentum in the stock’s price. It can be a very useful tool for a technical analyst and can help you identify strong signals that
you can make trading decisions from. For beginners, using MACD alone with your candlestick charts can be a good way to
Another weakness that can result from indicators is that traders tend to
start as a chartist. Remember, you may add any number of indicators over-time. For this course we are going to focus on
use them as a crutch. Beginners generally lack confidence in their chart
understanding and implementing MACD as our primary indicator. It will be important to understand how to use it, what it
reading skills. This can make you want to rely on the use of indicators to
measures and when to act on MACD signals.
tell you what to do. This is a mistake. Remember indicators are secondary
tools to confirm YOUR readings from price. Don’t let them become the star
of the show. When an indicator produces a signal you should pay attention
to it, add it into your analysis and then make your own decision. You want
to be a strong technician that uses the tools on the chart to aid in your de-
cision making. Relying solely on any indicator is a mistake.
→→ Oscillators
Oscillators are a type of indicator that moves up and down in a banded range.
Types of oscillators include the Stochastic and Relative Strength Index.
Oscillators are used by traders to measure overbought and oversold condi- In this example you see a diagram of some of the basic components of the MACD indicator. MACD is not an oscillator – yes
tions. In other words, if an oscillator moves to the high point of its range it it does move up and down – but it
is a signal that the current move based on its time frame is probably going
to slow down. Oscillators can be very helpful tools at identifying where and moves up and down over its Zero Line. There are two lines present on the MACD. They are an 8 and 17 period moving
when price may be slowing down. Used in conjunction with pivot points, average. MACD measurements are derived from the relationship of these two moving averages have. When the moving
support and resistance an oscillator can be a powerful tool for a trader. averages cross up it is a bullish signal. When they cross down it is a bearish signal.
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The Zero Line is a significant zone for the MACD indicator. Whenever the two moving average lines are above Zero then
you have a confirmed upward trend. Whenever the two lines are below zero you have a confirmed downward trend. This
is important information. If you see the lines cross down below zero that should force you to analyze the trend of the
stock, its pivot points and support and resistance zones and then confirm the reading. Changes in the MACD are a result
in changes in the stock’s price and trend. Remember all indicators are lagging in the sense that they measure information
and price changes that have already happened. In that sense, all technical analysis is lagging. That’s ok; the past can give us
vital information about what may be happening in the future.
In this example you see the stock Yahoo Inc. (YHOO). When the stock is breaking down or in a downtrend, the MACD
crosses to the downside are strong signals to sell. Conversely when the stock is at support and crossing up the upward
moves in MACD are strong signals to buy. No indicator is going to be 100% correct. It’s not supposed to be. Crosses from
the MACD signal a change in momentum.
When other components support this change – support zones or breakouts – then that signal becomes strong. What would
you consider to be the strongest crosses in the example? In the most recent cross to the downside at the end of the chart
would you use that as a signal to sell that stock?
Using MACD crosses is a smart approach for beginning traders. One factor that will be big in determining your success
using the crosses will be determined by your judgment in identifying which crosses are strong, significant and correspond
with other signals in the stock.
MACD can help you identify changes in trend as well as momentum. In example
you see the Dow Jones Industrial Average on a weekly chart with the MACD indicator set below. At the beginning of the
chart while the stock was in a downtrend you see MACD below the zero line and putting in lower highs and lower lows.
As the trend changed you’ll notice the MACD also changed. As the lines curl up, and enter higher lows and highs within
the MACD chart you can use MACD to confirm the new trend. By the time MACD moved above the Zero Line you have
a confirmed and strong uptrend on the index. Using MACD crosses can help you identify specific entry points. Watching
the MACD in general can help you spot momentum changes and confirm the direction of the trend.
»» MACD and Entry Points
→→ One of the most popular uses of the MACD indicator is to use the line crosses as a signal to buy or sell
a stock. When the two lines cross each other that is an indication that price is changing direction. Buying
The daily chart is the most common chart time frame used by traders. Good traders will use more than the daily chart – such
stock on an upward cross can be smart. Remember, indicators are not used solely on their own though. If a
as the weekly and intraday – to see different views of a stocks technical analysis. In example 2.12 you see the Standard and
stock is at a support zone, in an uptrend or a strong fundamental stock AND the MACD crosses up – you
have a very powerful signal. Traders who combine indicator analysis with other forms of technical analysis Poor’s 500 Index ($SPX). Just looking at the MACD crosses to the upside, through the year of 2009 while the $SPX was in
generally get better results and make more money than those who just rely on the signals blindly. a general uptrend the MACD only crossed 11 times. 11 times! That’s about 1 signal every month or so. MACD signals from
a daily chart will generate moves that may last from several days to over a month in time. If you are going to trade from this
signal you need to understand what kind of move it should produce and then match a trading plan accordingly. Buying a
stock because the MACD crossed up on the daily chart can be a swing trade (a few days) or position trade (several weeks).
You will want to have this expectation in mind and set your stop and target accordingly.
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The Master Playbook
»» Exercise – Using the MACD »» MACD and Momentum
One of the most important skill sets you can develop is to identify when trends are changing. Momentum in a stock is a
→→ Add in the study for MACD using the default settings (8,17,9).
measure of the strength of the current move. When momentum starts to change it can be the beginning signs that the
→→ Set the chart to daily and the scale to about 1 year in time. You can adjust the amount of time on a chart trend is rolling over and going to start heading the other direction. One of the most important measurements derived from
in two ways – either by dragging the very bottom of the chart left and right or by locating the button in the the MACD indicator is the strength in momentum. Where the lines cross is as significant as the fact that the crossed at all.
tools section on the left side of the screen labeled “increase spacing” or “decrease spacing”. Just like in stock charts, you will watch for the pivot points in the MACD and how they relate to each other. By identifying
momentum changes in the MACD you can keep yourself in a position of safety, or start to take trades in the direction of
→→ Count the number of upward crosses that the MACD had for GOOG on your chart.
the newly developing trend.
→→ How long did the average move last after the MACD crossed up?
→→ How short was the shortest move? How long was the longest move?
→→ You will want to gain a clear expectation of what kind of move a MACD cross produces as well as how
long the move lasts. Each stocks behavior and personality is a little bit different but on a daily chart you will
see MACD cross in one direction around 12 times give or take a few. The same number would be present
for downside crosses.
Higher highs and higher lows are the basis of an uptrend. In the first chapter we learned to identify pivot points. At the
beginning of this chapter we examined support and resistance and learned how the relationship of support and resistance
over time can help us see the trend of a stock. You can use the same concepts when analyzing MACD. This chart was
developing at the peak of the bull market in 2007 and 2008. This is a weekly chart so the MACD is measuring longer term
signals and giving us more important big picture information. When the market was hitting highs – the MACD was starting
→→ In downward trending stocks you will be focusing on downward crossing MACD signals. The MACD
to put in lower highs. This is called divergence – when the indicator is signaling the opposite reading that the price is pro-
crosses in both directions on all stocks. But if there is a trend prevalent then the crosses in the direction
ducing. It is powerful and important. If a stock has higher highs and higher lows but the MACD has lower highs (OCT 2007)
of that trend should carry more significance. Above you will see the $SPX during the end of 2007 and be-
ginning of 2008. The index was in a clear downtrend as is labeled by drawing the resistance zones. Lower then you are seeing a change in momentum. In other words, the uptrend is slowing, failing and eventually rolls over. Could
highs and lower lows are consistent across the chart. When MACD crosses down in the direction of the this be valuable information to have? Of course it is. And you will want to use MACD on your charts.
trend this is strong confirmation that the stock is ready to fall in price. Some of the signals produce small
One significant part of this example is that it is measured from a weekly chart. If we had a daily chart up for the same index
moves – others were followed by significant moves to the downside. Using trend, resistance and MACD
during the same time frame it very well may produce the same readings. But it will have more ups and downs, and respond
crosses together a trader could have identified periods when the market was weakening.
to changes faster. Which one do you think is more important? Part of the answer to that question depends on if you are
→→ What can we do with this information? Well if you are invested in stocks you may see a signal like this trading short-term (swing and position) or longer term (position, managed investments, 401k’s, IRA’s etc.).
to start liquidating and moving to cash. As a trader you may start selling short – selling a security you don’t
Charting on multiple time frames is an advantage. It can help us understand big picture signals as well as short term signals.
own – to try and profit from falling prices. Selling short is a way for traders to play down trending stocks.
We will use both.
You don’t have to wait for the market to be bullish to trade. In fact, it is important to learn to short sell.
Short selling will be a big part of your trading business and can allow you to profit in bear markets when
you identify signals like you see in the example.
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MOVING AVERAGES POTENTIAL AVERAGE YIELD (PAY)

