Active-Trader - What is your Time Frame?

Welcome back, Active Traders.

Active Trading involves so many decisions - what to trade, when to enter, when to exit and why.  At first glance, it seems like almost an almost insurmountable number of decisions - clearly more than enough to boggle the mind of even the most rational individual.   So let's examine just one angle of that decision - what time frame should you be trading?

Before you consider trading anything in any time frame, examine the multi-time frame view.  The chart in the upper left shows my "Active Trader" tab in TradeStation which shows the Weekly, Daily and 39 minute time frame for anything which I consider trading.  Before entering a trade ask yourself these questions:

- What is the all-time high (ATH) and all-time low (ATL) price?
- If you don't know the ATH or ATL, switch to a larger timeframe. If you don't know the ATL or ATL or when it occurred you should not be trading.
- Is the current price closer to the all-time high or the all-time low price?
- Is the price closer to an area of support or demand?
- Is the price closer to an area of resistance or supply?

Note that every area on the chart where there the stock traded previously can be considered an area of support (where buyers will enter) or resistance (where sellers will enter).   Consider your entry price versus and whether its closer to support or resistance.

The common view of the retail trader is to buy when prices are going up and sell when the prices are going down.  Compare and contrast this with the common view of the institutional trader who will buy when prices come down to an area of value (stock is cheap) and sell when prices rise to the area of supply (stock is expensive or fairly valued).  Point is that regardless of what time frame you trade, you need to understand the bigger picture so that you don't buy at resistance (supply) or sell at support (demand).

The only exception I would make to the above statement is when the stock moves out to an ATH or all-time high.  This is a very special and rare price area where there is no prior supply or resistance and whose chart have the best prospects of continuation to even higher prices.

With that said, let's review the common chart time frames - from smaller to larger - along with my commentary on each.

Time Frame	Commentary
5-Minute	5-minute bars are hard to trade for all but the most nimble day traders. Breakouts of the high or low of the first 5-minute bar of the day is a common day trading technique - the 5-minute Opening Range Breakout. Be careful of time trade since the first 5-minute bar is often thrown back or rejected.
15-minute	15 and 30-minute time frame are used by many novice retail traders but have the advantage of signaling moves in advance of larger time frame bars
30-minute	30-minute bar is most useful for capturing the results of the 30-minute Opening Range Breakout which occurs at 10 AM EST.
39-minute	Carter favors the 39-minute bars since they split the 6.5 hour trading day into 10 39-minute bars
60-minute	60-minute bar - while widely captured in many popular charting packages - is not as useful as the 39 or 78 minute charts
78-minute	Carter also likes the 78-minute charts since they are exactly 2x the 39 minute bars and split the the trading day into to 5 78-minute bars
Daily	Daily is a good time frame for the swing trader since you should only be making decisions once per day - preferably in the last 30-minutes of the day when most of the daily bar has already been formed.
Weekly	Weekly is a good time frame for the most conservative once-a-week type traders.  We recommend you trade this time frame in the last 30-minutes of the week when most of the weekly bar is already been formed.
Monthly and above	I don't think anyone trades in time frames above weekly.  Possible exception is pension fund managers who choose asset allocations quarterly or annually.

So are the key takeaways here?

1. Decide what type of trader you are. Swing traders should trade 39, 78 minute or daily time frames. Day traders should trade 39 minute or below time frames. 
2. Once you pick a time frame stick with it! If you enter on the signal of a daily bar (for example) don't change your exit time frame to an analysis of the 60-minute bar! This is a common mistake and I made it myself this past week. But we all make mistakes and we must learn from them 
3. Retail suckers use the common time frames - 15-minute, 30-minute or 60-minute. Professional uses the 39-minute and 78-minute charts or tick charts. Retail traders wait until after hours to see changes of direction. Professional traders note when the happen between 10 and and 2 PM. 

Bottom line is know your time-frames. Pick one that works for you and stick with it.

And have a great week ahead.

Active-Trader - Seasonal Low in Energy

Welcome back Active Traders and Wealth Builders.

Every once in a while a trend change comes along that's so obvious, those who miss it are just not paying attention.  And the recent turn in energy prices is one such example.  Let's examine the evidence.

To your left is a 24 year seasonality chart of crude oil.  Its seems pretty obvious that low point on the chart is right about mid to late February which is hopefully just about the time you are reading this blog post.

Now your first instinct might be that its time to load up on oil.  I'm not a futures trader and I don't find the leverage to be either necessary or useful.  In fact the opposite is the case, the leverage can shake you out on the slightest wiggle. I had the same experience with Forex and I find its better to just avoid highly leveraged vehicles.  The only exception would be options on equities which I can trade right out of my equities account and risk the same or a smaller amount that I would with a straight stock position in the underlying.

