Trading by Numbers E-Book

Rick Swope

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 421

Veröffentlichungsjahr: 2012

Beschreibung

Get the E*Trade experts' inside track on playing the markets For retail traders, knowing which possible strategies to employ when has always been a challenge. That is, until now. For the first time, popular E*Trade educators Rick Swope and Shawn Howell introduce their two-dimensional scoring system for determining how bullish/bearish a trade setup looks by reading charts. In Trading by Numbers, they present a scoring system that uses a trend score and a volatility score, removing the guesswork and giving you a solid guide to the markets. Based on the score, the authors provide a toolkit of option strategies that are best to execute in each specific situation. Using common indicators and patterns, the book provides analysis for choosing your right strategy while managing risk. * Authors Swope and Howell are accomplished market educators and their partners are the leaders in trading and investing, including E*Trade, CBOE, OIC, NYSE, NASDAQ OMX, CME and ISE * An easy-to-use guide that will help you make the best decisions in any situation, the book is essential for traders at all levels Trading by Numbers outlines a proprietary market scoring system that helps traders determine the best option strategies to execute in any market climate.

Leseprobe

Contents

Cover

Series

Title Page

Copyright

Dedication

Acknowledgments

Introduction

CHAPTER 1: Market Scoring

INTUITION CAN BE HIGH TUITION

THE ROLE OF TECHNICAL ANALYSIS

CHAPTER 2: Trend Scoring

TREND-SCORING SYSTEM

CHAPTER 3: Volatility Scoring

VOLATILITY OVERVIEW

VOLATILITY SCORING SYSTEM

KNOW THAT YOU DON'T KNOW

CHAPTER 4: Protecting Your Position

SEVEN KEYS TO RISK MANAGEMENT SUCCESS

THREE LEGS OF MANAGING RISK

SETTING STOPS

SAFETY IN NUMBERS

CHAPTER 5: Covered Calls

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY MANAGEMENT

STRATEGY APPLICATION

CHAPTER 6: Long Calls

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY MANAGEMENT

LEAPS

STRATEGY APPLICATION

CHAPTER 7: Long Puts

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY MANAGEMENT

SPECULATIVE PUTS

COLLARS

STRATEGY APPLICATION

CHAPTER 8: Straddles and Strangles

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION—STRADDLE

STRATEGY MANAGEMENT

STRATEGY IN ACTION—STRANGLE

STRATEGY APPLICATION

CHAPTER 9: Debit Spreads

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY MANAGEMENT

STRATEGY APPLICATION

CHAPTER 10: Cash-Secured Puts

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY MANAGEMENT

STRATEGY APPLICATION

CHAPTER 11: Credit Spreads

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY MANAGEMENT

STRATEGY APPLICATION

CHAPTER 12: Horizontal Spreads

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY MANAGEMENT

STRATEGY APPLICATION

CHAPTER 13: Diagonal Spreads

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY MANAGEMENT

STRATEGY APPLICATION

CHAPTER 14: Index Options

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY EXECUTION

CHAPTER 15: Butterfly Spreads

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY MANAGEMENT

STRATEGY APPLICATION

CHAPTER 16: Iron Condors

GETTING TO KNOW THE STRATEGY

STRATEGY IN ACTION

STRATEGY MANAGEMENT

STRATEGY APPLICATION

Appendix: Strategy Profit and Loss Diagrams

About the Authors

Index

Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding.

The Wiley Trading Series features books by traders who have survived the market’s ever-changing temperament and have prospered—some by reinventing systems, others by getting back to basics. Whether you’re a novice trader, a professional, or somewhere in between, these books will provide the advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our web site at www.WileyFinance.com.