Indicators are tools that you’ll find underneath the candlestick charts. They are charts in and of themselves. Moving aver- This is a unique indicator created to aid in understanding more accurate ranges. It takes into account two very important
ages are what traders call overlay’s. pieces of data:
They are lines that are drawn on the candlestick charts. Traders use moving averages (MA’s) to quickly identify the nature »» Time expectancy: Use two swing ranges to estimate the average number of days in a typical price swing.
of the trend over different time frames. In the section below we will discuss three MA’s the 20, 50 and 200.
»» Price expectancy: Use two swing ranges to estimate the average price swing.
In the above example you see a chart for the stock GOOG. You’ll also notice three lines drawn upon it. These are moving
average lines. Not all traders use MA’s. Some prefer to keep the chart clean without clutter. Traders who add MA’s to their BULLISH RETRACEMENT (PULLBACK)
charts do so for various reasons. Some traders will use them to help identify trading signals. For example, if a stock has a
All stocks go up and down. Even strong stocks. When an up trending stock falls back in price it can create a pattern called
history of bouncing off of the 20 day MA and rising it may be a reasonable assumption that when the price hits the 20 MA
a Bullish Retracement. Bullish retracements are opportunities for traders to buy stock with the anticipation that price will
you can look for a trade. As is the case with indicators, you don’t want to use MA’s to produce trades just from their signal
start going back up. Some of the strengths of bullish retracements include:
alone. If the signal happens in conjunction with other technical analysis signals – pivot points, support and MACD crosses
– then it may be extra confirmation to the strength of the trade. »» Buy Low / Sell High
A simpler use of MA’s is to help you quickly identify the trend. There are three MA’s on this chart. Traders would use the »» Occurs Frequently
20-day MA to help identify the short term trend of the stock. If the MA is moving up, then you can confirm that the short
»» High probability of trend continuation
term trend is moving up. The 50 MA would be used to identify the intermediate trend and the 200 MA used to identify the
long term trend. These are skill sets you will develop as a trader and be able to do this without MA’s but if you need a little
extra help and a point in the right direction adding MA’s to your charts isn’t a bad idea.
»» Conclusion
In the previous session you were taught how to identify support, resistance and various signals derived from indicators
such as MACD, Stochastic and Moving Averages (MA’s). These are a few of the indicators available for use by traders. Using
indicator analysis can be helpful when trading. Remember that if you’re going to use an indicator then you must thoroughly
understand what it is measuring before you allow it to reside permanently on your charts. It’s ok to try other indicators
(there are an infinite amount) but before you ever change the way you analyze charts you should have a firm understanding
of what that indicator measures and how you’ll use it. In the next chapter you will be taught how to identify two of the most
important bullish entry points – the Bullish Breakout and Bullish Retracement.
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Bullish retracements occur in up trends so you’ll want to look for stocks that have higher pivot highs and higher pivot lows.
There are 7 price and volume criteria to look for when qualifying bullish retracements.
Price and Volume Requirements for Bullish Retracements
For bullish retracements to qualify perfectly under our model the stock must be:
»» In an uptrend
»» Increasing Trend Momentum
»» Have 3 periods of Retracement
»» Slowing down within the retracement
»» Have a technical catalyst The vertical distance in price between resistance pivots is the best measure of momentum. Expanded resistance is a strong
indication of a strengthening trend. In example 3.4 you see two different examples of momentum. The example on the left
»» Have a reversal candle
shows a trend with increasing momentum. The range on the upward price swings is increasing. This is what you want in a
»» Have decreasing or below average volume on the retracement trend. If it is consistent then you can go ahead and trade bullish retracements as well. In the example on the right you see
a trend with slowing momentum. When momentum is slowing demand is slowing. Buyers are becoming less willing to push
price to new highs. This is an expression that supply is slowly overcoming demand and the trend may soon reverse. Avoid
these patterns when looking for bullish retracement trades.
Technical analysis is the historical record of price over time. The subtleties like momentum and pattern are conditions that
a technician looks for to better understand supply and demand. When we see characteristics that make us believe the
trend is slowing – like momentum, reversal candles and certain volume patterns – then we avoid those situations for certain
types of entry points.
You can use this as a check-list when qualifying the stocks, you are researching. In the above example you see the stock
GameStop (GME). GME has a strong bullish retracement happening. The stock is in an uptrend. It has increasing trend
momentum – the strength of the up moves is consistent and expanding. There are 5 candlesticks that created the pullback
(only need 3 minimum). It is near a technical catalyst (fib retracement and 20 day moving average). It has a strong reversal
candlestick (hammer). And the volume is decreasing on the sell- off.
Learning to identify bullish retracements is more natural for some than others. Remember, at its core we’re simply looking
for a good up trending stock that has had a price correction. All of the steps and check-lists are just to confirm the strength
of the pattern. The basic idea is still there. Uptrend + a short term fall in price = bullish retracement.
One of the qualifying factors is the strength of the uptrend. Higher swing pivot highs and higher swing pivot lows are what
define an uptrend. But not all higher highs and higher lows were created equal. Some trends have signs of increasing or
sustained momentum – these trends are more likely to continue.
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When identifying bullish retracements price should be

trading near a technical catalyst that can help initiate
change. Catalysts include: support/resistance zones,
trend zones, moving averages and others. In example
3.6 you see the stock JAS. The pattern has a bullish re-
tracement developing. Part of what makes this a good
candidate is that the retracement is occurring near
some key technical catalysts. First, the old resistance
zone near 34.00 should produce a new support zone
near where the price is pulling back to. Second, the
trend line that is drawn with the upper green arrow
connecting the pivot points together can act as sup-
port as well. When looking for bullish retracements
learn to look for these kinds of characteristics.
An orderly price retracement from the swing pivot high for a minimum of 3 periods is typical of a profit taking sell-off. A reversal candle can signal change. Watch for a doji,
When looking for bullish retracements we want to see that the pullback in price is orderly and clearly recognizable. hammer, and engulfing or another reversal candle. A
closing price that is greater than the opening price is a
Orderly pullbacks tend to have orderly rallies. They’re easier to spot and easier to trade. This stock has a very orderly bullish
simple reversal candle. Anytime you’ve had an order-
retracement developing. When the candles are down in a consistent fashion, slow their selling and then turn back up the bull-
ly retracement, the stock price is trading near a key
ish retracement pattern is smooth and traded easily. It can be more candlesticks – as is the case here with 5 red candles down.
technical catalyst and has a reversal candle present
Decreasing candle range indicates that the sell-off is losing momentum. This is something else you want to look for. When you can look at those stocks as tradable bullish re-
the sell-off starts you can expect some long range candles. As the sell-off slows down the candles will become smaller and tracements. In other words, look to buy the stock for
that indicates the sell-off is about to be over with. a bullish move is highly probable.
Finally, decreasing or below average volume indicates

decreasing participation during the sell-off. Volume
tends to increase near the technical catalysts as trad-
er’s act & react. During the sell-off you see that the
volume driving the price is smaller than on most days.
As long as volume is normal or less than average you
can go ahead and take the bullish retracement trade
and enter into it. If volume was much bigger than nor-
mal this might be a sign that selling is strong and bears
are in control.
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TRADE
I DENTI F I CAT I O N
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01.
BULLISH BREAKOUTS
TRADING BULLISH BREAKOUTS
When you buy a breakout pattern you are buying the momentum of the upward price swing. The intention is to buy at
Bullish breakouts occur anytime a stock breaks above a technical level of resistance. Breakouts can be exciting, powerful a high point (as it breaks resistance) and to carry the stock as it moves to even higher highs. Buy high sell higher is quite
and can occur in many different trading patterns. Using bullish retracement and breakouts together you will have the different from the traditional mindset. In that sense it’s not easy for some traders to jump on the breakout bandwagon.
beginning tools to trading bullish stocks. But, it is critical that you learn to play this momentum grab. It can feel uneasy purchasing stocks when they are at a high
point in their graph, but if the stock pattern and characteristics fit the guidelines you are going to learn then you should
be pulling the trigger. All trades are probability bets. You are assuming that based on the conditions in the stock you have
a high probability of it moving to profitable prices. When you enter a breakout that probability is based in the momentum
that drives the breakout.
Stocks breaking highs tend to move higher. It is a trend following trade and one you will want to use.
»» Price and Volume Requirements for Bullish Breakouts
In this section we will be describing the price and volume requirements that you need to identify when entering a
bullish breakout pattern.
In this example you see a diagram of a high base breakout. Breakouts can occur in any trend. Strong breakouts occur
when the stock is already in an uptrend, price is near the resistance zone, on bullish continuation patterns, have room to
run after the breakout, have seen consistent buying pressure before the breakout and have had light volume preceding
the breakout.
Breakouts are essentially a momentum play. When momentum stalls at resistance traders are unsure whether price will
fall back or continue higher. This hesitation tends to be accompanied with a lack of decision making – low volume and
low range candles. When price finally eclipses resistance you can see a nice upside move as the result. The indecision
period has been replaced by a momentum shift to the upside.
In the above example you see the stock KEIM. This stock has many breakouts throughout the duration of this pat-
tern. The one identified in the graph is a strong breakout. Resistance was clearly established and then price rallied
above resistance and exploded to the upside. To be a strong breakout stocks must have the following:
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→→ An Uptrend In the previous example you see 4 separate patterns: a cup and handle, an ascending triangle, a high base and a bull flag. All
of these patterns are good patterns to look for bullish breakout candidates in. When you run breakout scans you will need
→→ Be Trading within One ATR of Resistance
to try to understand the momentum. One common characteristic of all of these patterns is that price was trending – and
→→ A Bullish Continuation Pattern then stalled. That indecision bottles up and when breakouts occur they can be profitable. That’s what we’re trying to find.
When you go out and actually scan, it can be common to find patterns that are close to what you remember but not exactly
→→ Room for Price to Run
text book. The key component and characteristic to look for is a stalled trend.
→→ Consistent Buying Pressure
When deciding amongst many candidates make sure that no historical support/resistance zones will interfere with a healthy
→→ Remaining Range run in price. Remember to check plenty of history on both daily and weekly charts. If you are looking at a stock that shows
a breakout potentially at $50.00 but 6 months ago it had a major resistance at $51.00 maybe you should look at other
→→ Volume light or normal before the breakout
candidates. You will find trading candidates, part of your job is selecting amongst those candidates and hand-picking the
Higher swing pivot highs and higher swing pivot lows are what define an uptrend. Sometimes strong breakouts will strongest ones. This can be one major consideration – how much room do you think it can reasonably run?
occur after a series of higher highs and then price starts stalling and moving sideways as it fails to break resistance.
If the overall trend is intact, this stalling action is called a high base. High base breakouts are strong patterns to enter
for bullish trades.
Correctly timing a breakout is more likely if price is trading within one ATR of the resistance zone in question. Using
ATR is helpful in many regards. You can use it to help set stops, understand the volatility and range of the candles
and also know what candidates are ready to enter on breakout trades. When price is trading close to its resistance
it is time to enter the order for the breakout.
COMMON PAT TERNS FOR BREAKOUTS

