Tyler Chianelli’s EASYOPTIONTRADING by OPTION TRADING COACH PART 1 - THE FOUNDATION FOR TRADING SUCCESS A SIMPLE SYSTEM FOR TRADING OPTIONS WORKS IN UP, DOWN, AND SIDEWAYS MARKETS PART 1.1 - BASIC FUNDAMENTALS OF TRADING It is Important to Trade with the Trend Trade ‘Fundamentally Strong’ Companies Buy Stocks that Pay Dividends Go Long Shares in Bull Markets Sell Short Shares in Bear Markets Always Buy Shares with a Limit Order Have an Exit Strategy for Each Trade You Make Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.1 - BASIC FUNDAMENTALS OF TRADING Market Capitalization: The total dollar value of a company. Earnings Per Share: The amount of money a company makes on a per share basis. Profit Margin: Measures how much the company keeps out of every dollar that comes in and is calculated by taking the net profit divided by total sales. P/E Ratio: This is calculated by dividing the stock price by earnings per share. Earnings Growth: The rate of growth for a company. PEG Ratio: Calculates the company value using earnings growth. Price/Book: A ratio that compares the market value to the book value. Current Ratio: Shows if a company can pay short-term debt obligations. Return on Assets: Shows how profitable a company is with it’s total assets. Beta: Measures the volatility or risk of a company. Total Cash Per Share: A ratio that determines if there is a likely change in earnings per share by dividing the free cash flow by the total number of outstanding shares. Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.2 - UNDERSTANDING RISK Private traders have no managers, therefore they need their own system of discipline to keep them in check. Understanding Trade Risk vs. Portfolio Risk Portfolio risk is the amount at risk in Trade risk is the amount at risk in your trade. your portfolio. For example,if you have Use your maximum loss on spread trades. a $25,000 account and you risk 2% on For example, if you put on a $1,000 trade and a trade, the portfolio risk is $500 you risk 50% on a trade, the “trade risk” is ($25,000 x 2% = $500) $500 ($1,000 x 50% = $500) Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.2 - UNDERSTANDING RISK Professional Traders and Investors only Risk 1-2% of Their Total Account Equity on any Single Trade. $1,000 2% Risk on a $10,000 Account = $200 —> your MAX ALLOWABLE LOSS Buying 4 option contracts at $2.00 would put your max stop loss at $1.50 per contract $800 Trade @ $200 MAX RISK = 25% Stop-loss Note: If you are looking to make significantly more than 100% return on a trade, you will more than likely have to risk more more than a 50% stop-loss. In this case buy fewer contracts. Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.3 - CALCULATING THE RISK-REWARD To Be Consistently Successful You Must Follow a Set of Rules. A Common Risk - Reward Ratio is: 2-1 To calculate the possible reward, first look at the stock then figure what the option will do on a relative basis. Look at the distance from the stock’s support to its resistance. Look at the distance from a break above resistance to the next level of resistance. If the stock is at a 52-week high simply look at the 5-year chart for resistance. If the stock is in a strong uptrend, calculate the distance from the lower trend line to the upper trend line to project the potential upside potential. Judge your stop-loss. If your stop-loss is at $1 and your option is $1.50 you are risking $.50 Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.4 - TRADING EXCHANGE TRADED FUNDS ETF’s are Investment Funds that Trade Just Like Stocks. ETF's or Index Tracking Stocks Offer Great Diversification. One ETF can make up anywhere from 30 - 2,000 different stocks. • Mitigate a catastrophic account equity decrease. • Keeps you in the game longer during major losing streaks. • Acts as a strong defense during periods of high volatility. • Help you follow your trading plan more effectively. • Will increase your knowledge in a vast amount of sectors. • Is a pivotal part of being a consistently profitable trader. Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.4 - TRADING EXCHANGE TRADED FUNDS ETF’s are flexible investment vehicles because they appeal to a broad segment of the investing public. Index Sector Industry ETF’s ETF’s ETF’s DIA XLE EEM SPY XLF BZF QQQ XLV FXI IWM XLU JPNL GLD SLV OIH Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.5 - THE SUCCESSFUL TRADER MINDSET The Five Principles of a Successful Trader Mindset 1. It is absolutely critical to always predefine and accept your risk on every trade. 