The Importance of Option Volatility in Our Trading

It’s always interesting to see how the “experts” refer to volatility as generally a bad thing in the markets. For us option traders, especially us option sellers, it’s our life blood. As option sellers we are typically selling option volatility and therefore the higher the better. Increased option volatility raises option premiums allowing us to collect more for the option sale and more easily sell high and buy back low, which is the goal of sellers. Let’s look at an example of how higher option volatility impacts pricing and the advantages of higher option volatility when selling options.

Example of Option Volatility in Action

Effect of Option Volatility

The figure above shows a one standard deviation range for a hypothetical stock that is priced at $400 with options expiring in 40 days (DTE) with three different volatilities (A one standard range says that the stock is expected to be within that range at expiration approximately 68% of the time). As we can see the width of the one standard deviation ranges increase as volatility increases thus allowing one to sell options farther away from the current stock price. Additionally because of the high volatility the options are typically more expensive than the comparable options with lower volatility which increases our profitability and probability of success. Thus when picking stocks for option volatility trades, as option sellers we want to focus on stocks with volatility . So from the example above, if there were three $400 stocks with the different volatilities shown we would want to sell options on the stock with the 40 volatility versus the 20 volatility. This will give us the most premium and thus highest probability of success.

Options Trade Sizing

In my previous post we talked about how to use stops with defined risk trades. Now one key to that strategy is appropriate trade sizing. As with any type of trade, trade sizing is key to your success. Now before I get into the aspects of trade sizing I want to touch on probabilities. Much of my options trading is based on probabilities and a key aspect of making probabilities work is to a have large enough number of traders (occurrences). This is known as the law of large numbers. To understand the law of large numbers lets take look at a coin flip. As everyone knows a coin flip has a 50-50 probability for heads and tails. Now intuitively we know that if you flip a coin 100 times you have a better chance of getting a 50-50 outcome then if you flip a coin only 10 times. The probabilities bear this out. If you flip a coin  4 times you have a 6% probability of getting 4 all heads in your flip. Now flip the coin 10 times and that number drops to .097% and flip it 100 times and the number becomes infinitesimal.  Baseball offers excellent examples of how statistics and probabilities work out. For instance a career .250 hitter can hit .350 over a short period of time but over the length of the entire season (a larger sample size) they will average closer to .250. Another good example is to look at casino’s. Casino’s  prefer large numbers of small bets versus a small number of large bets. Since they have the edge, similar to options sellers, they want to make sure the probabilities work out so they want to use the law of large numbers. That is why you see large numbers of small bet tables and machines. If you are interested in probabilities and entertaining book (if you can say that about probabilities) is The Signal and the Noise; Why So Many Predictions Fail – but Some Don’t by Nate Silver, who is a statistician and correctly predicted the last two US elections and writes the fivethirtyeight blog for the New York Times.

Now how does this relate to trade sizing? Well first, in order to have a large sample size we need to place many trades per month while not using all of our capital. We don’t want to use all our capital as we need capital available to manage and defend positions as well as have dry power for any unique opportunities that may arise.  Additionally as we move from one expiration cycle to the next we need capital available to start placing positions for the next expiration cycle while still managing positions in the current cycle. So to stay small and have the ability place lots and lots of trades I typically limit the amount of capital used for each trade to 1-3% of my available capital. Assuming a $100K account size at 1% you can have 50 positions on if you’re using using 50% of your total available capital. This also means that during an expiration cycle you could easily have 75 – 100 trades placed which will have the probabilities work for you.

Now you may be saying, “Well that’s great but I don’t have a $100K account”. Not to worry, you can still place enough trades to get the law of large numbers working for you. With a $25K account (the pattern day trading minimum) you can easily have 12-15 positions on at any one time and only use 50% of your capital. This will allow you to typically have between 20-40 trades per expiration cycle which is enough trades to have the probabilities work out.