As for the best way to trade energy, let's break out TC2000 and examine a few alternatives include energy ETF's USO, DBO and energy equity ETF's XLE and OIH.  A look at those in the scan on the left show that OIH and XLE are actually positive for the year while energy commodity ETF's are actually down for the year.  More significant, look at the dividend yield of OIH and XLE to find a positive number versus the dividend yield for the actual commodity EFT's which is - zero.

This brings up the core problem with investing in actual commodities and that is called negative carry.  Put another way that means it costs money to hold crude oil and other energy assets.  This is reflected in term structure of future's contracts where farther dated contracts are usually priced higher than nearer dated contracts to reflect the cost of storing the commodity for delivery on that future date.  This term structure can erode the return of holding commodities over a period of time even when the price holds constant.  Take a look at performance of USO and you will see that it does a poor job of matching the overall return characteristics of crude oil due to the cost of carry and other costs such as maintaining a portfolio of future contracts to construct the index.

So what the answer?  Energy stocks of course.  Energy stocks have a positive carry as reflected in the dividend paid by the stocks themselves.  And you can see those results clearly in the returns above for the year as well as in the dividend yields themselves.  There are probably even smarter ways to trade energy like selling puts, or put spreads or selling calls against your positions to bring in extra income.  But I am not an expert on energy companies and until I get to know more will be happy to invest in energy ETF's OIH and XLE.

One more tip for you - bring up a chart of OIH inside Thinkorswim and select Style, Chart Mode, Seasonality.  You will see a chart that looks like the one on the right.  Notice how OIH starts the year at a low and then tops out some time between August and September.  There's your seasonal high and when its time to take profits.  And there you have it a way to play energy ETF's with a better than even chance of coming out ahead - particularly when you factor in the dividends.

So go out there and dump your USO and buy some XLE and OIH.

And have a great week ahead.

Active-Trader - Free Fib Lines for Thinkorswim!

Welcome back Active Traders.

With this post I am pleased to announce that the Fib Lines indicator for TOS is now available at no cost to members of my Yahoo group!  This is quite an accomplishment considering that last year at this time I was just starting to unravel the mysteries behind this indicator.  And now - barely one year later - I am giving away free copies of the indicator for both TradeStation and TOS!

Included with the indicator is support for over 130 symbols including the major Exchange Traded Funds DIA, SPY, QQQ and IWM, the Dow 30 stocks as well as most of the Nasdaq 100.  Also note that there was no way to protect the script so the beginning and end of Wave 1 and full source code for the indicator is provided.

If you would like to get your hands on the indicator, simply send an e-mail to fx-mon-subscribe@yahoogroups.com and follow the directions in the e-mail reply.

There are some limitations in this version which I could not provide which are included in the version on TradeStation:

1) I was unable to display the slanted line which shows the beginning and end of Elliot Wave 1

2) I was unable to label the Fibonacci percentage levels for each of the lines.  For example, the green line in the AMZN chart above is the 361.7% Tree line.  While these labels serve to de-mystify the indicator, they do not detract from its usefulness.

Be sure to let me know any feedback as well as requests to add new symbols.

Good luck and good trading.

Active-Trader - Questions on Fib Lines

Welcome back Active Traders.

Last weekend I got the Fib Lines indicator working under Thinkscript under TOS. I have some more work to do before I can make those available to members of my yahoo group.  But to whet your appetite, this screen shot shows the complete fire and tree line levels for QQQ and you can clearly see the beginning of Wave 1 at 24.98 and the end at 50.60. Recall that the remainder of the lines can all be calculated once those 2 values are determined.

Blog reader Jay posted some questions about the Fib Lines shown here and how they related to screen shots from free videos posted by John Carter as part of Simpler Options web site.  I thought it would be a good opportunity to address those questions and talk a bit about the steps used to determine the lines.

When I first started calculating the Fib Lines, I compared my levels versus those from the Carter videos with the belief that the levels had to be "right". In some cases (such as NFLX) my values matched Carter's within a point or 2.  In other cases (such as QQQ shown above), I could not come up with levels which match Carter's.  But in the end it doesn't matter.  What matters is how well the levels correspond to price behavior.

In the process of working on the indicator, I determined the levels for about 135 stocks, the major ETF's plus the Dow 30 and most of the Nasdaq 100. I got into a type of rhythm where in many cases in under 1 minute I could find levels which worked perfectly.  For an example of levels which work, check out this chart of MMM.

The skeptic in you might say - this is "classic" technical analysis, show me the cases which work and ignore all those which do not!  And you might be right - but keep in mind that the Fib Lines are not a Holy Grail, just one more clue into unlock the mystery of what underlies price action.

Finally to address the last part of Jay's question - why might the levels need to be re-calculated over time?