There are many different patterns that breakouts can occur in. When you trade a breakout you are just buying a break of
resistance with the anticipation that price will rally higher than that.
In the above example you see the stock MIPS. You will want to identify the normal range that the price runs in. On upside
moves this stock normally made a .50 cent to .75 cent move. The biggest move it had was 1.25. Price is not likely to exceed
a typical trading range. Make sure that price is not overextended or overbought prior to the breakout. For this stock, the
current move seems to be starting at 5.25. A breakout at 5.50 and add a normal trading range above that we still could ex-
pect a .50 to .75 cent move (which is what we got). If your breakout candidates have room in the range left they are strong
candidates and should be traded.
Decreasing or below average volume indicates that participants are waiting for directional price confirmation. Once direc-
tion is confirmed participation tends to increase as trader’s act and react. You shouldn’t expect to see the volume spiking
before the breakout occurs. When you’re identifying breakouts you will normally see light or average volume. This is pre-
ferred. In fact, if there is a great deal of volume before a stock breaks resistance it may be a red flag as those are probably
sellers who are getting rid of their stocks. Volume isn’t a big part of the analysis pre-breakout. As long as things look normal
then you can move forward with the rest of your analysis.
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SECONDARY GUIDELINES FOR BULLISH BREAKOUTS »» Case Study

After you’ve identified the primary characteristics to qualify a stock as a breakout candidate
you will want to look at the secondary guidelines to make trading decisions. Many times you Now that you have an idea on how to identify and locate a breakout candidate in the next section you will see how
will find several stocks that might be good breakout trades. Making a choice between 2 can- a trader would apply the S.U.C.C.E.S.S. model to the bullish breakout strategy. Using this method, you can methodi-
didates might come down to how the indicators look, what sector each stock is in and so on cally work through each of your candidates.You will want to gain a clear expectation of what kind of move a MACD
and so forth. In this section we will be describing many secondary areas to consider when cross produces as well as how long the move lasts. Each stocks behavior and personality is a little bit different but on
trading breakouts. a daily chart you will see MACD cross in one direction around 12 times give or take a few. The same number would
be present for downside crosses.
Indicators can play a role in all trades you make. Many times the indicator is used as a second-
ary tool to confirm the momentum or trend of a stock. When looking at breakouts you will
want to make sure MACD has strong bullish characteristics – including an upward sloping line,
positive trend in the MACD pivots and the lines above the zero line on MACD. When using in-
dicators, you want to put them in their proper context. You would probably not disqualify any
breakout candidates due to MACD characteristics. What you can do is qualify one candidate
as stronger than another based on the readings from the MACD or other indicators.
When you are deciding on which stocks to trade it can be smart to look at the underlying sector
the stock lies in. There will be times when the individual stock you are looking at is so strong on
its own that you won’t care much about its sector. As a secondary point of analysis it’s some-
thing that you CAN look at but not MANDATORY to factor in. It’s up to the individual trader
how important they want to make these points of analysis. Don’t use these secondary guidelines
as a way to disqualify everything…. use them to help make decisions between equal candidates.
It’s also smart to check the news on companies you will be trading. No news is generally good In the above example you see the stock WLT. The stock has a clear uptrend and is currently in a basing pattern with
news. If you go into the news headlines, scan them and look for major announcements. If there the price near resistance at 72.50.
is a news story a month in the past – ignore it. News has an impact on the stock as its occur-
→→ Survey the Market
ring. Outside of that the market has a short term memory. They price the information in and
move on. When checking the news, also look to see when the company releases its next quar- You will want to search for and trade bullish breakout stocks when the market conditions are also bullish. During your
terly earnings report. Beginners shouldn’t trade stocks that will be releasing earnings soon. daily routine if you see an upward move in the overall market it will be smart to also look for upward and bullish stocks to
trade. Using bullish breakouts during upswings in the market increases your probability of success.
Calculate your potential reward and risk. Anytime you make a trade you should try to estimate
the reward potential you see versus the risk you will be taking. For stock trades, it’s better to →→ Choose the Tradable Instrument
have more reward than risk. When looking at breakouts you have to estimate what a normal
We will use stock for this trade. Options trading is a wonderful thing to learn and use but when you’re new try to
trading range is and then try to project how high the stock can reasonably go. Then estimate
use stock for its simplicity and to learn how to execute the trades.
where you would place a stop loss. The amount of reward is the difference between your entry
price and your upside target. The amount of risk is the difference between your entry price and
your downside stop loss. These two numbers will give you an estimated reward to risk ratio.
Fundamental analysis may or may not be an important factor to look at. Most swing traders –
traders who buy and look to hold for a few days to a few weeks – don’t consider fundamentals
as a big factor in their decision making. It can be a factor – but definitely not a critical compo-
nent. If you are trading a breakout on a weekly chart though and you are looking to hold for
several weeks to several months then fundamentals are important. In other words, you must
like the company, what product or service it offers, the health of its industry and so on and so
forth. Remember, the longer you plan on being in something the more fundamentals matter.
For swing trades or shorter, it’s not a big part of your analysis.
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The Master Playbook
→→ Systematically Journal and Review.
After the trade is closed and you have either

made money, lost money or broke even log your
thoughts and records in your trade journal.
This case study gives you an example on how

