Amazing, just amazing how fast we have made a U-turn in the market. I still would have never thought we would be back at the recent bullish highs so fast but here we are. As the Russell and Dow start to breach higher, I wanted to give you all my thoughts on where we can go from here as well as some noteworthy comments on the US Dollar and Crude Oil.

This dang market is very strong (or just extremely inflated). Seems hard to remember but just two weeks ago we were nearly 700 points lower on the Dow Jones. Now it seems that every fear or concern has been thrown out the window and the markets are just marching higher. Today will be a big day for the Dow in particular as it nears the most recent bull market highs.

I’d actually like to see stock pull back AT LEAST down to the closest area of support before heading higher. Not only would that give option traders an opportunity to enter new trades, but also would be more convincing.

Heading higher at this rate is unsustainable – at some point a large sell-off will come and push equities lower in a matter of days…so for me the possible reward is not nearly worth the risk.

Remember that we are also in year 3 of this current Bull Market which typically has much less returns overall – I think the last numbers I heard were that year 3 of a 4 year Bull Market has overall returns around 2% or less.

The last chart I wanted to cover is the latest Investors Intelligence showing again how bullish investors have become. Typically readings around 55% (which is where we were 3 weeks ago ironically enough before the latest fall) signal that extreme bullishness could signal short term tops. When everyone is bullish on the markets, who is left to continue to send the markets higher? And the low volume over the last 2 weeks really drives home this point.

What Are Your Thoughts?

I’m sure you have had a whirlwind of thoughts during the last month. March really has been a very interesting and volatile month for stocks. Add your comments below and let me know your thoughts going forward…do you believe in this rally?

Most at home stock and options traders think that professional traders have some magical advantage, or secret, that makes them more successful. As an options coach to a lot of students each month, I constantly hear this “sob story” from some of the beginning traders. They think that if they only had this “secret” trading method, they too can make a ton of money trading stocks and options. Honestly, there is not a huge different between professional trading houses and individual investors.

I’m sure you too have had these thoughts at least once cross your mind right? But this opinion is both based on faulty information and completely false. Individual traders can be much more profitable than professional traders.

70% Of Day Traders Lose Money – That WAS You!

The bottom line is simply this – most day traders are losers. Forbes reported on a study just the other year that:

North American Securities Administrators found that 77% of day traders lost money on a consistent basis.

Then, BusinessWeek was reporting that actually the numbers were higher and more like 82% of all day traders lose money. That data come from a study by a couple professors at the University of Taipei and the University of California that researched 66,400 investors over the course of a couple years. The major conclusion: the more you trade the less you earn.

The Major Differences – Trading Plans And Risk

Now you will notice in the title of my post I said “CAN” and not “WILL” be more profitable. When you strip away everything else, professional traders are identical to at home traders. They both need to learn how to trade in the markets in a manner that is both safe and profitable. And we are all human and therefore we have emotions that effect our trading to a certain degree – myself included.

Here are 3 ways you can be even more profitable than professional traders:

1. Treat This As A Business: Professional trader don’t make money or have a job unless they are profitable. They can’t pay their bills and feed their families with massive losses. As such, they realize that options trading is NOT the fast and easy way to riches. Obviously, having this attitude gets the typical at home trader into trouble very quickly. So treat this like a full out business. Have a strategic trading plan, proper risk management, and simple strategies. Protect your investment and reduce risk whenever possible.
2. Money Management Is Your 1st Priority: All too often beginners focus on how much they will make on a trade rather than how much they can lose. Stop this right away. For our own trading alerts and strategies that we offer here, I always take the highly conservative route. I’d rather make a solid 2% gain than risk thousands of dollars for a possible 5% gain with considerably higher risk. Professionals protect their money at all costs, or they are out of a job and on the streets. Think long term on every trade and realize now that keeping money is sometimes more important that making huge gains.
3. Master Some Technical Analysis Skills: If you’ve ever learned a basic skill, you know it takes time to master it completely. Trading is no different. You just can’t pick up basketball and shoot 70% free throws right out of the gate. Even though we all know this to be true, some traders at home don’t want to take the time to learn the skill of technical analysis indicators like MACD, Stochastics, RSI, and Bollinger Bands. If you actually commit time to these indicators and understanding how they work (and don’t work) then I promise you will start to trade more consistently.