Recall that Elliot Wave analysis is based on an idealized price move - 5 waves up and 3 waves down.  In that model, at the bottom left of the chart, pessimism is at its maximum, and there are few buyers.  As the move develops, more buyers come in, and the price action follow the idealized model (more or less) with fibonacci levels and relationships being demonstrated by overall crowd behavior.  At the end of the sequence, the pessimists are once again in control and a new low in price is formed.

Once the 5-wave sequence has completed, the original predictive power of wave 1 is over, and a new cycle begins and perhaps a new identifiable Elliot wave 1.  And since the Fib Lines are based on the beginning, end and magnitude of Elliot Wave 1, the Fib lines would need to be re-calculated.  In many symbols I reviewed, those lows occurred at the depths of the financial crisis back in 2008 when many of the symbols I reviewed put in their wave 1 lows.

Other times, prices reach the end of the sequence (423.6% level) and exceed that price.  How do we handle that situation?  Based on the opinion of the analyst, it might be required to move out to a higher time frame a consider the original extend of wave 1 to be too small, and chose a beginning and end of wave 1 based on a larger time frame.  We had to do this recently in Facebook because I think - over the long haul - those prices are going much higher.  Recall that Elliot Wave is an art, and not a science and requires human intervention.  And therein lies the magic.

Have a great week ahead and good trading.

Active-Trader - Anatomy of a Trade

Welcome back, Active Traders.  We had a perfect storm of market action this past week.

After many months of dropping hints, the European Central Bank or ECB announced a massive amount of Quantitative Easing - where they basically create billions of Euros out of thin air and buy up all types of debt securities.  This has the effect of driving up the prices of those securities, and driving down the yields, which forces money into stocks.

Europe as a culture (particularly Germany) has strong cultural biases against this type of action with generational memory of hyper-inflation leading up to prior world wars.  But with the US economy firing on all cylinders,  the dollar rallying and oil prices plunging, they could no longer deny that it was working.  So they followed the path of the US Fed who completed a round of QE late last year.

The markets loved this of course and it sparked a huge rally across the board, particularly in Europe and Emerging Market Equities.  By comparison, international equity ETF's EFA and EEM are up 0.85% and 3.74% respectively versus DIA and SPY which are both down on the year. Emerging Markets have a lot of catching up to do after several years of under-performance.

Now let's go from the macro level down to the micro and look at an individual trade able - Netflix. NFLX reported earnings on Tuesday and I approached in my standard fashion - selling an iron condor outside the expected move.  Specifically, I sold the 302.5/305 385/387.5 iron condor for a credit of 1.03, max loss of 1.47. This trade had a skewed risk to reward ratio, but since its outside the expected move, has better than even chance of going max profit.

What happened next was unexpected, NFLX surprised to the upside and exceeded the expected move.  In no time at all the stock was trading at 390 and my condor was a max loss situation.  I did not immediately reverse my position however, somewhat skeptical that this move outside the expected move would last.

Well the stock did nothing but trade up, and it settled close to 415 and hung out there for a while. But it edged ever higher and I finally got long and bought the next Friday 410 call at 15.6.  The stock moved steadily higher and closed the day in the 428 area.  I went out long expecting a pop up into the open the next day.  We didn't get it, but I ended up closing the call out for $19 so I took a decent profit on it.

Friday came around and the stock attempted a sell-off, but it didn't materialize and the stock quickly recovered the 430 area and hung out.  I was expecting the 432 area to be resistance since there's the 261% fire line at 432.47 or thereabouts.  The stock traded up and then back down and headed ever higher.  So I went long the next Friday 420 call for a debit of $15 and flipped it out later in the day for $20.  So with a profit of 3.4 on the other trade and 5 on this is a total of 8.4 profit not counting commissions overall I came out ahead on this trade in a lemons to lemonade fashion

Now let's examine how John Carter traded it.

He started off with an iron butterfly, selling the at-the-money 345 puts and calls, and buying the 300 put and the 390 call as protection.  Overall, the trade had a max gain of about $4000 and a max loss of about $5000.

Carter had the same outcome as me, a max loss on the initial trade.  But what he did next is what makes the difference, so read on.

Next, to make up for the loss, he sold 15 of the 395/400 put credit spread for a credit of 1.2 bring in a total of $1530 to make up some of the 5K loss.  Next, he bought 10 of the next Friday 405 calls at 14.20 and sold 5 of the 425 calls and the 430 calls against it. Those options basically doubled and he made over 10K on that trade and easily wiped out the initial loss.   Although as the stock moved higher, he would have had to scramble to buy back the 425 and 430 calls at a loss since the stock rallied into the close Friday.