to approach bullish breakouts. You will want
to start practicing these in your paper account
sooner than later so that you can master these
techniques. Bullish breakouts are a trend fol-
lowing probability bet. As you review your
trading records you should expect to have a
batting average – you will win and lose at times
– regardless of how well you trade breakouts.
→→ Carefully Plan & Prep the Trade Your overall profitability will come down to
identifying good candidates, trading with mar-
In the example we see the stock WLT again. As a breakout we will enter this trade with a buy stop limit order if the price ket conditions, managing risk, position sizing
rallies above resistance at 72.50. We will set our stop 1 ATR rate (2.71) below our entry price at 69.79. The average trad- and trade management.
ing range is approximately $15 and the current move is $5 into that range already. A successful breakout can produce
another $10 move so we will set our profit target at $82.50. We will purchase a number of shares that reflects this risk.
How much money do you lose if you buy at $72.50 and then get stopped out at $69.79? Answering this question can
help us determine how many shares we’re comfortable trading. Each trader is different and you’ll want to develop some
position sizing rules for yourself to make sure you don’t make the mistake of over-leveraging.
Entering the order like you see above is a correct way to enter into a bullish breakout trade. By doing it this way you will
only be part of the breakout if the breakout occurs. In example 3.17 and 3.18 you see that the stock has not yet broken
out. This is what we want! We want to be there when the breakout occurs. Using stop-limit orders is a way for you to
pre-determine when and where you will be willing to trade the stock.
→→ Execute the Trading Plan
Now that you have entered your order you will need to either wait for the trade to fill and then set your stop and
target or use an advanced order to do so now. Advanced orders are broker specific – one popular one is called a
one-triggers-other (OTO). OTO orders are a way for you to submit an order that will send off a second order if and
when the first one gets filled. So in other words if you get in, then your stop loss and target get sent in as orders
but not otherwise. Contact your broker to see if this is available in the trading platform you use and ask if they can
help you understand how to do this within that platform.
→→ Supervise the Trade
Once you get in you should log into your trading account and monitor the trade as part of your daily routine. Check
to see if there is profit developing. As the trade moves up and if you are making money you can move the stop
loss to higher prices to lock in that profit. Usually you should just execute the trading plan according to how you
established it. The longer you trade you may develop the skill sets and willingness to adjust the plan as the trade
develops in small and strategic ways.
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The Master Playbook
02.
BEARISH RETRACEMENTS
In previous sessions you learned how to identify, locate and trade the bullish entry points. In session 6 we will turn our
attention towards the bearish side of the markets. Markets rise and fall. As a trader you will need to learn how to rec-
ognize bearish patterns as well as how to profit from them. Using stocks you will be selling short to benefit from falling
stock prices. Short selling is the action of initiating a trade by selling it before you own it. If you trade in an IRA you will
want to learn to use products such as inverse ETFS that you can buy instead of sell-short so you can still participate in
TRADING A BEARISH RETRACEMENT
the bearish side of the market. As you make progress as a trader you will eventually be introduced to the options prod-
ucts such as put contracts that you can buy and make downside bets on stocks in the market. Not all brokerage accounts allow you to sell a stock short. You will need to have a cash or margin account to be able to do
so. Generally, if you have questions about the rules and setup of your brokerage account you will need to contact them
A bearish retracement is a common trading pattern that occurs in down trends. When stocks are falling, occasionally directly as each broker is a little different. If you are going to sell-stock short within the bearish retracement pattern it will
they will have short term periods where the price bounces back up. This upward price action is seen as a correction. require that you use margin.
When the trend is intact, traders look to use this as an entry point to sell the stock.
Margin is thought of by traders as the cost of selling short. It doesn’t mean that you are using leverage necessarily – in
When you sell something you don’t own, that is called short selling. In essence, you’re selling it now at retail prices with fact all that happens is that the broker takes some of the money you have available and sets it aside so you can’t use it
the intention of buying back at a lower wholesale price. for other trades.
Bearish retracements have certain pricing requirements that we look for to qualify each candidate. In the following
sections you will learn about those requirements, how to analyze a bearish retracement pattern and then how to search
and enter these trades.
In the above example the stock has a clear downtrend and has had several bearish retracements throughout the duration
of the trend. At the beginning of July, you see a bearish retracement where the candlesticks have brought the price back up
into the falling trend line. These periods of retracement are what we’re looking for when using this strategy.
In the above example you see a bearish retracement pattern. There are 7 points of pricing and volume criteria that we
are looking for. Bearish retracements are the inverse of the bullish retracement. It occurs during a downtrend and we’re When trading bearish retracements, you can use seeker scans to find candidates, use stocks from your watch lists or stocks
looking to take advantage of these short term opportunities in bearish stocks to make some money while stocks fall. you hear in the news. The key will be to find a pattern that fits the pricing and volume criteria. In the following sections we
will be looking at these criteria in detail.
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→→ The stock must have a corrective retracement.
As we have seen in the few previous examples, corrective retracements are periods when the price rallies
from a low point back into the falling trend. You want the retracement to be orderly and have a minimum
of 3 candlesticks to qualify as a retracement. If there are more candlesticks, as is the case in example 4.3
where there are 7 candlesticks, that’s just fine. The key is that the retracement is clear and orderly.
→→ The stock must be slowing as it approaches the technical catalyst.
As the stock retraces back up you want to see the candlesticks slow down. This slowing effect is an ex-
pression of the lack of buying interest and signals that bullish buyers are slowing down their momentum.
In the above example you see two different pictures of what a retracement might look like. Increasing
candle range is on the left side of the example. When candle range is increasing momentum is picking
up steam and this should be avoided for bearish retracement patterns. The ideal scenario is a decreasing
candle range as you see on the right side. When the candle range is slowing down the bearish retrace-
»» Price and Volume Requirements for a Bearish Retracement ment is setting itself up for confirmation and a new price move to the downside. As a trader you will want
to look at candle range during these retracements to qualify the pattern as a strong tradable pattern.
In this example you see the stock TBT in a bearish retracement pattern. When stocks rally back into technical cata-
→→ The stock must be trading near a technical catalyst.
lysts during their bearish retracements this can give you a queue that the stock may be ready to turn back downward
in the direction of the general downtrend. Technical catalysts are things like moving averages, trend lines/zones, resistance points, old support
points and so on and so forth. In example 4.3 you see the stock has rallied into the falling 20 day moving
→→ The stock must be in a downtrend to qualify as a bearish retracement.
average. This is a technical catalyst. The price is also trading near an old support point which very often
→→ When you have lower pivot highs and lower pivot lows you have a confirmed downtrend. will form as a new resistance. Support in May and June was near $37.50. This will also be a technical
catalyst. You must have at least one technical catalyst to qualify the bearish retracement. If you have
→→ The stock must have sustained or increasing trend momentum.
more, which is the case with our current example that can be added confirmation that you have a good
You want to use stocks that are consistently falling and it’s even better if the speed of and length of the stock to trade the bearish retracement strategy with.
drops is increasing. Momentum is best seen through the length of the moves that occur after the pivot
→→ The stock must have a reversal candle.
points. In example 4.3 you see several downward moves in the last few months. How much did the stock
normally drop during these moves? This momentum picture can be best described as consistent. We don’t Reversal candles signal change. Watch for doji’s, hammers, haramis, hanging men or at minimum a can-
see increasing momentum – bigger and bigger drops – but the drops seem to be consistent. In May the dle where the closing price is lower than the opening price. This candle is a good signal that the technical
stock dropped form a pivot at $44 to roughly $38. In June it had a smaller drop from $41 to roughly $38. catalyst is being confirmed and the stock is ready to fall in price again.
Then in late June the most recent drop was from $40 to $35. A series of $6, $3 then $5 is pretty consist-
→→ The stock must have average or below average volume during the retracement.
ently falling. Increasing trend momentum would see smaller drops proceeded by bigger drops.
Look at the candles in which the price started rallying back up. Did the volume spike considerably?
Was it about the average that it has normally been? You want to avoid bearish retracements where
the price is moving up on high increased volume. You want to target bearish retracements where the
price is moving up on average or light volume.
These are the pricing criteria to qualify a trade as a bearish retracement. In the following section we
will identify a few seeker scans that can help you find some candidates to trade.
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»» Secondary Check-Lists for Bearish Retracements
There are two categories of analysis: Must haves and secondary guidelines. The previous section we looked at the
must haves. This section we will go over the secondary check-list items to consider before you trade a bearish retrace-
ment trade. Remember the stars and moon mistake – you won’t have all of your trades fit every point of analysis. As
you develop trading experience you will learn when you’re willing to ignore one part or another. In paper trading, it’s
more important that you trade – even if you’re making mistakes – than to make sure everything is perfect. You have
to develop your experience.
Indicators such as the MACD, Stochastic, RSI and Money Flow can help you with any trade you make. There isn’t
a specific signal you’re looking for but rather just a confirmation that the trade you’re making is in line with the
measurement the indicator is telling you. For example, if you’re looking at a bearish retracement trade and using
MACD you may look to confirm that the momentum is bearish, that the MACD is below the zero line to confirm
a bearish down trend and so on and so forth. Use indicators as a secondary point of analysis.
Now we analyze the sector that RIMM is in, XLK. This is the Sector SPDR Technology ETF. At the same time our
stock RIMM is in a bearish retracement pattern and looking like it may turn to the downside the Technology sector
is breaking below support and is bearish. This is helpful information to have as it gives more credibility to the idea
that RIMM would be a good trade for a bearish retracement. When the sector is bearish it just adds strength to
your trading decision on your bearish retracement trades.
Earnings dates occur roughly every three months and it is wise to look up the companies next earnings release
before you take the trade. Stocks can gap wildly on earnings so you don’t want to be in a position moving into
that event without knowledge of it. If you check the earnings date and it’s not in the immediate future you can
go ahead with your trading idea.
No news is good news. This is a saying you hear in markets. Scanning the news headlines, you can get an idea of
what information is driving a stock’s price. Look at the news that has come out recently and if there aren’t any
glaring headlines that scare you off then you can go ahead and move forward with your trade.
After all of this you need to apply any personal money management rules and then journal the trade. The process of
scanning, examining must have criteria and then looking at secondary guidelines will allow you to make good trad-
Another secondary guideline is to check the industry and sector when you make a trade. In the above example ing decisions. These check-lists are designed to get new traders to consider the components of a trade that matter.
you see the stock Research in Motion (RIMM).
RIMM is in a downtrend and is developing a bearish retracement pattern. Before you pull the trigger you may
want to look at the entire technology sector to see how its pattern and analysis is looking. By going to the sector
chart you can confirm that taking a trade on RIMM is in line with the overall movement in its sector.
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»» Case Study →→ Carefully Plan & Prep the Trade
For the purposes of this class we will be using stock. When trading bearish retracements you will be selling short. In
Now that you have been taught what they must have and secondary guidelines are we are going to look at a case study
future classes you will want to learn how to use put options, futures contracts and other products as well.
of a bearish retracement trade. Like in previous chapters we will be using the S.U.C.C.E.S.S. model as we go to make
sure we analyze the trade correctly and cover all of the points. This model can help you stay organized and methodical.
Now that you have entered the trade execute based on you planning and prep.
→→ Supervise the Trade.
Once you’ve entered this trade as a sell short you will want to check its progress on a daily basis as part of your daily
routine that was taught in session one. Most of the time you will just execute your trading plan. If the stock starts
falling you can move your stop loss down to protect profits.
→→ Systematically Journal and Review.
Every trade you make should be journaled for further review at a later date.
S – Survey the Market
U – Use trading software to identify potential trades
C – Choose the Tradable Instrument
C – Carefully Plan & Prep the Trade E – E -- Execute the Trading Plan
S – Supervise the Trade
S – Systematically Journal & Review
→→ Survey the Market
You’ll want to look for bearish retracements when the overall market conditions are also bearish. If the market has been
weak or sideways recently but yet had a short term rally – bearish retracements might be out there for the hunting. Follow
your daily routine as was described in session 1 and during your market analysis phases this can give you an idea on what
strategy to do research for.
→→ Choose the Tradable Instrument
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STOCK: AMAT STOCK: AMAT ACTION: SELL SHORT

