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Everyone and their brother are probably scrambling right about now, as they try to figure out the market direction. I want to take a few minutes to teach you three techniques I’ll use to attack the market.

 

If you found this market difficult to trade lately, you’re not alone.

Of course, one headline can change the course of action, which is why I’m preparing myself for once a bulk of the uncertainty is taken out of the picture.

You see, if I can time the market, then there should be INCREDIBLE plays.

So what am I doing right now?

Here are the three techniques I’ll utilize right now:

  1. Define critical support and resistance levels
  2. Identify reversal signals
  3. Develop a stock watchlist

I knew immediately this environment didn’t work well for swing trades.

So, I scaled back on my positions, focusing on day trades with my LottoX.

But this next run could be epic!

Now, I don’t want to guess when the market will turn and when volatility will drop.

That’s why I need objective ways to look at the market.

I want to walk you through which price levels I found, the indicators I use for market trends, plus a handful of stocks I like in the coming months.

1) Support & Resistance

 

When I look for support and resistance levels, I use major market ETFs.

For my trading, the Nasdaq 100 QQQ ETF is my favorite.

While it’s a tech-heavy ETF, it tends to follow along with the momentum stocks that I love to trade.

Here’s how I look for support levels for a market bounce.

First, let’s take a look at the weekly chart of the QQQ.

 

QQQ Weekly Chart

 

I start by looking at the 8-period and 21-period exponential moving averages. These often act as support and resistance.

Look at how the ETF interacts with this in the past to see what I’m talking about.

We’ve already pushed through the 8-period EMA on the weekly chart.

So, the next stop is the 21-period EMA.

That would be the next logical area I could see for support.

But is there some other way to confirm that might work?

Let’s try a Fibonacci retracement. 

 

QQQ Daily Chart

 

When I use the Fibonacci retracement tool on the highest point in the Qs and the lowest point, $297.46 and $260.11 respectively, I get a 23.6% retracement at $268.92. That’s pretty close to the 21-week EMA.

And, if I assume that it may take another week or so to reach that level, the two might just match by then.

Now, that’s only one spot where the market might stop.

The next would be the obvious low point at ~$260.

Do I need it to stop on a dime at these levels?

No. I just need them show me signs of a reversal.

So what does that look like?

 

2) Reversal signals

 

Here’s a quick exercise I promise won’t take long.

Go back over the last 20 years in the SPY and look for bottoms in the market after severe drops. 

Take a look at the volume.

Notice anything unusual?

You should see a large spike in trades.

 

QQQ Weekly Chart

 

I highlighted a few times when this happened over the last decade.

While these were more extreme examples, the same thing occurs on smaller timeframes.

To this point, we haven’t seen a lot of volume on the recent selloff. 

Even though that doesn’t mean the market can’t bottom, it’s a signal that it might have.

Another item I look at – the put/call ratio.

This measures the number of put contracts to call contracts.

Generally, this sits at around 0.7-0.8. When it stays elevated for too long, chances are we’re about to see markets find a bottom and reverse.

In a similar vane, I like to see the VIX hit extreme levels.

Although it’s been relatively high the past few months, if I see readings over $60, chances are we’re headed for a bottom in the coming weeks.

 

3) Creating a watchlist

 

This is my favorite part of preparation. It’s like being a kid in a candy store.

When I look for stocks to trade off the reversal, I want ones with lots of relative strength.

These are stocks that performed better than the rest during the market drop.

Yes, the hardest hit often bounce the most. But as an options trader, those don’t work well for me.

Why?

Because that huge bounce is already priced into the options.

I’d rather go for a stock with a lot of short-squeeze potential that’s near all-time highs.

Stocks like Peloton (PTON), Chewy (CHWY), Tesla (TSLA), Carvana (CVNA), Wayfair (W), Zoom (ZM)…you can go through my past stock picks for each week and find a whole bevy of them.

I know I’ve given you a lot to digest.

That’s why my LottoX service is a great place to start your education.