The real take away is how Carter handles adversity.  His initial idea failed, but he traded around that and managed to come out ahead.  In my case, I was afraid of compounding one losing trade with another.  It took me about 25 points of price movement (from 390 to 415) before I finally changed directions, while Carter did it much sooner.  In either case, Carter's ability to build a position as the price action evolved (and in the middle of trade) is what gave him an advantage.

But clearly part of Carter is rubbing off since I am:

1) Selling premium to bring in income
2) Buying Delta 0.7 puts and above for directional positions
3) Giving myself the give of time and buying the next week options for longs while selling this week's premium for shorts.

I've come a long way, but it still feels like baby steps.

Have a great week ahead.

Active-Trader - Free Fib Lines indicator

Welcome back, Active Traders and Wealth Builders.

After many, many hours of work, I am pleased to present the FibLines indicator for TradeStation v9.5 at no charge to members of my blog.

This is a pretty major accomplishment considering that last year at this time, the Voodoo lines indicator was a complete mystery.  Of course, I could have spent the $1000 to buy the indicator plus $50 a month thereafter to use it.  But as you know, I'm not that kind of guy and don't believe in paying for indicators, at least not nearly that much.

So go ahead and download the file FibLines.zip and follow the directions in the document to install it on your system.  Here are the highlights:

- Requires TradeStation v9.5 or above.

As I mentioned in last week's post, support for Thinkorswim is not going to happen due to limitations in that platform.  Note that I use Thinkorswim to draw the lines initially, and I can share for any symbol at your request.

- Lines appear identically in all time frames from monthly down to intraday.

- Includes support for over 130 stocks including DIA, IWN, QQQ and most members of the Dow-30 and the Nasdaq 100.  I also threw in a few favorites, PANW, BABA and GPRO.

Not included at this time is:

- A method to deliver support for new symbols over the Internet.  As of now, the symbol data is hard-coded into the DLL, so you will need to download a new DLL file to support more symbols.

- Support for Futures or Currencies since I don't trade those.  I'm not adverse to adding support for these if there is a demand for it.

As for my future plans, I may turn this into a paid service with support a much larger number of symbols.  Left to be determined is if there is enough demand for this indicator and what people may be willing to pay for it.  So give it a try and let me know your feedback.

Active-Trader - 2015 Week 1

Welcome back, Active Traders.

I am back from a week in sunny Cape Coral, FL.  Before you get too jealous. I was with my in-laws.  So what was I doing with all that free time on my hands?  Coding the Fib Lines indicator of course!

One question you might be asking is, does this indicator really help with trading?  Its a very relevant question since one of my resolutions for 2015 is to trade less.  In other words, don't take a trade unless the setup is so obvious you could explain the setup to someone who knows nothing about trading.  And with all these lines on the chart, some of them are bound to be meaningful and others are not.  How do you know which is which?  The answer is you never know for sure.  But sometimes when the signs appear, you have to act.

And along those lines, take a look at CBOE. As you know I have been a fan of this stock and long since my post CME back in December of 2014.  I was able to get some shares and stay long and ride a nice breakout.  This past week, I noticed the stock slammed into the 223.6% treeline and seemed to hit an invisible ceiling.

So I took the opportunity to take profits and since then the stock has pulled back almost $1. I don't expect the bull case is over in these shares, and I will reload on the long side if we can get a pullback to the 193.6% tree line just under $65 per share.

As for what else has been accomplished, I found (and coded in the DLL) the fib levels for the Dow-30 stocks.  Next step is to locate the Fib lines levels for the Nasdaq 100 and perhaps the SP-100. I would like to supply those Fib line levels when I release the indicator to members of my Yahoo group (for free of course).

As for ongoing challenges, I don't believe I will be able code the indicator for Thinkorswim.  As it turns out, the Think script environment has some serious limitations that I did not anticipate as follows:

• No ability to input data from the outside world except for simple parameters to the study.
• No file input or output, no ability to call Windows DLL files like in TradeStation
• Once you plot a value in ThinkScript, the price chart is scaled to always include the plot, which is pretty much a deal killer for Fib Lines in Think script which are very often out of view based on the time frame and Zoom level selected.

All this is pretty ironic considering I use Thinkorswim to discover the Fib line levels just to transfer them over the Windows DLL to include them into Tradestation.  Why don't I just do everything in Thinkorswim you might ask?  Because I prefer the programability of the TradeStation environment as well as the $1 pricing I for a trade of 100 shares or one option contract in Tradestation.

Overall, it has been a good start to 2015 and I started off the year with a good rest and a good running start of the Fib Lines indicator. I am feeling pretty good about my prospects and content to just watch events unfold and wait for great trading setups to occur.

So go ahead and relax and don't feel any pressure to act.  Let the market doing the talking and don't make any moves until your market declares itself one way or the other.  Don't guess, react.

And have a great week ahead.