I Still Write This Blog For You (And Me)

The average at home trader these days are are looking for a magic system or a robot to do the trading for them. I’m here to help them and you realize that you are going to waste more money and time going the “get rich quick” route than you are if you had just learned how to trade correctly from the beginning.

Over the course of the last 4 years with this website I’ve seen many traders really take their portfolio to the next level – which is awesome! And I want to see more of you step up and make more money. We are not trading against each other and anything I can do here to help will only make me a better trader as well.

None of the things I’ve outline above can be implemented without a strong commitment to becoming a more successful trader. But no matter where your trading career takes you, I encourage you to learn as much as you can from professional traders.

Remember that “if you want to be successful, do what successful people do.”

Well the markets closed higher on Friday marking 6 out of the last 7 days higher for stock. Overall, stocks rallied more than 4% since last week.

But remember that we broke out of a major trendline just last week…so where do we go from here right?

Please watch my weekend video update below!

I’ve sure you have heard about RSI or the Relative Strength Index before right? Most traders use RSI strategies when looking at the market to help spot extreme areas – above 70 or below 30 – signaling oversold or overbought stocks. Personally I think when you hear someone talk about this you should cover your ears and make loud noises until they stop speaking!

What Is The Relative Strength Index RSI?

First you really need to know more about the actual indicator itself. RSI is a momentum indicator or oscillator that measures the speed and change of price movements in a security. Traditionally it will move between 0 and 100. It is usually considered that the stock is overbought when RSI is above 70 and oversold when RSI is below 30.

Trading RSI Divergences

So before I said you should cover your ears when someone says RSI is at an extreme right? Well, this is because it is NOT a great signal just to have RSI at an extreme. You have to see some kind of divergence with RSI and the underlying security to get a valid signal.

RSI does point out divergences between price and momentum and these signals are much more consistent (not perfect) than just simply looking for extremes. Ask anyone who has tried to trade them after they just hit the extreme levels has almost certainly been stuck right at the beginning of a trend. As the more advanced traders can tell you, RSI can stay very high or very low and trade with trend strength.

That’s why looking for the divergences is so important!

How Do You Have RSI Set-Up?

There are a lot of different ways to setup RSI on your charts. Some traders use regular RSI, RSI with breakouts and then multiple time frames. Add your comments below and don’t be afraid to share how you have RSI setup and what YOU look for with signals!

As traders, we have all wondered from time to time whether a certain rally or sell-off is a long term move or a mere market hiccup. And trust me it can be difficult to determine which side of the trade to play. I myself have sold stocks right before new highs were made just days later – it sucks but it happens to all of us.

This is a frustrating and all too common scenario, but it can be avoided if you know how to identify and trade retracements properly.

Retracements vs. Reversal

The table below is a great quick tool to help you determine where the stock or market may be in a cycle. Without at least glancing at this table you risk a lot as a trader; exiting too soon and missing profit opportunities, holding onto losing positions and losing money, and wasting money on commissions/spreads.

Fales Signals?

Even a picture perfect retracement that meets all the criteria outlined in our table above may turn into a full out reversal. Just because it meets all these criteria does not mean that the market cannot do something unexpected right? So the best way to protect yourself as always is to use stop-loss orders.

Current RUT Chart: Retracement or Reversal?

In the comments section, add your thoughts on whether the current chart below of the RUT is a retracement or reversal…

Online trading forums are great places to continue to share ideas and grow in your trading education. It’s definitely best if you can learn to make your own trading decisions of course (which I what we try to teach with our membership) but sometime you may just need some reassurance from other traders/investors. Forums can be a great place to bounce ideas off someone, talk about the market, or just sit back and get an idea of other trading sentiment.

Be Selective When Searching

With some many places to get information these days, I do have to throw in my own words of caution. Some forums out there are just pumping penny stocks and horrible trades. So it’s important to find the best forums and stick with it for a couple weeks.

Our Facebook Fan Page and the blog comments sections are great places to start and actually have broken some major market news before other global news sources (Protest and Earthquake news broke here well before other news stories)! I’m sure many of you can attest to the great community we have here that is always willing to share ideas and help.