2. Always cut your losses short and never let a winning trade turn into a losing one. 3. Cultivate an unemotional mindset that is not affected by the market's behavior. 4. Train your mind to think in terms of risk-reward, probabilities, and systems. 5. Constantly train your mind to be in the "present opportunity flow" with laser focus. How to Eliminate the Emotional Risk of Trading Stocks and Options Neutralize your expectations or premonitions about what the Stock Market will or will not do at any given moment or any given situation. Be willing to think from the Markets’ point of view. Listen to the Market by understanding that it always communicates in terms of probabilities and risk. Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.6 - THINK LIKE A SUCCESSFUL TRADER Train Your Mind For Success and You Will Manifest Your Beliefs. It is critical to build the trading skills that are necessary to get through the inevitable losing periods that you will experience as a trader. 1) Build the self-trust necessary to operate effectively Trust in an infinite environment. 2) Learn to flawlessly execute a specialized trading Confidence system tailored to your style. Think Probabilities 3) Train your mind to think in terms of probabilities. Unshaken Belief System 4) Create a strong, unshakeable belief in your consistency as a trader. Remember that anything can happen in this business, every moment in the Market is Developing a winning attitude is key to your success as a trader. unique, you don't need to know what is going The problem for many traders is that they either think they to happen to make money, and that there is a already have one, when they don’t, or they expect the market to random assignment between wins and losses develop the attitude for them by giving them winning trades. in the variables of your trading system. Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.6 - THINK LIKE A SUCCESSFUL TRADER Perhaps one of the most powerful personal development strategies is the use of affirmations. Using this technique will help instill your successful trader mindset. I'M A GREAT TRADER BECAUSE... I identify the overall trend, support & resistance, and momentum levels on every trade. I know the intermediate and short-term trend on every trade. I know if I am trading the long, intermediate, or short-term trend on each trade. I buy where I'm supposed to buy, and I sell where I'm supposed to sell. I have a stop loss and a profit target price on every trade I place. I have written rules and have a detailed system that I follow on every trade. I trade the Market not my thoughts by taking action and following my plan. I follow and trade my rules and the profits take care of themselves. Like a master chess player, I think several moves in advance but I only trade based on market price action, confirmations, and never on my emotions. I take consistent action and I am consistently profitable. Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.7 - THE FOUNDATION OF TRADING Debits & Credits are the Mathematical Core of Options. What is a Debit? What is a Credit? • Takes Money Out of Your Pocket • Puts Money In Your Pocket • Buying a Call or Put is a Debit • Selling a Call or Put is a Credit • Buying Shares of Stock is a Debit • Selling Shares of Stock is a Credit • A “Debit Trade” is one that you pay • A “Credit Trade” is one that you get for upfront paid for upfront and normally ties up margin or “buying power”. Copyright © 2015 Option Trading Coach, LLC. All Rights Reserved. Terms of Use Apply. PART 1.8 - INTRODUCTION TO FUTURES Futures are the driving force behind the Stock Market and Indices. The Main Futures Consist of: /ES - E-mini S&P 500 Futures ($5,000) = $50 per point /YM - E-mini Dow Jones Futures ($4,300) = $5 per point /NQ - E-mini Nasdaq 100 Futures ($4,000) = $20 per point /TF - Russell 2000 Futures ($5,600) = $100 per point /GC - Gold Futures ($5,500) = $100 per point /CL - Crude Oil Futures ($5,000) = $1000 per point /VX - CBOE Volatility Index Futures ($6,200) = $1000 per point Copyright © 2015 Option Trading Coach, LLC.