Not only do you get my top trades for the week, but I lay out my full trading plan.

That includes what I’m watching in the market AND where I see it going.

So, if you’re looking for trade ideas and a great way to learn the market, then you’ve come to the right place.

Click here to learn more about my LottoX service.

 

Author: Nathan Bear

Although Nathan Bear has made options trades that resulted in over 1,000% profit, he’s “only made a few” he says wryly! Nathan is one of the best options traders there is. Period. His unique approach incorporating his adaptive 3-step “TPS” trading strategy, has so far brought Nate well over $2 million in realized trading profits.

Nate is a down to earth trader who now imparts his simple trading methods and relaxed approach to his trading subscribers to help give them the keys to trading success.

With the way the market has acted over the last few sessions and all the uncertainty right now, I don’t think it’s the time to go out and try random indicators.

Instead, it’s more beneficial to find reliable patterns that elite traders will use to navigate through this mess of a market.

Listen, I’ve tried hundreds of indicators over the years, if not thousands — and I don’t want you to waste your time as I did over the years.

Out of all the indicators I’ve tested over the years, I’ve found only three to be reliable:

  • Moving averages
  • Bollinger Bands
  • The squeeze

I came back time and again to what I believe to be simple indicators for one simple reason…

They help me make money.*

You’ll be surprised how they might improve your trading, as many of my LottoX members found out.**

Before you go out and try to trade off these indicators…

Give me a few minutes of your time to explain how these work and why they’re useful.

 

Moving averages

 

Moving averages come in two main varieties: simple and exponential.

Simple moving averages add up all the closing prices for a given number of periods and then divides by that number.

For example, a 200-period moving average adds up all the closing prices for the last 200 periods and then divides by 200.

The other type of moving averages are exponential.

These work similarly, but give more weight to recent prices.

The most common simple moving average used by traders, and myself, is the 200-period moving average.

I apply it to pretty much every timeframe.

It’s most useful as a point of support and resistance as well as a market trend reference.

Here’s an example using the SPY daily chart.

 

 

You can see how shares hit the line on three separate occasions.

The first time, it acted as support in what was one of the worst declines in years.

Once price closed below, that sent a signal markets had turned bearish.

As price rebounded, shares came up just short before consolidating sideways.

Once they crossed over that level, they used it as support twice before taking off.

These interactions create excellent places to design trade setups, take profits, or stop out.

I use exponential moving averages in much the same way.

For me, I employ them on everything from the 5-minute chart to the daily chart. 

As a core component of my TPS setup, I use the 8-period and 21-period exponential moving averages to enter my setups.

Here’s an example from a recent LottoX trade.

 

SFIX Hourly Chart

 

In the chart pattern above, you can see that I had a spot where the moving averages touched one another. 

Generally, I want to enter the trade when price is between the two.

So, when they’re right on top of each other, it makes my decision making even easier.

Now, let’s take a look at the Bollinger Bands

 

Bollinger Bands

 

Many chart and technical traders like to use Bollinger Bands. 

I find them extremely useful to gauge over/undersold stocks.

Bollinger Bands calculate a two standard deviation range where, based on the defined number of periods, there is a 95% statistical chance the closing price lands in that range.

Here’s a graphic to help you visualize this.

 

 

The Bollinger Bands look at the last set of closing prices, say 20 periods, and says that based on that data, it’s statistically likely to fall in the green or yellow zones 95.4% of the time.

What does that practically look like?

Here’s that same chart of Stitch Fix.

 

SFIX Hourly Chart

 

The light blue lines represent a two standard deviation range at any given point based on the last 20 periods.

You can see how it widens after a strong move and shrinks during consolidation.

Many traders use closes over or under the lines to signal breakouts or as countertrend plays.

Since I work off consolidation ranges, I use them to create boundaries for my trade.

If price starts closing above or below the Bolinger Bands, I know that it’s telling me the big move has begun.

So, I don’t always have to wait for the pattern to fail as a stop out.

