The Euro story - A classic trendline break

Chart school time. Look at the diagram below of the Euro
futures of June 2008. It illustrates the trendline break
on high volume. Notice this, it is a textbook example of
how to trade. You go short below the LOW of the break day
which is 4/24/2008. The low is 1.5604. You put a stop
short trade and get executed at 1.5603 ( the Euro is
highly liquid ).



Now the next thing is to find out Fibonacci retracement
levels for the move down and stops for the trade. The
first target down is the 38.2% Fib level which will be
roughly around 1.54 and the stop is at the close on 4/24
which is 1.5651. The reward is almost 200 points down
from 1.5603 to 1.5400 while the risk is 50 points up
to 1.5651. This is a 4:1 risk reward ratio which is
better than the standard 3:1 which most traders aim at.

I will NOT make this trade. I do not trade the Euro,
nor do I trade the future ( I sell options ). Another
caveat is there are 2 very volatile events coming up -
today is FOMC rate decision day where it looks like the
FOMC will finally indicate that it is done cutting
rates ( which may or may not be good for the dollar ).
Also Friday is payrolls day which is always volatile.

Curiously enough, with the dollar looking to have
bottomed in the short-term, this trade may work out
very well. To avoid getting stopped out by post-FOMC
gyrations, increase the stop to 1.5672, where the
important 9-day moving average stalls. This will
reduce the risk-reward ratio ( RRR ) to 3:1 but thats
plenty good enough.

Thanks for your viewership!

IST Theory - The NIFTY is approaching 200dma resistance

Apart from the S&P500, I do weekly analyses of a few other
things. One of them is the S&P CNX NIFTY, the index of the
National Stock Exchange of India ( ^NSEI on Yahoo! and
$CNXN on Stockcharts ). Here is my summation from last
weekend. I put this down because as I am sitting here I
see the NIFTY is approaching 200DMA resistance. This first
approach will ALWAYS fail, though one does not know WHEN
it will fail.

=5111 rsi 49.26, 200dma resistance looming at 5149! 50dma 4916
low 4448 Jan 22 4468 Mar 18
support 4900 resistance 5150, 5400
weekly uptrending 50WMA at 5006, line retaken!!
WRSI bounced from multiple support at 40, is back at 50 and will go up

The weekly chart -



My take ( note I do not recommend trading this index ) -

We are in an uptrend. The present dip is similar to the
one in 2006. There is a 200DMA overhead. Thats a short
term scalp trade in the longer term trend which is up
as long as the 50WMA ( blue line ) does not start to
flatten out.

Thanks for your viewership!

IST Theory - Is the cat out of the bag?

So what now? Did I let the cat out of the bag? Are my secrets revealed
for everyone to reproduce my performance?

I want to warn you here. Do not think you can execute
my technique and get the same kind of returns that I do. You will be
doing yourself a disservice, not to mention a financial harm. The
disservice is because you will not be following my #1 trading adage,
"figure things out for yourself".

So you can go ahead and do just that. You can figure things out by
trading a practise account using my techniques. Please realize that
I have given the broad outline only. Once you get down to the
nitty-gritty, you will find there are many fine points that will
derail your efforts. Those are the things you must figure out.
Thats what I have done for 3 years now, since I stopped trading
the stock markets ( yup, I used to trade things like RIMM and OSIP
and CREE and SIRI! ).

But, trading a practise account is NOT the real thing. You will
NEVER learn anything by trading a practise account. So you will
have to trade a real account.

How long will it take for you to figure everything out?
Will you remain solvent?
Will you remain committed to the technique?

I am not so sure. This is why I will next tell you what I
really mean to do with this blog. But thats in the next post.

For the time being, here are my performances for the 1st 3
months of this year. These have been some of the most volatile,
gut-wrenching months in recent history. Did it matter to me?
Not one whit! When the markets crashed in January and March,
or when they snapped back in February and April, my system
did not miss a heartbeat! And I am sane and unmoved. I am
learning Espanol, blogging, starting a new contract programming
company and building extensions to my house!