By placing many small trades and getting the probabilities to work for us we greatly increase our overall success as a trader. Now with this type of trading you are not going to hit many home runs and we are never going to risk a large portion of our account in a trade to try to strike it rich. Instead we are going to consistently make steady profits and grow our account over time. Keep in mind that if you earn only 8% per month on your account that equates to approximately 100% on an annual basis, not too bad. And to make the 8% on your account you only need to earn 16% on the 50% you use as capital, a very reasonable figure. This requires us to change our mindset from thinking about how much we can make in any single trade (get rich quick) to focus on managing our return on capital for each trade (how professionals trade). To use another baseball example we don’t want to the guy that hits 40 home runs but bats .180 and strikes out 300 times.  We want to be the person that hits .400 and leads the league in total bases.

Professional Handling Of Contract Rollover

This is an important article, because it’s something that I guess, in my old years, I tend to take for granted, but it’s amazing. This is something that I saw recently with contract rollover and I wanted to share it for your benefit. Basically, what I saw was several new student family members that are new to my methodologies, but not new to trading, asking the question when and how to rollover. They say,“Rob, you’re in the December contract, you’re supposed to be in the March contract.” So it was a great topical piece first thing this morning.

What I want to do right off the bat is just explain something important to you. I understand that your charting packages often will automatically roll you over to the new front month. Your brokers will also send you emails encouraging you or telling you to go ahead and move over into the new front month. But I will tell you, volume and liquidity are key survival tools and mechanisms and needs that we have as traders. So one of the things that I do with my trading is I always make sure that there’s more volume pushing into the new front month than the old one.

So, for instance, what you will see in the video above is a snapshot of the SNP futures. And you will see  it’s about 1:42 central time, so 2:42 eastern time when the snapshot was taken, so there was still got some time left in the market on that day. But this is a day that we were supposed to rollover, first thing this morning. That’s what our brokers tell us to do, that’s what they encourage us to do. Our charting packages have already rolled over, front month to the March contract. So everything we receive as traders says to us “Hey , we should be in the March contract.” I will tell you right now that the way that I handle this from a professional perspective and that tends to make the most sense for most people is to throw up a volume chart of the prior month and the new month.

So, in this case, watch the video above and see that I have the SNP December contract, and then I have the SNP March of 2013 contract What I do, is that I take a 5-minute chart and I compare these two 5-minute charts with each other.  If you want to do this,  all you have to do is put your little cursor on the front time, and see what they’re doing. What you’ll notice in the example above is that –we had 16,500 contracts being traded in the December contract with only 6,500 contracts approximately in the March contracts. So just shy of a 3:1 ratio. There was more volume still in the December contract.

Now, in this example, with an hour and 15 minutes in the cash session still to go, we’re seeing about 5,100 contracts being traded in the SNP December, and 2,600 now being traded in the March contracts. So we still have even a 2:1 ratio. Now of course, what you want to do is you want to wait till this bar closes, just to verify this, to see exactly where they settle out each bar. Because what you’ll see is some more volume sometimes creeps into the front month still, the prior month, the December contract in this case. Wait till the bar closes, and then do the reading.

Once the volume in the March contract starts showing those 5-minute bars locking in more volume in that new front month, in March of 2013 in the case of the example in the video above, that’s when I’m going to go ahead and make the switch.

So this is how I handle every single rollover. This is how I manage  the gold, the crude oil. I’ll do the currencies the exact same way. It’s very important: this way, what I’m doing is I’m keeping as much liquidity in my favor as possible. And, of course, that’s very important for someone like myself who trades big contract size, but it’s also important even if you’re a one or two contract trader because obviously you’re more prone to slippage and whipsaws back and forth in a lower-volume environment.

This is a very important topic. It happens, , depending on the instruments you trade, once a month, once every other month, once every quarter. So it happens frequently, and  it’s something you need to be aware of. For all traders, I hope you enjoyed this update and get a live snapshot here of how I actually control the rollover process.