Now, let’s turn to my favorite indicator, the squeeze.

 

The squeeze

 

As an options trader, I need to time my trades correctly. Otherwise, I can get the trade direction right and still lose – and that sucks.

I found the squeeze to be particularly good at timing trades for explosive moves.

As I explain to my LottoX members, the squeeze occurs when the Bollinger Bands move inside the Keltner Channel.

I know that sounds like a mouthful, so let me show you what that looks like.

SFIX Hourly Chart

 

You see those red dots at the bottom?

Those tell me the squeeze is on.

When they turn green, that means the squeeze has fired and the energy is released.

Essentially, it’s looking for periods where price contracts so much that it should make a strong move in one direction or another.

By adding in other parameters of my TPS Setup, I tilt the odds towards that happening in the same direction as my trade.

 

Learn by doing

 

It takes some practice to put all these pieces together.

And you don’t have to do it alone.

I created LottoX to help folks like you learn how to trade the market.

Not only do you get access to my live-streaming portfolio and trade alerts, but every day I lay out my entire trading plan.

Not to mention each week I hold a live training session to teach you some of the same skills I used to turn $38,000 into over $2,000,000 in just two years.

Click here to learn more about my LottoX service.

 

Author: Nathan Bear

Although Nathan Bear has made options trades that resulted in over 1,000% profit, he’s “only made a few” he says wryly! Nathan is one of the best options traders there is. Period. His unique approach incorporating his adaptive 3-step “TPS” trading strategy, has so far brought Nate well over $2 million in realized trading profits.

Nate is a down to earth trader who now imparts his simple trading methods and relaxed approach to his trading subscribers to help give them the keys to trading success.

How Does an Iron Condor Work?

T here are so many options strategies at your disposal, giving you the opportunity to constantly learn and develop your trading skills. One of the more advanced strategies out there is the iron condor.  By learning what the iron condor is and how and when to effectively use it, you can determine whether it’s a good fit for you and your portfolio.

What Is an Iron Condor Option?

Image via Unsplash by austindistel

An iron condor is a strategy for trading options that involves two different credit spreads in the same trade. Each spread uses two calls and two puts, with one in each set being a long position and the other being a short position, all of which have four separate strike prices but share the same expiration date.

When traders use this strategy, they’re hoping to profit from an underlying asset’s low volatility. Put simply, the iron condor strategy yields the highest returns when, at expiration, the underlying asset closes somewhere around the middle strike prices.

When creating an iron condor, investors can create positions on individual stocks or indexes of any size, but the underlying asset is frequently one of the broad-based market indexes. The iron condor differs from a regular condor spread because it uses calls and puts instead of just one or the other. Aside from that, both the condor and iron condor have similar payoffs and are extensions of the butterfly and iron butterfly strategies.

How Does an Iron Condor Work?

To construct an iron condor, traders:

  1. Purchase an out-of-the-money (OTM) put that has a strike price that’s less than the underlying asset’s current market price. This option will shield the investor from a significant downturn for the underlying asset.
  2. Sell one at-the-money (ATM) or OTM put with a strike price that is a bit closer to the underlying asset’s current market price.
  3. Sell one ATM or OTM call with a strike price that is above the underlying asset’s current market price.
  4. Purchase one OTM call with a strike price that exceeds the underlying asset’s current market price even more than the call they sold. This option will shield the investor from a significant spike for the underlying asset.

The low and high strike options that are further out of the money are both long positions. These options are often referred to as the strategy’s ‘wings.’

Since the wings shield the trade against any significant fluctuations in either direction, this strategy gives traders a position with minimal upside or downside risks.

The wings have lower premiums than the written options because they are further out of the money. As a result, a net credit is placed on the account when the trade is placed. When using this strategy, traders hope that all of the options will expire completely worthless. This is only possible if the underlying asset closes somewhere around the middle strike prices at the expiration date. If the trade is successful, there’s usually a fee to close it. Even if the trade isn’t successful, the losses are still contained.