For the purposes of this class we will be using stock. When trading bearish retracements you will be selling short. In →→ Action: Buy to Cover
→→ QTY: Same as you Sold Short Price: Stop @ 11.59
→→ Action: Sell Short
→→ Duration GTC
→→ QTY: determined by your position size rules Price: Stop/Limit 11.28/11.17
This stop loss will tell your broker to exit and cut your loss if the trade doesn’t work. Setting stops is an important
Setting up an order this way you are telling your broker to sell the stock short if the price falls to 11.28 or below. part of trading. Many beginners will feel intimidated at order entry but that’s why it’s so crucial that you start
By using a stop limit and setting the limit at 11.17 you are telling them that the least you’d be willing to accept for practicing as soon as you can. If short selling is a new concept to you then jump into your practice account and
the short sale is 11.17. This allows you to control the price that you will enter at as well as telling the broker to try a few out.
wait until this price is met. If the stock simply keeps going up then you won’t enter this trade. You will only enter
To set your target you must get an idea on what a typical trading range is. Looking back historically at the pivot
this trade if the price trades below 11.28 and if you get filled before it falls to 11.17 or lower. Stop limit orders are
points in example 4.8 you see that the stock generally falls 1.00 to 1.50 when it moves between pivots. Selling
great tools to enter stock trades.
short at 11.28 we could reasonably set a target order to buy back at $10.00 which would be a $1.28 fall in price.
Another part of the trading plan will be the stop loss. When you sell the stock short you want the price to fall. If the
price goes up that’s how you’ll lose money so you set your stop loss above your entry price. The high of the day is
at 11.53 and the ATR is .31 cents. Our desired entry is at 11.28 so adding 1 ATR rate above our entry the stop loss.
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»» Case Study
STOCK: AMAT ACTION: SELL SHORT
→→ Action: Buy to Cover
→→ QTY: Same as you sold short Price: Limit @ 10.00
→→ Duration GTC
This order will take your profits once the price of the stock falls to $10.00. Many traders will tie their orders togeth-
er with a one-cancels-other advanced order (OCO). Not all brokers have this function so you will need to check with
the online broker that you are set up with.
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The Master Playbook
03.
BEARISH BREAKDOWNS
Bearish breakdowns occur when a stock price falls below support on a bearish stock. They occur frequently, are easily
recognizable and can be traded by selling stock short to benefit from falling stock prices. In this section we will be ex- TRADING A BEARISH BREAKDOWN
amining the bearish breakdown pattern, looking at examples of breakdowns, teaching the core pricing criteria to qualify When you trade a bearish breakdown generally you’ll enter using a stop-limit order. You want to be prepared for the break-
breakdowns and then looking at a case-study of a breakdown trade. You will want to master all four patterns that have
down even before the price falls below support. In this sense, you are looking for stocks that haven’t broken down yet…but
been taught in this workbook as they are the core to entry into stock trades.
show all of the signs of a potential breakdown. In this next section we will discuss each pricing criteria in depth so you can
get a good idea on what to look for when trading bearish breakdowns.
»» Price and Volume Requirements for a Bearish Breakdown
In the above example you see a bearish breakdown. Breakdowns occur anytime the price of the stock falls below sup-
port and starts heading lower. What makes a breakdown strong is if it fits the pricing criteria we teach throughout this
section. All stocks have breakdowns. You will want to trade the ones that fit these criteria. Breakdowns are essentially
a momentum play. You are selling at a low point with the anticipation of buying back at an even lower point. Sell low,
buy lower is not a common mind-set. But you are working with the trend and when stocks breakdown you can see swift The stock must be in a downtrend to qualify for a breakdown. Lower pivot lows and lower pivot highs are what define a
and sharp moves to the downside. downtrend. In this example you see the stock STX. This stock has been falling throughout the duration of the chart and is
now in a sideways basing pattern. If the price breaks below the support point, it will be in a bearish breakdown entry point.
These are the signals you want to look for.
The stock must be trading within one ATR of support. Correctly timing a breakdown is more likely if the price is trading
close to the support zone. The ATR is a good measure of how fast the stock moves so you can use it to identify when a
stock is close enough for you to set up your entry point. Use the ATR on your charts for this purpose – as well as to help
you with trade management.
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03.
You must have remaining range. To make trades with good reward versus risk ratio you need to have good range on the
stock. Looking at example above you see that the stock traditionally has had a range of about $4. If the breakdown occurs,
you should have another $3 of range to let the price fall since it’s already moved down nearly $1 from its high point a few
candles prior. Remaining range will confirm that you have good profit potential and can go ahead and take the trade.
BEARISH BREAKDOWNS You must have decreasing or average volume during the consolidation. While the stock is stalling and forming a bearish
pattern you want to see that volume is slowing or not increasing. Below average volume assures you that there aren’t
large buying transactions being made forming the support with strength. In other words, the price is just stalling and
waiting for its next leg to the downside.
Bearish breakdowns occur when a stock price falls below support on a bearish stock. They occur frequently, are easily
recognizable and can be traded by selling stock short to benefit from falling stock prices. In this section we will be ex- These are the price requirements for bearish breakdown trades. In the next section we will look at some of the seeker
amining the bearish breakdown pattern, looking at examples of breakdowns, teaching the core pricing criteria to qualify scans that you can use to find and trade these bearish breakdowns.
breakdowns and then looking at a case-study of a breakdown trade. You will want to master all four patterns that have
been taught in this workbook as they are the core to entry into stock trades. It may take some practice to become efficient at the scanning process. Many new traders tend to spend too much time
at the early phases of analysis. Remember when you start your scan you don’t have to have the stock meet every bit of
secondary analysis to consider it a candidate. Use the initial scan to develop a short-list of candidates that you can then
work through your secondary check- lists.
»» Secondary Check-Lists for Bearish Breakdowns
Once a stock has been selected and meets all of your must have pricing guidelines you then will want to look at
certain secondary guidelines to qualify the stock as a strong candidate. In this section we will be discussing all of
those secondary points of analysis.
As is the case with all stocks you analyze, you can use indicators to better understand the underlying character-
istics. MACD has been discussed in depth as a helpful tool to identify momentum and trend. If you are going to
use an indicator make sure you know what to be looking for based on the pattern you are trading. When trading
a bearish breakdown most often the MACD will already have crossed. You are not just looking to see if it has
crossed or not…rather you need to read the MACD to help understand trend and momentum.
→→ Earnings
You must have a Bearish continuation pattern. Bearish continuation patterns are periods when the stock consolidates
during a downtrend. In this screenshot you see 4 separate bearish continuation patterns – an inverted up and handle, a It’s important to always check when the next earnings date will be for the companies you’re trading. Being aware
descending triangle, a low base and a bear flag. These are the types of patterns you will want to look for when identify- and prepared for potential news is part of the trading process.
ing bearish breakout candidates.
→→ News
You must have room for the price to drop. After the breakout occurs how much more room can the price fall before it No news is generally good news. Look at the news headlines and what is happening with the company. Remember,
runs into other technical levels? Do you have a large amount of the trading range remaining after the breakout occurs?
anything that has happened in the past is already known by market participants. Most news stories older than a
As a trader, you want to believe there is plenty of opportunity for profit on the trades you take. Ensuring that there is
week old are ancient history to the stock market. Scan the headlines to better understand the stock – but don’t read
room to run allows you to pull the trigger with confidence knowing that you have profit potential in front of you.
too much into it.
You must have consistent selling pressure. You want to see that there has been good selling pressure throughout the →→ Check the stocks fundamentals.
trend. As stocks move into bearish trends they will naturally fall and then rise. During the falls look to see if the moves
are strong and consistent. Swing traders won’t consider fundamentals much but position traders will need to consider the health and
strength of the company they are trading. When trading bearish breakdowns, you would want a stock with aver-
age or below average fundamentals.
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The Master Playbook
»» Case Study
Having gone over the must have and secondary guidelines of the bearish retracement trade, this next section will
walk you through a case study and a step-by-step analysis of how to make this trade happen. Use the case studies
as templates for your own trades. They can be good examples for you to refer back to when you’re trying this out
the first few times on your own.
→→ Calculate the potential reward and risk for the trade.
In this example you see the stock Yahoo (YHOO). By analyzing historical trading ranges you can get a good idea of
what to expect if you enter a breakdown trade. Looking at the chart for YHOO we see a support point near $13.50.
If the stock breaks below that support we’ve historically seen about a $2 move in a typical trading range. You can
use this information to help determine your targets.
→→ Apply your personal rules.

