Good Day Rookie Traders! We are back into the swing of things here and we have wrapped up the consolidation phase nicely and now we are moving onto to the second phase of any market and that is the breakout to the trend. As we previously discussed this is everybody’s favorite phase. The reason this is everybody’s favorite is that investors can just throw some money at the market and watch their equity go up. Traders also like this phase because of the multitude of opportunities that present themselves. The other reason that market participants like this phase is because it is dominated by the one thing that most folks understand about the markets and that is directional movement. You see when most folks approach the market they think about picking a stock that goes up or possibly down if they have a little more knowledge about the markets and trading. We actually proved in the last session that there is a third movement that the market can, in fact, move sideways.
In the last section we had a major over riding theme for the different types of trades we used. They all benefited from the neutrality of the phase and there was one other theme that was very important. That was that cash flow type trades thrive in this neutral market condition. With the shift in market types we need to shift our thinking as well. We have been thinking along the cash flow lines and that is a good thing and it still does work in this market condition as well but we need to start to focus on the directional movement and start using trades that take advantage of this movement. Make no mistake cash flow is always available but in this phase it is secondary and it is much more profitable to be trading directional type strategies.
If you remember, the trades we use in this phase are as follows. Long options like calls and puts can work well in this phase and are the easiest of the trades to put on and comprehend. We can also use credit spreads as we did in the consolidation phase but in this phase the trade can come to a conclusion in a quicker manner sometimes. Other trades that work well in this phase are diagonal spreads and calendar spreads. There are a few more advanced strategies like back ratio spreads and debit spreads that can work as well. The keys to this phase of the market are watching the delta, as in direction, and the vega, as in volatility. These two things are going to be paramount to make profits in this phase.
This week we explore the long call. As stated this is the easiest of the trades to comprehend and the easiest to execute as well. We need a specific outlook for this type of trade and we need to watch out for theta or time-decay as it can hurt the trade if we are wrong on the timing. Check out the video this week to see what the parameters are for the Long Call. We will also check in with our current mock trades and see if they are working and if any adjustments are necessary.
Trade well all!