Using Stops with Defined Risk Options Trades

I have recently had many people ask about how to use stops in their options trades. My simple answer is that I don’t use stops with defined risk trades. Now you might be thinking “Wow, this guy is crazy to not use stops on his trades!”. Well the first thing to remember is that we are only talking about DEFINED RISK trades. By definition, when you enter a defined risk trade, e.g. selling a credit spread or buying a debit spread, you know your maximum risk for the trade as it is defined when you place the order. Say you placed a 495/500 call credit spread on AAPL for a $1.60 credit. Once you place that trade you know that your maximum profit is $160 and your maximum loss is $340 with approximately a 68% probability of success with the trade.  When placing this trade you MUST be comfortable with the maximum loss as something could happen to AAPL that could cause the trade to go to maximum loss. A common mistake people make that causes them to need stops is that they are trading too large a position so their account cannot sustain the maximum loss. When I trade options I make lots of small trades (more on this in a future post).

Another key reason not to use a stop on defined risk trades is that often the price will move against you at some point over the time you are in the trade. If, for instance, AAPL moved to $480 the spread would show a significant loss and many would stop themselves out and take the loss. The problem with this is twofold. First one has to keep in mind that if the position were to expire that day it would be a full winner and you still have time (duration) on your side. Secondly, stock prices will move up and down over the duration of the position. This leads to the concept of the Probability of Touch.  The Probably of Touch says that the probability of the stock price touching the short strike is 2X the probability of expiring ITM (in-the-money). Thus in our AAPL example there is approximately a 64% chance of AAPL touching $495 at some point while we are in the trade. Thus if we used a stop we are pretty much guaranteeing that we will be stopped out as based on the stops most people use (2X the credit received or sometimes less) the prices does not even need to reach $495 for a stop out to be triggered, thus turning a potential winner into a guaranteed loser.

Now does this mean that if the stock moves significantly against us we are looking at a max loss every time? Certainly not. There are several management techniques that can employed to either reduce the loss or scratch the trade. The key is to properly employ these strategies and also know when to just left the trade go. This gets back to the concept that you must be able to sustain the maximum loss for the trade.  Remember though that also long as there is time left till expiration you generally have options.

Note: This is a guest post from professional trader and longtime Become A Better Trader student, Randy Jacques.

International Trading Champion, Rob Hoffman, And World-Renowned Trader, John Person, To Present Their Best Position And Swing Trading Setups

Summary: Following their very successful joint presentation at the 2013 Las Vegas Money Show, International Trading Champion Rob Hoffman and world-renowned trader and author John Person are teaming up for another special training event. Serious traders should set aside time immediately for this must-attend live webinar event.

Chicago, IL (PRWEB) May 29, 2013

After a powerful joint presentation just two weeks ago in Las Vegas, International Trading Champion Rob Hoffman and world-renowned trader and author John Person are teaming up again, after rave reviews, to teach their best swing and position trading setups in a live webinar event.

This special educational training event is scheduled for Wednesday, May 29th at 7:00 PM CT, 8:00 PM ET. Serious traders and investors should not miss this joint presentation as it will contain information that will benefit both novice and advanced traders and investors. Many students of their previous course have already commented on the dramatic and positive change in their trading.

While only recently teaming up to share their complementary trading strategies, this dynamic duo has already drawn quite a crowd to their events. Their techniques are quickly gaining recognition within the trading education community; however, their primary aim is to help each student to Become a Better Trader.

“Working with John these past several weeks has been very exciting for both of us,” says Hoffman. “Our teaching styles couldn’t be more complementary, and it feels like we’ve been doing this together for years.”

Student feedback has been remarkable for the pair, as their offices continue to be flooded with calls asking for more joint training and seminars. What started out over dinner in Paris has now flourished into a remarkable training team where the students are really benefiting and learning how to trade.

Person brings 33 years of varied trading expertise and experience to the table, along with Hoffman’s 18 years. The two have very different stories behind their rise to the elite ranks within the trading community. It is likely that their varied pasts contribute to the complementary style they present when working together.

Anyone interested in attending can register for more details and information on this event, as well to receive priority notification of all future events by visiting http://www.becomeabettertrader.com/register.

About Rob Hoffman

Rob Hoffman is Founder and CEO of Become A Better Trader, Inc. and an 18+ year veteran of the financial markets. Hoffman is a Professional Trader, frequent speaker for the major financial exchanges, commentator on market and instrument direction. He is also as highly skilled educator and passionate mentor to tens of thousands of students from around the world, an International Trading Champion, and consultant to institutional clientele as well as aspiring traders.