Copyright © 2012 by Rick Swope and W. Shawn Howell. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data:

Swope, Rick, 1964– Trading by numbers : scoring strategies for every market / Rick Swope and W. Shawn Howell. p. cm. – (Wiley trading series) Includes index. ISBN 978-1-118-11507-7 (cloth); ISBN 978-1-118-22438-0 (ebk); ISBN 978-1-118-23753-3 (ebk); ISBN 978-1-118-26245-0 (ebk) 1. Electronic trading of securities. 2. Stocks. 3. Risk management. I. Howell, W. Shawn, 1968– II. Title. HG4515.95.S96 2012 332.63′2042–dc23 2011042684

I have learned that a true teacher is characterized by who they are rather than what they do. This book is dedicated to teachers and mentors. My parents—having invested their lives in teaching generations. My professional mentors—Dr. Richard M. Wyskida and R. Wayne Penrod are among the best. Those who serve with passion—Lisa Phelan, Lisa Colson, and more. Mentors for eternity—Mike Schmid and Joe Donohue come to mind. Teachers from the ages—C. S. Lewis and G. K. Chesterton. —Rick Swope

This book is dedicated to my family. To my parents: Thank you for the double dose of the “teacher gene” and for your enduring and unfaltering confidence that my abilities are limitless. The life lessons you taught me are woven throughout this book and hopefully will enrich many others’ lives as they’ve enriched my own. To my wonderful children Katie and Will: You both have brought me immeasurable joy. You have incredible adventures ahead, lives to live, stories to tell, and gifts to share with the world. Remember, follow your passion, trust your inner voice, and stay a child at heart. To my wife Shelly: You’ve been my unswerving advocate, cheerleader, advisor, partner, friend, and copilot on our amazing journey thus far. In a life filled with countless blessing, the gift that is you, our bond, our children, and our life is without equal. —W. Shawn Howell

Acknowledgments

When a book manuscript is finally completed, nobody feels more like a turtle on a fencepost than the author. You realize that you didn't get there through your own efforts alone. We'd like to acknowledge some important people who have helped us to the top of our fencepost.

We're grateful to our professional colleagues who invested their time and energy into reviewing the manuscript for technical accuracy. These include Jim Bittman, Marty Kearney, Peter Lusk, and Russell Rhoads from the Chicago Board Options Exchange (CBOE) Options Institute. We also appreciate the review from our friend and colleague, Dan Gramza, of Gramza Capital Management.

Our sincere thanks go to our business partners, through whom we're able to teach multitudes of traders and investors. These include the Options Industry Council and E*TRADE. A big thanks to Kat and Diana, the best event gurus we could work with. Thanks also to Chris Young and Chris Larkin, who have supported us through a terrific partnership. And a special thanks to the “Frank” behind our model trader throughout the text—Frank Tirado. Without the outstanding team of partners surrounding us, we would still be looking up at the top of the fencepost.

Writing a book is a long and tedious process. When you begin, you're staring at several hundred blank pages that are waiting to be filled. The team at Wiley makes that process manageable and even enjoyable. Laura Walsh was the one who first spotted our potential as authors—we're indebted to her for taking that chance. Judy Howarth has been an encouragement along the way as we've fed her a chapter at a time and welcomed her feedback.

No acknowledgment is complete without a special thanks to our families and friends. The long hours on the laptop, missed schedules, impatience, and distracted attention are not borne by the authors alone. Dani Swope and Shelly Howell have continued to run quarterback for all the plays that Rick and Shawn have neglected this year. They are truly our support. Caleb Swope and Will Howell are the best sons a couple of guys could ask for—they will be fine young men, indeed. Katie Howell and Tori Swope are two peas in a pod. They may very well rule the world one day.

Finally, thanks to you, the reader, for trusting us to present you with the best trading and investing education. We don't take that trust lightly and we hope you find the information contained in these pages worthy of your time.

Rick Swope W. Shawn Howell

Introduction

The genesis of this book came from a very simple concept. We wanted to write a book that we wished was available when we started our trading careers. As hard as it may be to believe now, it wasn't too long ago that a new trader pretty much had two choices for learning the markets: (1) Find an experienced trader who would let you shadow his every move or (2) open an account and hope you had equity left over after you learned all the painful and expensive lessons. Sure, there have always been the in-depth books that cover various trading topics in excellent detail, but most never seemed to have that practical edge—the kind of edge that takes the material from the realm of the academic to the realm of being real-life applicable.