The following 3 images are for the mark-to-market profit
and loss statements of my account for the 1st 3 months of
this year. Please note the all-important internal rate of
return number.Those are MONTHLY percentages, not annualized!

Thanks for your viewership!

IST Theory - What is the half-life of time?

The half-life of a quantity whose value decreases with time
is the interval required for the quantity to decay to half
of its initial value.

In options, the half-life of time is the interval required
for the time premium of an option's value to decay to half
of its initial value.

The initial value here is the value at a certain point
in time from when I track the option. This is typically
30 days to expiry for options expiring at the end of
the next month, or 60 for those expiring at the end
of the month after next.

The time premium of an option decays slowly when the
option is far from expiry. The decay speeds up when
the option nears expiry. This is the point at which
the option becomes interesting to me.

As expiry nears, options lose most of their time premium.
Sometimes, looming volatility events cause some of the
time premium to remain till close to expiry. Also, at
this time, liquidity vanishes. This is the time I
lose interest in the option.

The sum of my technique is as follows -

1. Sell options in strangle form about 30 days to expiry.
2. Close them out in the last week of expiry.
3. Pocket the time premium.

Specifics -

1. I use only European options on the e-mini S&P for
liquidity and certainty. Liquidity pertains to the
underlying, which is the most liquid future in the
world. Certainty pertains to the characteristics of
European options, which cannot be exercised before
the expiry date, and then following strict rules
( for example, the buyer cannot exercise a out of
the money option, unlike in the American series ).

2. European options expire on the last trading day
of the month. This is good for me in many ways.

3. I never hold a position on the day of expiry. This
is tantamount to suicide. Markets have a tendency
to make volatile moves on the last trading day of
the month. Since liquidity has completely vanished,
you will be stuck playing a game of roulette.

Thanks for your viewership!

Brief Looks - Those darned financials!

Ok, so it has been a while since I wrote the inaugural post
of what I hope will become a well-known trading blog.

In the meantime, I have thought a bit about what this blog
should be. My initial goal of showing how one can profit
consistently by selling options through the concept of
the "half-life of time" remains the main goal of this
blog. But there are certain other things.

Firstly, I rely on my techniques to make a living. I feel
a little wierded out to disclose it to the world. I have
been trading for over 5 years and have tried various
techniques, markets, vehicles. I have finally hit upon
something which works for me. I am sure it will work for
anyone who understands it and puts it into practise
with discipline. But why should I let the cat out of
the bag?

Secondly, I do a lot of research. I feel that I can write
on those. Thats more like a regular trading blog. The
research yields insights, something which are mine alone.
I do read a lot but I never follow others' advise or
technical points. This is the first rule of trading.

"Figure things out for yourself"

So lets start with something out of my research for this
weekend. I will not go into all the issues. I just want
to highlight a little something called the P&F chart
for the financial select sector spider XLF. Here is
the diagram -



Now this is one of the few sectors that has still not
printed a bullish reversal. I will remain sceptical of
the intermediate-term bullish scenario till I see something
change here.

Why? The financials are hugely weighted in the S&P500 and
have been singularly responsible for the plight of that
index. The quarterly performance of the index looks like
it will print about -14%. But there are sectors like
tech, energy and industrials which are actually printing
positive growth! Think about that. Below is the market
carpet of the S&P500 which shows the deep influence of
the financial sector. It shows the performances of the
respective sectors over the last 2 months.



For the week coming up, here is my short summary of the
S&P500.

=1398 rsi 61.70, 50dma 1345 up, 200dma 1436 sloping down at 15pts/mo
low 1257 on 3/17
1325, 1365, 1380 support, 1405, 1415 resistance,
RSI has broken out, headed to 70? MACD has broken out too.
200WMA at 1306, looks like 5 waves are over and we will see a
3 wave up to 200DMA/50WMA at 1430-1440;
weekly RSI at 51!
Fib levels- 1378.88 rejected!claimed! 1416.54 target? 1454.19

Thanks for your viewership!