For more Media Inquiries or information about this special event or upcoming events, contact Kim Thomas at media (at) becomeabettertrader (dot) com or visit http://www.BecomeABetterTrader.com.

About BecomeABetterTrader.com

Become A Better Trader Inc. provides must-have educational resources in the area of Futures, Forex, Stocks, Options, and ETFs with a focus on both intraday and swing trading strategies for both short-term and long-term traders and investors. Clients range from aspiring traders to institutional clientele requiring private consultation.

Avoid Chasing Trades Using This Technique

I want to focus on  the concept of rocket fuel, which is a term I use to talk about times when the markets are running out of steam right when you’re thinking of jumping into a trade.  However, this will also help put a couple of different pieces together and there will be a  multitude of different important lessons included here, based on some of the previous video and article concepts I have reviewed.

First of all, we can go back and see some of the things we’ve already learned in some of the previous videos, where we talk about the concepts of accumulation and distribution. So if you watch the video above you will see an example where,  we can see the distribution bar is coming 50% off the highs there. We can see accumulation bars where we’re coming 50% off the lows, then we’re coming back down and testing that area, only to go and push right back off that area. So we can see these concepts of accumulation and distribution in multiple places.

Now in addition to that, let’s talk about trading at the open. In my opinion, trading at the open is very risky, and that’s putting it lightly. There’s just no illustrating the risks that are associated with the U.S. open, and the London session open for that matter as well. There’s a lot of inflows and outflows at those times, and basically if you’re one or 10 or 15, 20 contracts, or a few hundred shares, maybe a thousand shares or so of something, you’re trying to hold down a whole market, so to speak. It’s just not realistic. So what happens is, during that time when a lot of money is sloshed around there very quickly, a lot of people tend to get themselves hurt.

Check out the video above for a classic example of how that happens on a chart. You see what ends up happening is as we went into this morning session in the example, things were  looking ripe for selling, kind of negative. On face value, we were dipping down. In this type of situation , I always gauge a lot of this off of the reactions of some of my newer students, what they’re thinking, where their head’s at, because I find that it is indicative of the average retail trader on the street. So, based on that, what ends up happening is, there’s a lot of people excited about the possibility of shorting the market.

Now, hopefully, some of you are already seeing some of the potential issues with doing this. Number one, being right there at the U.S. open, if we’ve been dipping down dramatically into the U.S. open, the likelihood of it continuing to sell off is fairly slim. Frankly, it’s –extraordinarily slim. We see these situations where the news ends up being very bearish. The market’s selling off into the open. Next thing you know, the market has this big rally, only to leave you hanging with a short position, and you’re thinking “What? The news was bad, the market was moving down, what happened?” And then all of a sudden an hour or two later, the news media is like “Oh, because of this or because of that.”

So here are a couple things to keep in mind:

  1. Trading rate near the U.S. open, very dangerous. I usually avoid trading plus or minus 15 minutes, around that time.
  2. Another thing to keep in mind is what’s going on with the bigger trends? That’s where the multi-timeframe analysis really factors in. Sometimes,  when the 2-minute looked like the market was going to heck in a hand basket; the 5-minute chart looked like the market was going to heck in a hand basket; the 15-minute chart didn’t look good in itself, but if you looked at my rising long-term support levels, you’ll notice on the 15-minute chart, at just that point where it looked its worst, we were actually smacking into rising support there. Additionally, you look at the hourly chart here, and we were actually looking very bullish with what I refer to as railroad tracking underneath with long-term support levels.

So, I often tell traders, be careful not to get that myopic focus on that 2-minute and 5-minute chart in exclusively. You really need to look at the bigger picture as what’s going on. Even though you may be a day trader or a short-term trader there, the 15-minute and the 60-minute can still be a heck of a guidepost for you.

Now, when we talk about the concept of rocket fuel, what happens is often, traders don’t sit there think…“Well gosh, I want to buy this area here.” No. Remember, most traders, especially newer retail traders, were actually looking at shorting into an area that is pushing down. So what happens is, now as the market starts to spike up. Those that are in a short position are realizing how wrong they are, and then this long wide-range bar spooks them out of the trade all together and they take a loss.