Here Are 3 Reasons To Join A Forum:

FEEDBACK – By far the biggest benefit of any sort of online trading forum is feedback but its members. When you post a question, have a comment, or share an idea you are likely to get a lot of responses back. Even just reading through past comments and questions can be quite educational for anyone of us. Use these opportunities to give and receive honest feedback.

CONNECTIONS – Sometimes a comment or post tread with lead to deeper and more meaningful connections with other members. Over time these connections grow into great relationships. I can personally attest to the wonderful benefits of this blog (my own personal forum if you will!). I have met some of the most amazing and smart traders by doing this blog and membership service that I wouldn’t give it up for anything. It’s made me a much better trader over the years and will continue to help me grow.

NEWS, IDEAS, CHARTS – No one website can possibly capture every single breaking story and news. As such, forums are a great way to share ideas, news stories, and charts with countless investors and traders. A minefield of resource information, and all for free. And honestly, the more you share the more you will get in return from whatever forum you choose to participate in. Givers gain when it comes to online trading forums.

Can You Suggest A Great Trading Forum?

If you’ve been a part of a great online trading forum on Yahoo, Google, or others, please share the link in the comments section. Let us know why specifically you like the group!

If you’ve thought all along that options expire on the third friday of every month you really need to read this. And I thought it would be fitting given that we are close to expiration right now and I’ve gotten a lot of emails about this particular subject. But what most people don’t know is that overnight trading can dramatically effect your positions.

The Friday Deadline

Here’s the skinny on options expiration. Options do expire at 4 p.m. on the third Friday of the month in the sense that they no longer trade. Here’s the catch – the stocks themselves however do keep trading after hours!

So what could be an in-the-money (ITM) close at 4 p.m. on Friday can be out-of-the-money (OTM) by 5 p.m., or vice versa. Again not knowing this one minor detail can be the difference between making money and losing money.

Check out this old chart of AAPL earnings cap to get an idea of just how far a stock can move overnight.

Exercising ITM Options

While there are a couple differences between how brokers look at ITM options these days, most ITM options will be automatically exercised based on the 4 p.m. closing price. Some may now be automatically exercised even if they are as little as a penny ITM – while other brokers have different requirements.

Regardless of wether you choose to exercise your option or not, you have to make the decision fast! Even though options technically don’t expire until noon on Saturday (again not when they are last traded in the open market), you need to make your final decision ASAP.

Most brokers require you to contact your contact them either way by 5:30 p.m. on Friday or they will usually make the decision for you.

What About Index Options?

Some index options are referred to as “cash settled” in which the options occur primarily in the underlying instrument and at expiration cash changes hands not necessarily the underlying security.

But there is a little twist with Index Options which expire on a completely different day and have a very unique overnight trading policy. I’ll leave this for you all to help answer in the comments section below.

A potential massive sell-off could be hitting the US Markets today (and in the coming weeks) as the Nikkei 225 index suffered a dramatic loss overnight, finishing down 10.6% after falling as much as 14% intraday.  Combined with the previous day’s loss of 6.2%, this is the worst 2 day performance since 1987 for Japanese equities!

You could have saw something like this coming if you read this blog.

Just this past Thursday I posted about this massive pennant or flag formation that had formed on the S&P 500. Below is the chart of the breakout that I was expecting…

But I had under estimated just how far down this market would go. I had originally thought that a target of 1,270 would act as strong support. The early futures trading suggest that the market could open near 1,260.

My suggesting is to steer clear of this for the time being. Let the market continue to fall and let the VIX continue to spike higher. As option traders we want to to trade at the extremes and although it may seem like an extreme sell-off today, more selling is sure to come in the rest of the week and next week.

There’s no reason to try to buy any bottom and hope for a bounce. If you are going to trade this and buy options just realize that you are paying a very hefty premium for volatility. So any profits will need to be taken quickly to prevent time decay and Vega erosion.

When I just started trading on my own I lost a little over $10,000 the second week. I had made the full-time jump and therefore was desperately emotional to make it work. Looking back now, I probably did things I would never do today. I pushed trades into the market when it wasn’t a good time to trade, I let trades run up huge losses without stops, and took any profit I got quickly.

Below is a great display of the difference between the “retail traders” on the right and the “professional traders” on the left. Notice how when the retail traders are screaming SELL, the smart money is slowly buying and visa versa.