Trading by Numbers is our attempt to provide the necessary depth for understanding the markets and strategies while still maintaining a level of practicality that allows you to try these strategies on your own tomorrow. We wanted to provide you with a user's manual, rather than a reference book.

The material is presented in two main sections. The first four chapters lay out an approach to adding structure to your analysis. The two key market dimensions that every trader must understand are trend and volatility. Chapter 1 sets the stage for analyzing trend and volatility by examining the role of technical analysis. Chapter 2 discusses trends and how to quantify them for your trading decisions. We want to be clear that we're not ascribing a level of precision that doesn't exist in the markets. Rather, the goal of scoring is to help you remove emotion and opinion from the process so that you can take an honest look at what the market is trying to tell you. Chapter 3 follows with a structured, quantified approach to market and trade candidate volatility. The result of both chapters will be a two-dimensional score that will help you choose the appropriate strategy.

Chapter 4 is a stand-alone chapter discussing risk and how to manage it in an uncertain market. In our view, managing risk is perhaps the most important discipline you can master in the markets. For many traders, we recommend starting with Chapter 4 if you are not inclined to read a book through in sequence.

The second major grouping of the book begins with Chapter 5 and continues through to Chapter 16. Each of these chapters deals with a different strategy. We start with some of the simpler strategies such as covered calls in Chapter 6 and move on to more complex strategies like the iron condor in Chapter 16. While we generally have sequenced these according to complexity and the order in which many traders naturally learn them, you can start anywhere and jump around at will. If you already understand basic directional strategies, feel free to start with straddles and strangles in Chapter 8. The point is that each strategy mostly stands alone, so there's no requirement to take them in the order presented. On the few occasions where we do reference other material, we include the chapter reference for you to easily review.

You'll notice that we liberally apply stories to the strategies, especially in the introductions. Our style of teaching is to establish a common understanding of concepts from other life experiences and then draw the parallels to the trading strategy. While not perfect, we hope it better accomplishes our goal of making this text more usable. Finally, we want to thank our model (albeit fictitious) trader, Frank, for serving as the example of the strategies in action. By seeing examples of the strategy played out, we trust you'll gain a better appreciation of when to use or forgo the various options available to you.

CHAPTER 1

Market Scoring

It is not enough to do your best; you must know what to do, and then do your best.

—W. Edwards Deming

Many sports enthusiasts consider October 25, 1964 the date of one of the most embarrassing moments in sports. During a game against the San Francisco 49ers, Minnesota Vikings defensive end Jim Marshall had the good fortune to scoop up a fumble. He then ran 66 yards for the end zone and threw the ball away in celebration. Unfortunately, he had crossed into the wrong end zone and scored a safety for the opposing 49ers.

“My first inkling that something was wrong was when a 49er player gave me a hug in the end zone,” commented Marshall after the game.

Best efforts, in sports as well as in trading the markets, are noble but not always fruitful. Jim Marshall had the necessary skills and certainly put forth his best effort, but he lost sight of his position and ended up on the losing side of the play.

A trader who “does his best” will memorize 50 candle patterns, run fundamental and technical screens at the start of every trading day, and hold his own in any discussion about the merits of Fibonacci retracements versus Elliott waves. To be sure, there are prerequisite skills that a trader should master before entering the markets, but knowing which skills to master and how to use those skills to manage your position can mean the difference between winning and losing.

INTUITION CAN BE HIGH TUITION

Let's begin with the obvious question: Why do we need a market-scoring system? Of course, we'll describe and develop the system in the following chapters, but we should start with a purpose. Is it really important to set a structure to our analysis of the markets rather than follow our instinct and intuition? Following only intuition can be costly in the markets because our intuition isn't always reliable in the face of a multitude of market data.