Those that weren’t in a trade start thinking “Ah-ha, the real move is to the upside; I need to jump on this thing long.” Well, the problem is, after moving 40 ticks like in the  example in the video above able this concept, where we moved almost 40 ticks on the Russell in about 15 minutes, that’s a pretty healthy move in itself, even though it was bouncing off of longer-term support. It is a pretty healthy move in the current market environment that we’re operating under, So, when the market moves 10, 12 ticks in a certain direction, people are trying to jump on a trade only to have it whip right back against them. So, again 40 ticks is a pretty healthy move.

Well, to add insult to injury, now let’s take the concept I also taught you with support and resistance here in just the last several videos and blog articles. Remember what you do: you take areas where you have lots of opens, highs, lows, closes, right? So you see back over here in this area over here, we had lots of these closes, opens and closes, opens. Same thing here, closes, opens, lows right here, open to this bar. Lots of that taking place on these 15-minute bars. Over the course of hours, this point right here showed itself to be a key resistance band. So what happens is, a lot of retail traders see this big long wide-range bar, and this ends up being a calling card for them that this is going to go much higher. What they’re not looking at – because then they start saying “Wait a minute, the trend is up, the hourly’s are up, that’s great. We’ve gone and pushed through.” Not giving deference to what’s been happening where we’ve been congesting for the last several hours.

Remember what I said here: this whole area from this band to this band was resistance right through here. So right where you saw that area, that’s all basically one big resistance. So as this was pushing down and was rallying back up, it was rallying right back into that resistance, and you can see it right there, the bottom end of that. So you see how we’re putting together multiple concepts that I’ve shared with you in these different videos and blog articles.

At this point where a lot of people are finally saying “Hey, you know what? Maybe I want to go long on this,” maybe you should take a second breath and say “Wait a minute. It’s already just pushed 40 ticks in 15 minutes right up into a resistance band on both the 15-minute chart I’m looking at trading and the hourly chart band of resistance right up above through those previous areas of accumulation and distribution Rob shared with me. Maybe I don’t want to take that trade after all.”

We’ve talked many times about the average stop-outs and things like the Russell and the SNP. On the SNP it’s usually 6 to 12 ticks is the average stop for most retail traders; it’s usually 12 to 20 ticks for most Russell traders. Well sure enough, you can see, this thing got right up to that key level we’ve mentioned hundreds of times over the last several years. Gets right up there to 1223, comes right back down to the 1221 and just slightly below it. So it made sure it got all those retail 12 to 20 tick traders right out of there.

So, I want to make sure that you understand a couple of different things and how they work together. The concept of rocket fuel, how far, how fast have you gone? And then basically is your rocket running out of fuel right at that key time where it’s hitting in the major atmosphere and needs to blast into outer space, and yet you’re sitting there with all this resistance right there to your rocket? And yet you’ve just used up all your fuel to get from here up to here.

That’s the key thing that I want to impress upon you, this idea of how dangerous it can be to chase an instrument. That’s really what we’re talking about here, gang. We’re talking about chasing an instrument. Many of us have done that. It’s something that we tend to do a lot more as we’re newer in this business and we’re working on becoming a professional. So the sooner you’re aware that you’re chasing into these instruments, the better.

Now, when you combine this with – taking that concept of the rocket fuel along with the areas of accumulation and distribution that I mentioned to you earlier, and how to identify key support and resistance levels in the past videos and blog articles, now you can really start putting the pieces together of the much higher probability areas where things are likely to fizzle out. Rather than sitting at that point of where you’re historically thinking “I want to jump into this long,” you’re thinking  “Uh-uh. No thanks. I don’t want to be anywhere near this, certainly not long at least.”

That’s the key, putting a couple pieces together, not shorting into the rising higher timeframe resistance, using areas of lots of opens, highs, lows, closes, as resistance bands, and using the accumulation and distribution techniques and putting it all together to help avoid those chasing moments that most of us experience early on in our trading career.