I had never been an “emotional trader” but all of a sudden I was stuck. My emotions had got the best of me. So what changed right? Well, I went back and started to revisit the roots I learned trading for Deutsche Bank that I’m going to share with you below.

The Fear Of Missing Out (FOMO)

Here’s the scenario: you’ve been sitting on the sidelines while watching the market rally nearly 100% off the March lows from 2009. Are you itching to jump in and buy? Are you frustrated because you are missing profits that others are making?

Many traders I’ve been talking to feel this way right now and it’s not uncommon. We have all watched the market rally much further than anyone expected. And, it’s not just the swing trader who feels this way. Day traders are feeling the heat as a trending market offers little entry opportunity.

Even though it may be hard, sitting on your hands can be one of the most difficult things a trader NEEDS to learn. If fact, I really do feel like it’s a requirement for a successful trade – one lesson I learned quickly during my first few weeks trading at home. We have to treat trading like a business not a hobby – and sometimes waiting for the right entry is part of the business.

Treat Trading Like A Business

After talking with some former traders whom I worked with, I realized I was doing 1 thing completely wrong! I was blindly waking up each day and trading with no real direction – how stupid of me right? Sure I had traded for the banks and knew what to do – but being at home was completely different.

What helped me get over the hump was to treat trading like my own personal business. I wrote a business plan, had specific achievable goals, and daily activities to keep my emotions out of the way. What this helped me do was to remove my emotions from the traditional Fear and Greed cycle.

The trader who can remove themselves from this cycle and treat it like a business is much less likely to force trades out of boredom or because he/she feels an internal pressure to be productive. Case in point – this is where I went wrong when I lost that $10,000.

Let’s Control Those Emotions Shall We

Productivity can be extremely helpful when starting to trade. If you are bored then you are more likely to make stupid trades. If you are business searching, analyzing, reading, etc then you are more likely to find amazing trades with great risk/reward.

Here are 5 practical tips to help you learn to be productive and control your emotions:

1. Learn Something New About Trading. Maybe you have wanted to learn more Iron Condors or Credit Spreads, or maybe you have been wanting to learn more about RSI and MACD indicators. Well, stop thinking about it and schedule some time to sit down and do the hard work – pick up a book, get some coaching, watch a video tutorial.

2. Perform Some In-Depth Market Research. You have to be curious about something that’s happening in the market right now right? Down times in the market can be great opportunities to do some intense market research.

3. Paper Trade Until You Fall Over. I STILL paper trade each week. I test out new strategies, new indicators, new ideas with paper money first before I ever put real money to work. Focus on a particular setup and paper trade it on a simulator 10 or 20 times. A great new tools is thinkorswim’s ThinkBack trading that allows you to “replay” an entire day of trading just as if you were reliving it all over again!

4. Write A Trading/Business Plan. If you don’t have one you need one and if you have one you need to revise it monthly. These can always be improved. Take a section of your plan and think carefully about how you can improve it, and then do it already!

5. Analyze 5 Completely New Charts. Pick out stocks or ETF’s you’d like to trade and analyze the charts carefully, making a list of the bullish and bearish reasons to trade it. This will help you think carefully about the trade and remove your emotions completely after making the list.

How Can You Add To This?

You can never control the market and you can never control how any given trade will turn out. But, you can learn to control your actions and emotions with a solid trading plan and by keeping yourself productive.

Add your comments below and share some things that have worked for you! Maybe share a story of a bad trading experience and how you have changed since to remove your emotions?

A powerful tsunami spawned by the largest earthquake in Japan’s recorded history slammed the eastern coast Friday, sweeping away boats, cars, homes and people as widespread fires burned out of control. Tsunami warnings blanketed the entire Pacific, as far away as South America, Canada, Alaska and the entire U.S. West Coast.

The magnitude 8.9 offshore quake was followed by at least 19 aftershocks, most of them of more than magnitude 6.0.

A tsunami warning was extended to a number of Pacific, Southeast Asian and Latin American nations, including Japan, Russia, Indonesia, New Zealand and Chile. In the Philippines, authorities said they expect a 3-foot (1-meter) high tsunami.

The death tolls unfortunately are only preliminary and this will be a major historic even for the Japanese people. We all need to keep them in our prayers today.