S – Survey the Market
Money management rules must be set up by each individual trader. Anytime you take a trade you have to deter-
U – Use trading software to identify potential trades
mine your risk and make sure that you are not risking more than what you should, based on your account size and
risk tolerance. C – Choose the Tradable Instrument
→→ Journal the trade. C – Carefully Plan & Prep the Trade E – E -- Execute the Trading Plan
Keeping records can allow you to review periodically to better understand what you’re doing right and wrong. S – Supervise the Trade
S – Systematically Journal & Review
→→ Survey the Market.
As a trader, you will be looking at the overall stock market performance each and every day. This is part of your daily
routine. If the market is bearish or looks like it is about to become bearish based on your analysis, then you could
go and scan and research bearish retracement trades. Always start with market analysis so your scans are in line
with what is happening out there.
→→ Choose the Tradable Instrument.
For the purposes of this workbook we will be using stock as our product. To take advantage of falling stock prices
you must sell short.
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STOCK: TBT
→→ Carefully Plan & Prep the Trade
→→ Action: Sell Short
Looking at the example we can now start to plan and prep our trade. The first thing we need to decide is where will
we trigger this trade – at what point do we want to enter? $35.00 is a clear level of support. If the price falls below →→ QTY: Based on your Money Management Rules
support that is confirmation that the breakout is occurring.
→→ Price: Stop/Limit 34.99/34.65 (the first number is where we enter and the second is the outside win-
Next we need to assess the potential reward and risk for the trade. Historically we see that when the stock breaks dow of where we’re willing to enter.)
down it can fall sharply. The previous breakdowns have materialized into a move to the downside anywhere from
Setting up your stop can be done beforehand with an advanced order. It’s called a one-triggers-other. Using this
$3 to $8 or $9. Using these numbers, we could come up with a target of $5 to the downside which would mean the
technique, you can set up your entry order as described above and then have your stop loss automatically be placed
stock needs to fall to $30 from our entry point at $35. This is our potential reward. Risk is a function of the stop
when you get into the trade.
loss. We could set a stop at 1 ATR above our entry price. Doing so we would add the ATR $0.78 to our entry at
$35.00 and this would be our risk. So the Reward to Risk Ratio is $5.00/$0.78. That’s a great number. Considering
the potential reward, some traders would even give their stop loss more room than the ATR to give it more room to
breathe. When you have strong candidates you can do that.
→→ Supervise the Trade
Once you get in a trade, each day as part of your daily routine you need to supervise its progress. Move the stop loss
as the trade develops and starts to profit to protect your profits. You will rarely place the stop tighter than 1 ATR
from its current price. Many traders will use intraday charts and watch the stock develop and move their stop loss
down to the pivots that are developing. Trade supervision is an important part of your daily routine.
Remember that you want to execute your original trading plan so unless something has changed dynamically stay
the course of what you decided on when you got into the trade.
STOCK: TBT
→→ Systematically Journal & Review
→→ QTY: Same as you sold short Price: Stop 35.78
Once the trade has been closed and you’re all done go ahead and enter your results in your journal. You will have
wins and losses and by keeping records you may be able to identify areas of strength and weakness in your trading. →→ Duration: GTC
The most common culprit to a losing streak is setting your stop too close. If you see that you are taking lots of small
And as a swing trader we have our target order set at $30.00. There are advanced orders that some brokers offer
losses in your journal you may consider altering your techniques slightly to give the trade more room.
that allow you to set up your entry, stop and target all at the same time. You will need to spend some time speaking
The S.U.C.C.E.S.S. model is a helpful tool to keep you organized and on point with your analysis. You will get to the with your individual broker to get used to how to use their order forms. Every broker is a little bit different – but
point where it is just a habit that you go through each time. As you move forward with an understanding of these most have tutorials and support staff to help beginners so don’t be afraid to reach out for help.
strategies it would be smart to keep this process in mind so you can make sure you touch on all points of analysis.
Now that we have a plan in place we would execute it based on these numbers. The entry order would look like this:
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STOCK: TBT
→→ Action: Buy to Cover INVERSE ETF’S
→→ QTY: Same as you sold short Price: Stop 35.78
→→ Duration: GTC Not everyone will be able to sell stock short in all of their trading accounts. The market has many products that you
can use to benefit from a bearish market.
And as a swing trader we have our target order set at $30.00. There are advanced orders that some brokers offer
that allow you to set up your entry, stop and target all at the same time. You will need to spend some time speaking Short selling is the classic approach to stock trading in a bearish market. But, you can use put options, futures and
with your individual broker to get used to how to use their order forms. Every broker is a little bit different – but inverse Exchange Traded Funds (ETF’s). ETF’s are very popular in the market. Traders use them in many ways, but
most have tutorials and support staff to help beginners so don’t be afraid to reach out for help.
one of the types of ETF’s is an inverse fund. As seen in the above example inverse ETF’s will always work in the
opposite direction of stock market performance. So if you think the market is going to fall you can buy an inverse
ETF and benefit from falling stock prices. Think of a teeter-totter on a children’s playground. When one goes up the
other goes down right? That’s the way inverse ETF’s work in relation to the overall market. If you can’t sell short, but
want to trade when the markets are falling you can consider inverse ETF’s as an alternative product.
Options, plain and simple, are a way to trade stocks via a contract. There are some who have an incorrect concept
that options are very risky. While it is true that options carry some risk, the truth is that most options have less risk
than owning stock. Options enable buyers and sellers to connect in the market and apply leverage for higher profits
with lower risk.
STOCK: TBT
→→ QTY: Same as you sold short Price: Limit @ 30.00
→→ Duration: GTC
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OPTIONS
BASICS
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The Master Playbook
03.
STRIKE PRICE
The agreed upon price that an option trader uses is called the strike price. The strike price can be found in any standard option
chain. Strike prices are normally separated by increments of $2.50, $5.00, or $10.00, depending on the price of the stock. Some-
times, smaller incremental values will be used as the strike prices to accommodate supply and demand for the various options.
Options are defined as a contract between a buyer and cumstances like stock splits, mergers, or acquisitions, then
seller, that gives the trader the right (as a buyer) and places the contract per share amount may be different. If there are
04.
the trader under obligation (as a seller), to buy or to sell a any questions on the contract and how many shares it con-
specific stock at a specific price on or before a specific date trols for a particular option, contact your broker.
in exchange for a market premium.
Each option contract is agreed upon by buyer and seller
The option contract is a legal binding agreement between around a price level called the strike price. The strike price
a buyer and seller. The agreement is that the buyer has the
right (but is not obligated) to buy or sell stock and the seller
is different than the price of the option itself and is used
as the price in which the buyer can buy or sell the stock
EXPIRATION DATE
is under an obligation to either buy or sell stock. The con- at and the seller has the obligation to either buy or sell at
The expiration date of an option is always the third Saturday of the month. For example, if the trader buys an October call op-
tract is bound by a time limit (the expiration date). Usually that same price.
tion, then he knows that the third Saturday of October is the expiration date for that particular option. Because the markets
each contract is equal to 100 shares of stock. If there are cir-
are not open on Saturday, the third Friday becomes the standard day of the week to use when speaking of expiration dates.
01.
OPTION CHAIN
05.
The option chain is used to see the prices of the options, the strike prices available, and other information. The option PRICE
chain can be found on brokerage Websites and on your individual software.
The price of an option is determined by a primary formula called the Black Scholes Model. This pricing model was introduced
to the market in the early 1970s and by use of time, interest rates, supply and demand, and volatility, it generates a theoret-
02.
ical option price. This price, also known as the T-Value is then broken down into a Bid and Ask price.
CALLS AND PUTS 06.

LEVERAGE
Options are categorized into two areas: calls and puts. A call option buyer gives the trader the right to buy the stock from
the market at a certain price. A call option seller places the trader under obligation to sell the stock into the market at a
certain price.
Options provide leverage in trading. On average, an option usually costs around 10 percent of the stock price, yet it can rise
Put option buyers have the right to sell the stock into the market at a certain price, while put option sellers are under ob- in price about 70 to 80 percent of what the stock would rise in price. This is based on a Greek element known as the delta.
ligation to buy the stock from the market at a certain price.
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DELTA
Delta measures how fast the option will change after a move in the
underlying stock occurs. Deltas range from 0 to 100. For puts, you
may see them with a negative sign in front describing that for put
buyers they will gain value as the stock goes down. It is said that puts
have a negative relationship with the underlying. Call options have a
positive relationship with the underlying. When the stock goes up,
calls go up, assuming that the other factors like time decay and vola-
tility haven’t adversely affected the call value too much.
If you buy a call option with a delta of .65, then you can expect that
call to gain $0.65 for every $1.00 the stock moves. It is a relationship
explaining the rate of change you can expect in your option. As a
stock goes further into the money, the delta goes up and will eventu-
ally reach 1.00, which means that there is a one- tone relationship be-
tween the stock and that option contract. This usually happens near
the expiration date and only on options that are deep in-the-money.
So remember, delta will change as you either get close to expiration
or as the strike price goes into the money.
»» Delta Weighting
THE GREEKS
The top-down approach to the financial markets is one of the
techniques traders assess to determine a few different things
The Greeks are elements of the Black Scholes Model that help the trader to understand the relationship of the option that are vital to the health and stability of the trader’s portfo-
price to the stock price. One of the first Greeks to consider is delta. Delta values are from 0 to 1.00, and they give the lio. Remember, the portfolio is always more important than an
trader a fairly close approximation of how the option price will move based on a dollar move in the stock price. For individual trade. Often times, however, we get so caught up in
example, if a call option was priced at $3.60 and had a delta of 0.70, and if the stock moved up $1.00, then the trader one trade at one time that we get away from what we’re trying
would expect to see the option price rise from $3.60 to approximately $4.30. accomplish in terms of controlling and managing our money.
Options prices are influenced by many factors. Some help you and some hurt you, depending on the type of trade Have a game plan. Like a good coach in a football game, traders
you’re making. To trade responsibly means that you will know what the risks are associated with each strategy type prepare for the game of trading. This game is cutthroat, nasty,
and what influences can affect that strategy. brutish, zero sum, leave the children at home, and get ready to
play rough-type of game. It is also a game I absolutely love and
Greeks are a set of risk measures that will give you an idea of how your option will move on time decay and implied
one that, if we prepare like a good coach, we will be successful
volatility changes in the underlying stock. Delta, theta, vega, and gamma are the most important of the Greeks to un-
in playing. The list of preparation we go through is enormous
derstand. One thing to remember is that the effect will differ whether you are long or short the option. For example,
from start to finish and I will definitely go through all of it in
if you buy calls, then time decay works against you, whereas if you sell them, it works for you.
time. However, the thing I want to discuss in this post is that of
portfolio design and bias.
As a trader, I truly do not care if the markets go up or down.