Professional Trading With Volume

Welcome back traders and investors. This is Rob Hoffman from Become a Better Trader, here to show you more key tools and techniques that you must know as a professional trader.

In this article, I want to focus on usages of volume in a more professional way. I see a lot of people use volume in lots of different ways, but what I want to do is show you one of the key ways that I use volume. I actually have it already built into my methodology, but for those of you that aren’t familiar with my methodology or my indicators, that’s okay. I want to show you a strategy that will give you something else to look at as you’re analyzing short-term tops and bottom opportunities within your favorite instruments.

What I’m looking at is a chart of crude oil, which happens to be one of my favorite trading instruments recently.  As you look at the video above, what you will see is really an add-on to what you’ve already learned from me in the videos and articles.

Based on what you learned in previous entries here, you may already start to spot several areas of potential accumulation and distribution in the charts.  There’s lots of  different areas where after we’ve been moving up for awhile or we’ve been moving down for awhile, we start to see the tails. And these are a couple of these different points that we want to focus on. As you learned in the previous article we take these areas as highlighted in the video above, we draw them out, going into the distance. Those become key support and resistance levels,

Make sure you go back and watch the other videos so you can see that in action, how these past areas of distribution or accumulation become future support.  Also, be sure to watch the video above to follow along with the trading ideas explained in this article.

You can see that, as we play that out here into the future, I’m just using hand-drawn lines on the chart, but you’ll get the point for effect. What we’re doing with this is not just using this for accumulation and distribution as a whole, but we want to use the volume to try to help us identify where these potential turning points are in the first place. Notice that with the volume, you’ll see that the  bar pushed down on this much volume.

Then you’ll notice that the next bar pushed down, but then closed well off its lows with even more volume. Now think about that for a minute,: if there’s more volume when there’s all sell-side enthusiasm for the volume, shouldn’t this bar have closed down further? If this bar of sell-side enthusiasm could get it down this far, then the next bar should clearly have closed somewhere down in this area. Instead, what you’ll notice that it actually came back off the lows and closed up there around 50% off the high on higher volume.

This is likely to be an area where you want to start thinking that the market may reverse in the short-term. So if you’re short, basically what you’re looking at is an area where you may want to cut your trade. I have a tool,  that I call a hidden long, where I’m looking for the markets to come back up, or hitting short for the roll back overs, using these premises. So, depending on what your indicators show, you are  looking for these to be long side trades once the market confirms itself.

And there are different ways to do this. You can take the trade long above the high of the bar that caused the accumulation. That’s one of the most common ways to do it. It’d be much more aggressive to take it right at the close of this bar. Granted, as you can see in the examples in the above video, this would’ve given you extra profit opportunity in this particular case, but it’s a little bit more risky, because sometimes these accumulation bars can find themselves digging a little bit deeper before they ultimately come back.

So what’s basically happening in this example, not only is so much buying coming in to stall out the move to the downside, but enough buy enthusiasm is coming in there with enough intensity to actually push it back 50% off the low. Same thing occurs in the opposite direction as well: this one was coming in with enough intensity to bring it back 50% off the high. So the distribution was coming in, the selling was coming in. You’ll notice then we push back to the downside.
What’s happening now is not only has so much enthusiasm come in to stop the move to the downside, but it actually brought it roughly 50% or more off the low. So this is a concept you’ve heard me talk about, month after month after month, and we use that of course in the live trading room each day as well. So this is the same concept that we’ve talked about, both in this professional series, in the regular nightly videos, so I’m just putting it to use here again, since this ended up being my favorite trading instrument in the live trading room this morning, I thought I’d share it with you guys here today.

Check out the examples in the video above for more great examples of this concept at work.

You see this big long red bar to the downside and lots of volume, right? But then check out the next bar. The next bar had almost the same amount of volume, and yet it had this really tight little bar here. What ended up happening? Not only did buy-side enthusiasm come in to stop it from going down anymore, but it actually pushed it off – guess what? – 50% off the low. Well, look what happened. Then we ended up going up for the next several bars here, hit right back into that previous area for the bars earlier which were distribution, only to have this come down. You’ll notice that it came down 50% off the highs on higher volume as it’s tapping into this previous area of distribution. So this ties very well with some of the other videos that I’ve put together for you, and adds some additional color for you to really learn from here.