Traders can also make their strategy lean more bearish or bullish when selecting the different strike prices. For example, a trader might hope for a small upside turn in the underlying asset’s price before expiration if they set both of the median strike prices above the current market price. This strategy still offers limited risks and rewards.

The Profits and Losses of the Iron Condor Strategy

An iron condor has a limited amount of profit potential due to the strategy’s limited amount of risk. It’s also important to note that because there are four different options involved with this strategy, the commission you pay can be pretty substantial.

The profits enjoyed through an iron condor are limited to the credit, or amount of premium, that the trader receives for making the four-leg options position. Aside from having capped profits, the losses are limited to the difference between the long and short strikes for both the call and put positions. A maximum loss would occur if the underlying asset’s price exceeded the long call strike or dipped below the long put strike.

After accounting for this difference, you would subtract the net credits received from placing the wings and add up the commissions owed for the trade to get a complete view of the loss.

When to Use an Iron Condor

Options traders typically fall into one of two categories: volatility or directional. While a volatility trader prioritizes how much they think a stock will move in either direction, a directional trader is concerned with whether they think a particular stock will go up or down.

The iron condor is what is known as a ‘delta-neutral’ options strategy because it doesn’t really matter if the stock moves. Instead, what matters is how much it moves.

Directional traders favor this strategy when they believe that a stock or index is going to be range-bound. You sometimes see directional traders employing this strategy right after earnings. For example, once a stock takes a pretty big hit for an extended period of time, there’s usually a stretch when shorts and longs hit a stalemate, causing the stock to sit there pretty lifeless for a while. Traders who rely on technical analysis also make use of this strategy by using the levels from their support and resistance lines to create their iron condor.

Volatility traders like to use the iron condor strategy when they think a stock or index has a particularly notable implied volatility. This strategy is especially popular around earnings season. Since an iron condor has a clearly defined and capped risk, having short volatility before earnings is a little less scary. Because things are especially uncertain before an earnings announcement, the premiums on options are usually inflated, allowing volatility traders to collect higher premiums.

The Advantages and Disadvantages of Using the Iron Condor Strategy

As with any other trading strategy, there are pros and cons associated with the iron condor.

Advantages of the Iron Condor

Some of the benefits of using this strategy include:

  • You can collect twice the premiums. The iron condor gives you the chance to collect double premiums since you’re setting up a put and a call spread.
  • Half of the trade gives you guaranteed returns. You have guaranteed maximum profits on half of the trade, regardless of how things turn out.
  • You can react to changes as they happen. Options trading is extremely versatile, and the same is true of the iron condor trading strategy. If the underlying asset experiences a big shift, you could purchase back the suffering short options while allowing its corresponding long option to stay open. That way, if the stock continues in the same direction, the long option’s value will increase, balancing out, or even reversing any losses.

Disadvantages of the Iron Condor

A few of the iron condor’s challenges are:

  • There are two times the number of ways you can lose. Since you’re hoping that a stock will stay within a very specific trading range, you are essentially doubling the chances that you will lose money.
  • The losses can be substantial. The potential losses, though capped, can outweigh the potential profits.
  • There’s a risk of over-leveraging. Since the capital needed for this strategy is so minimal, traders sometimes fall into the trap of over leveraging by setting up more iron condor positions than they should.

T here are a number of ways to profit from options trading, so it’s beneficial to get acquainted with the strategies at your disposal before you get started. Though the iron condor is a more advanced options strategy, it is an extremely useful way to manage the risks associated with trading and ensure profits.

Author: Nathan Bear

Although Nathan Bear has made options trades that resulted in over 1,000% profit, he’s “only made a few” he says wryly! Nathan is one of the best options traders there is. Period. His unique approach incorporating his adaptive 3-step “TPS” trading strategy, has so far brought Nate well over $2 million in realized trading profits.

Nate is a down to earth trader who now imparts his simple trading methods and relaxed approach to his trading subscribers to help give them the keys to trading success.