However, as a delta trader, I obviously care that they go in my
direction. Regarding the portfolio, the first thing I need to de-
termine is the balance, ratio, or weight of the portfolio. This is
a concept we call delta weighting. It simply means the balance
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The Master Playbook
of bullish to bearish trades by percentage in a portfolio. Delta weighting a portfolio is a very advanced topic, but one The most important thing in assessing our bias is the trend of the market. The old cliché in the market is the trend is
thing the coaches at Tackle Trading specialize in is taking the difficult and teaching it in simple terms that all traders your fried. It’s a cliché for a reason. This is fairly clearly a bullish uptrend, but on the far right hand side, you are defi-
can understand. For example: if I have a $100,000 portfolio and I am neutral in the markets, it makes ZERO sense nitely seeing some slowing momentum and a double top which is the first sign the trend is over. Due to the slowing
to have all bullish positions in the portfolio. However, that is exactly what all the mutual fund zombies are doing. momentum and double top, my market bias would be in the 0 or neutral. However, after I analyze the SPX, I look
It makes tremendously more sense to allocate some type of neutral balance such as $50,000 in bullish trades and at other factors such as sector strength, the other indexes, flight to safety money flow, market cycles, geo-political
$50,000 in bearish. How about $25,000 in bullish, $25,000 in bearish, with some in commodities and currencies, concerns, and potentially other types of analysis to determine if there is something out there that would justify mov-
and some collecting dust on the sideline waiting to strap the helmet on to help either the bullish or bearish team? ing the bias to up or down 1 degree. There is absolutely nothing that will have me shift more than one movement
Regardless of the balance, I think you get the idea. from my trend analysis.
To determine the weight of the delta in a portfolio, we must first determine our bias in the market. A market bias is The flight to safety is when money moves from the aggressive and riskier asset class called the stock market to that
nothing but which direction you assess the market to be going in the future. There are three main biases in the market. of the safe havens such as the bond market and defensive sectors. Within the SPX, there are nine sectors, and some
→→ Bullish Uptrend of these are aggressive and others are defensive. What makes a sector aggressive or defensive goes to the heart of
the most predictable and thus most taken advantage of market participant: the consumer.
→→ Bearish Downtrend
Consumer spending accounts for 70% of the $16 trillion United States GDP. When consumers have a job, their 401k
→→ Sideways Neutral Trend is going up (although not even remotely close to what it should), they’re happy, not worried, and everything is grand
in their own world. They do one thing with their money: they spend. They live paycheck to paycheck regardless of
We certainly understand that all things are not created equal. If you don’t believe me, go look at the richest
how large or little it may be, and they spend. They spend on the iPhone 6 when the iPhone 5s they bought 6 months
Americans, and you will see four of the top 10 are Walton siblings. In breaking down the market bias, we look at
still works. They upgrade their vehicle when they just bought the other one a year ago. They spend and then they
a number system:
spend more. Companies base their entire market and business model off the greed and lack of awareness of the
→→ +2 = Bullish →→ -1 = Slightly Bearish consumer.
→→ +1 = Slightly Bullish →→ -2 = Bearish This mindset has a direct impact on companies that benefit off an increase in consumer and government (the num-
ber one consumer in the market) spending and these companies are in aggressive sectors which outperform defen-
→→ 0 = Neutral
sive sectors when the markets go up.
Now that we have that down, let’s look at the SPX which I analyze on a daily chart
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»» Aggressive sectors:
GAMMA
Below are the following sectors with their symbol and current market bias: Gamma measures the rate of change of delta. This is a simple concept to grasp. When call options are deep out-of-the-
money, they generally have a small delta. This is because changes in the underlying bring about only tiny changes in the
→→ Industrial (XLI) 0 or Neutral →→ Energy (XLE) = -1 or Slightly Bearish
price of the option. But as the call option gets closer to being at-the-money, resulting from a continued rise in the price of
→→ Technology (XLK) +1 or Slightly Bullish →→ Consumer discretionary (XLY) = 0 or Neutral the underlying stock, the delta gets larger. Gamma is usually smallest for deep out-of-the-money and deep in-the money
options. It’s highest near-the-money and is positive for long options and negative for short options.
→→ Basic Materials (XLB) 0 or Neutral
As you can see, only one sector based on trend analysis is currently bullish while the others are either neutral or slightly
THETA
bearish.
Theta measures how much the option declines as time passes. In other words, option premiums are made up of intrinsic
»» Defensive Sectors:
and extrinsic value. That extrinsic value will no longer be there over time, and that effect is described by the theta rate.
This type of sector will underperform the aggressive sectors in bull markets but due to them being part of the flight The higher the theta rate, the faster that time decay is occurring for an option. Shorter-term options have higher theta
to safety when the markets get concerned, as well as these items being things consumer spend money on regardless rates. This is because as options get closer to expiration date they are getting closer to becoming nonexistent. The decay
of their own personal fear. For example, regardless of anything, we take our kids to the doctor, we pay our mortgage effects of time passing become greater and greater until finally the option expires.
(maybe: thanks, sub-prime), we put food on the table and keep the house warm during the winter.
For long traders who buy options, this can be a problem for you. As you hold the options they leak like an old faucet. The
→→ Health Care (XLV) = +2 or Bullish →→ Financial (XLF) = +2 or Bullish longer you hold them, the more they leak. This is why option buyers generally buy lots of time and option writers tend to
sell of short amounts of time. For the option writer/seller, that leaky faucet is your way to make some money. Theta can
→→ Consumer Staples: (XLP) = +1 or Slightly Bullish →→ Utilities (XLU) = 0 or Neutral
be very high for out of- the-money options if they contain a lot of implied volatility. It is typically highest for at-the- money
options and will increase sharply in the last few weeks of trading and can really negatively affect the long option holder.
What does this mean for the portfolio? The simple answer is everything. Delta weighting is one of the most impor-
Theta is time based trading. The number one certainty in life is time. We can guarantee that time will pass and thus we like
tant concepts you will learn as a trader. Delta helps us understand the weight or balance of the directional bias in the
to trade strategies that benefit on the passage of time. Theta strategies are covered calls, naked puts, credit spreads, and
portfolio. Due to my bias being neutral, I want to carry a neutral delta. It’s the first number I look at in the morning
carry trades. There is many more but those are some of the basic ones. Theta trades are simple and conservative in nature.
when I start my daily routine (hobby traders look at P/L, Pros look at theta and delta).
While it certainly is an advanced concept, the initial understanding of the math behind it is quite simple: Remember what I always say, it is not difficult because you are new to it, it just means it is new. Theta is a very simple
concept and one everyone already understands and there is theta in everything. Consumers refer to theta as depreciating
PORTFOLIO SIZE X NUMBER = DELTA assets such as an iPhone or a vehicle or anything they purchase. They understand if they buy something like a truck for
(BASED ON 100,000 PORTFOLIO TO MAKE IT EASY) $30,000 and drive it off the lot it will decay by 10% in the first year. If you calculated the per day depreciation it would be
30,000 x .10 = 3,000/365 = 8.21 (look at my amazing 5th grade level math skills). The theta on the truck would be $8.21
depreciated every day. This money does not just evaporate into thin air; it goes from the buyer of the truck to the seller
→→ +2 = 100,000 x .07 = 400 to 700 delta
of the truck.
→→ +1 = 100,000 x .04 = 100 to 400 delta
If I substitute the truck for another product called a Put or Call option with a value of $30,000 in total contracts sold, theta
→→ 0 = 100,000 x .01 = 100 to -100 delta will work the exact same way. For example, if I sold 250 36 strike put options on GPRO, we would receive $30,000 from
→→ -1 = 100,000 x -.04 = -100 10 -400 delta the buyer. We are simply selling the buyer a truck for $30,000 called a put option. The theta # is .03 which accounts for
.03 cents per share of devaluation per day which on 250 contracts is $750 of depreciation or theta each day. At the time
→→ -2 = 100,000 x -.07 = -400 to -700 delta of expiration, which is in 44 days, the value of the theta will be zero. In essence, we are selling a truck that will devalue by
100% in 44 days and we get to keep the $30,000. Car salesmen are in the wrong business as they only get 10% devalu-
With my market bias, I need to end the trading day with a delta in the 100 to negative 100 range to ensure that
ation over 365 days. Theta is very conservative in nature with some of the highest probability in any market. The GPRO
my market bias and portfolio bias are in the same range. Below are some trades I made in a virtual trader in class a
example/illustration would have a 76% probability of success.
couple days ago.
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07.
VEGA
Vega measures risk exposure to changes in implied volatility. Vega tells us how much an option will go up or down as im-
plied volatility changes. When you buy options, you will benefit from a rise in implied volatility and be adversely affected by
falling implied volatility. When you sell or write options, you will benefit as implied volatility falls and be adversely affected
as it rises. Vega can increase or decrease even without price changes of the underlying stock because implied volatility
is the level of expected volatility. That means that as traders expect the changes of prices to either become more or less
IN, AT, & OUT-OF-THE-MONEY
drastic, that’s when implied volatility changes. Vega can increase from quick moves of the underlying stock, especially if
With a call option, if the strike price is less than the price of the stock, it is said to be in-the-money (ITM). If the strike price is
there is a big drop in the stock market. Finally, Vega falls as the option gets closer to expiration. higher than the price of the stock, the call option is out-of-the-money (OTM). If the strike price and the price of the stock are
equal, then the option is at-the-money (ATM).
»» Implied and Historical Volatility
With a put option, if the strike price is higher than the price of the stock, it is said to be in-the-money (ITM). If the strike price is
There are two types of volatility that must be taken into account: historical and implied. Historical volatility is simply lower than the price of the stock, then the put option is out-of-the-money (OTM). If the strike price and the price of the stock
how much the underlying changes in price. It’s usually calculated by taking the daily closing prices and averaging are equal, then the option is at-the-money (ATM).
how much change is occurring over a given time period. When historical volatility is high, usually the premiums to
the options are high as well. When historical volatility is low, then you will see cheaper premiums.
08.
Many option models were originally built entirely on historical volatility. In fact, you can plug in a historically vol-
atility number into a model and have it spit out a theoretical option price to see what an option should be trading
at. When you see discrepancies between theoretical value and the actual price that is where implied volatility has
affected the price of the option.
ASSIGNMENT AND EXERCISE