So then we see, of course, then it had the nice push-down, got caught right into the previous area of support here, and guess what? Yep, you guessed it: it went down on this big volume bar, but then the next bar was even higher volume, only to have it do what, gang? Stop the move to the downside, come 50% off the low. You guessed it. Basically they ended up accumulating it. So somebody stepped in, defended that position, and absorbed all the selling, and then came back saying “Hey, that’s great. I want all of it that you have to give me, and I want more and I want more right now.” So that’s what’s happening here is you’re seeing this accumulation and distribution in more of a three-dimensional facet here by putting the volume on here.

Here’s another way to have you take a look at this without having some of those additional tools at your disposal, for those of you that don’t have access to me in the room each day. Then of course we see the same thing over here, how we’re pushing down, coming 50% off the lows and higher volume. I’m willing to bet that in other examples it probably started pushing up on the next bars. Sure enough, it did.

So with that being said, I wanted to show you how myself and other professional traders like me use volume in much more creative and intelligent ways as we’re trying to identify key areas of accumulation and distribution that other professional traders are looking at, and this is one very solid, meaningful way that we do that. Hope you enjoyed that video, look forward to seeing you in the next one.

Professional Support And Resistance Part II

Welcome back traders and investors. This is Rob Hoffman from Become a Better Trader, here to  share more key tools and techniques that you must know if you want to learn how to trade like a professional.

Because this is such an important concept in my opinion, it is really important for you to understand this technique.  So, I elected to make a second video, seen above, to further dive in to this concept.  I think this will really help you understand its importance. If you watch the video above, you’re going to see that  we’ve actually pulled right back into that key support band. This area continues to be an area that we covered in the previous video and article, not just here and here and here and over here, all these areas were originally identified well in advance by the technique that I’m about to share in greater depth now. So with that being said, let’s go ahead and get right into the concept.

How are we able to identify that this area right here, this $85 area, was going to be an important area? I’ve been talking about this in my swing trading videos and how do we look at that?. Even traditional support and resistance analysis here would identify a point like up here and a point down here. But how did we know before we even got to this point that this point may be an issue in the first place? And then subsequently, how do we identify more and more issues as we move forward, which continued to cover in the swing trading videos. How did we know in advance that this would become a point? Most of the time, we have to wait until after the fact to then draw the line. Now we ultimately get use out of it in the future when the market returns to the area where we have drawn the support and resistance lines. But how can we have gone in and determined that that area may be an issue in advance?

Well, if you’ve been keeping up on the professional series of videos I’ve been putting together here, what you can do is you’ll notice, right back over here  That we have a potential accumulation bar. This is a bar, as illustrated in the video above, after we had this big nasty gap down on Netflix here, the first day where we actually had any sort of signs of buying in this market was right back over here. So what happens is, that’s an area then that I want to mark.

How do I mark that? As I showed you, what I like to do is take those areas from where they close to the low of the bar. In this particular case, we’re identifying accumulation. And then of course, from the high of the bar to the close if we’re identifying distribution. But what I’m looking at is I take that area and I draw that out. So now that whole band right there becomes, in the future, an area of potential support or resistance. So what happens is, if you recall, one of the ways I look for failures in this is if once we identify this key support and resistance level, if we start trading below it, then I’m looking for much deeper selling. That’s exactly what happened in the video example above with Netflix.

So meanwhile, once we roll back into that key resistance level – which was support back here until it was broken, then it becomes resistance –. So that original area of accumulation or distribution, which in this case was accumulation, we end up finding an opportunity here to identify well in advance where we’re likely to see distribution. And then of course, that carried on into the future analysis that we had in our swing trade videos. So this is another way to tie some of those different pieces of the puzzle together, even from some of the videos I’ve posted at www.BecomeABetterTrader.com. So keep watching those, keep learning from them and keep reading the articles that I am posting here. I hope this helps show some of the key concepts on more professional thinking as it relates to support and resistance.