Implied volatility of an option represents what traders expect to happen in the future of the stock and how volatile
they expect it to become. In other words, it is the volatility of the future.
How does it help us trade? In the earlier section on vega, you were introduced to the idea that changes in volatility Each buyer and seller has rights or is under obligation to perform the contract that has been entered into. If a buyer, who has
can affect your options trade. So in your direction trades it will be prudent to know if implied and historical volatility the right, but not the obligation, decides to exercise those rights, then the market assigns another person, the seller, and the
are high or low so you can assess what effect it may have on your trade. seller must make good on the agreement in the contract. Usually if a buyer exercises their position, then the Options Clearing
Corporation, a company that monitors the buyer’s rights and sellers obligations, will choose a brokerage firm, and then an
When entering debit transactions (trades where you are a net spender), you will want volatility situations that are individual, in which to assign the contract(s). Usually the seller will have three days in which to accomplish the requirement of
generally low. This doesn’t mean that you can’t make a debit trade (buy calls, bull call spread, etc.) on stocks that the assignment. delta of the same strike price put option.
move up and down fast. It is important to understand the distinction between historical and implied volatility. When
the implied volatility is high, it will have an effect on prices in the future. In other words, it’s the implied volatility Options II: Option strategies can be utilized to help the trader leverage their position in the market. There is an old saying, “If
that will affect your trade more. you are not leveraging the market, then it is leveraging you.” Several option strategies are presented in this session that, when
learned and implemented, will give the trader many powerful trading tools.
As a seller or writer of options, you will want to enter situations when implied volatility is above average for the
stock you’re looking at. For example, if XYZ stock has a current implied volatility of 47 percent and the 52-week
range has been between 20 and 50 percent, then we know that the implied volatility is high for this stock. This
would be a good time to make a credit transaction.
Remember, you can make credit and debit transactions in both bullish and bearish directions. So when we say to
make credit transactions during high implied volatility, that doesn’t decide which direction to make the trade. You
still will need to analyze the fundamentals and the technicals for that stock.
So what factors contribute to changes in volatility? Usually fear and greed are the primary culprits. Volatility changes
as investors change the way they see the market. Periods when the market is fearful and greedy are associated with
higher amounts of volume. This is usually accompanied by higher volatility. Volume and volatility go hand in hand.
Page — 224 Page — 225

The Master Playbook
CALL OPTION PROTECTIVE PUTS

The call option is one of the most fundamental of op- A protective put is a position that provides downside protection to stock ownership. A protective put is also known
tion plays. If a trader looks at the market and a particu- as a synthetic call position because the combination position has the same risk graph as a call option.
lar stock and forecasts that the stock will rise in price,
The protective put is played by purchasing stock and also purchasing a put option. Usually the put option is OTM.
then a call option may be a great way to leverage the
One way to select the appropriate put is to take 90 percent of the stock price and then select the next lower strike
market and make money as the stock rises.
price put option.
If a call option is purchased, then the owner has the
This still gives the trader exceptional protection without having to pay for the more expensive ITM strike price.
right, but not the obligation, to buy the underlying
stock. The trader will normally buy at least two months
of time (four to six is preferable). The strike price that
is used is the first ITM strike.
PUT OPTION COVERED CALLS

The put option takes advantage of a bearish or down- A covered call is a combination strategy in which the trader buys stock in increments of 100 shares and then sells
ward market. A put option is designed to gain in value a call option contract for each 100 shares of stock. The covered call strategy is used to produce monthly cash flow.
as the price of the underlying stock drops. Many pro-
fessionals agree that the market drops faster than it
rises. A put option may be a great way to profit from a
falling market or stock.
If a put option is purchased, then the owner has the

right, but not the obligation, to sell the underlying
stock. The trader will normally buy at least two months
of time (four to six is preferable). The strike price that
is used is the first ITM strike. Remember that for a put
option, the strike price that is higher than the stock
price is the ITM strike.
Page — 226 Page — 227

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THE MASTER

GAUGE MA RKE T PO STU RE & TRA DE B I AS

Minor, Pivots expanding

Price is trending & trading up

Trendless or sideways Between support & resistance zones Convoluted

Equidistance between pivots &

• A reversal candle can signal change.

CORE PRICE &

INCREASING TREND MOMENTUM

• Decreasing candle range indicates that the sell-off is losing momentum.

CHECK THE NEWS

• No news is good news. Good news can be bullish.

CHECK THE FUNDAMENTALS

USE THE RISK CALCULATOR & GRAPHING TOOL

JOURNAL THE TRADE

CHECK THE EARNINGS DATE

• Be aware of the quarterly earnings announcement date and time.

CLASSROOM STUDY GUIDE

• Cash Flow OptionsTM

• Elite OptionsTM & Technical MasteryTM

»» Spreads, Condors, Combos, & Repair Strategies

»» Dynamic Hedging & Adjustments

BULLISH RETRACEMENT ORDER TYPES

I. BUY STOP LIMIT III. SELL LIMIT TARGET

R1 BUY LIMIT = FILL

BUY STOP = TRIGGER

II. PROTECTIVE STOP LOSS IV. BRACKET ORDER

BUY STOP = TRIGGER

CONSISTENT BUYING PRESSURE

CORE PRICE &

TRADING WITHIN 1 ATR OF RESISTANCE

BULLISH CONTINUATION PATTERN

• A recognizable bullish continuation pattern should be present.

ROOM FOR PRICE TO RUN

CHECK THE NEWS

• No news is good news. Good news can be bullish.

CHECK THE FUNDAMENTALS

USE THE RISK CALCULATOR & GRAPHING TOOL

JOURNAL THE TRADE

CHECK THE EARNINGS DATE

• Be aware of the quarterly earnings announcement date and time.

CLASSROOM STUDY GUIDE

• Cash Flow OptionsTM

• Elite OptionsTM & Technical MasteryTM

»» Spreads, Condors, Combos, & Repair Strategies

»» Dynamic Hedging & Adjustments

• A reversal candle can signal change.

CORE PRICE &

INCREASING TREND MOMENTUM

• Decreasing candle range indicates that the buy-in is losing momentum.

CHECK THE NEWS

• No news is good news. Good news can be bearish.

CHECK THE FUNDAMENTALS

USE THE RISK CALCULATOR & GRAPHING TOOL

JOURNAL THE TRADE

CHECK THE EARNINGS DATE

• Be aware of the quarterly earnings announcement date and time.

CLASSROOM STUDY GUIDE

• Cash Flow OptionsTM

• Elite OptionsTM & Technical MasteryTM

»» Dynamic Hedging & Adjustments

CONSISTENT SELLING PRESSURE

CORE PRICE & VOLUME