deep market trader fast-start guide - amazon s3 · 2019-01-16 · deep market trader fast-start...

Deep Market Trader Fast-Start Guide 1


Deep Market Trader - Fast-Start Guide

I thoroughly enjoy reading the work of other market analysts or newsletter writers. I’m a big fan of some of their re-

search. Fascinating stuff. A pleasure to read.

I don’t think I’m a great writer and I won’t be sending you very much in-depth research about how an individual company

is going to change life as we know it.

What I’ll be sending you are emails (and text alerts if you sign up for them) that give you “intermediate-term” trades, which

means trades with a time horizon from weeks to months.

They’ll be based on the fact that other people, who are probably much more intelligent than I, have begun to deploy huge

amounts of investment capital into both a company’s stock and the sector it’s a part of. These people obviously see

something I don’t. I couldn’t possibly know the things they know before they know them. And they’re among the most

impressive people to speak with at a cocktail party.

At those parties I’ll probably make you laugh... but when I’m roped into discussing how I invest, and why I give the guid-

ance I give, I become quite unpopular with anyone who isn’t looking to fall asleep at that very moment. That’s the case

even at cocktail parties full of economists, market analysts and investors.

My market actions are data-driven. They’re based on historic market behavior. And the behavior of stock prices reflect

the emotions of human beings.

You’ve probably heard the term “put your money where your mouth is”. Or “put up or shut up”. You may hear someone

saying these phrases to another person who they are “calling out”, to see how serious, honest, realistic or committed the

other person is being.

In plain English what they’re saying is...

“If you really believe XYZ is happening or is going to happen... then hows about we place a wager on it? In fact, let’s up

the stakes a bit here since you’re so confident.”

People love to talk about what they would do (or perhaps what you should do) if they were in your shoes. But when you

ask that person to actually take on the risk that comes with those actions... then you find out what’s real and what’s not.


So when you’re listening to any investment advisor, market analysis, economist or any sort of expert offer their opinion

of what will happen to stock prices in the future, remember that they are probably just talking.

Even if they own the stock they’re talking about, there’s a good chance it’s in a very diversified investment portfolio that is

minimally impacted by the actual outcome. What’s worse is when these professionals have no money invested in what

they’re suggesting you buy.

The folks you want to “listen to” are those who have no interest in disclosing what they’re buying. But you don’t have

enough money to pay them to tell you. They don’t want to help you. But these are the folks who can’t move without our

seeing them.

We know they are “telling the truth” about how they really feel – how bullish or bearish they are on the stock market, on

certain industry groups or on individual stocks - because we witness them betting millions of their own dollars that

they’re correct. They are actually putting so much money behind their investment outlook that they are moving the prices

of those investments. That takes a lot of money and a lot of confidence.

But tracking what a large number of massive investors are buying (or selling) isn’t what gets the dopamine flowing through

the brain of the investor. Much like the effect the sound of a slot machine has on gambling addicts, the average investors

(and even the average investment professional) get excited about the story attached to a stock.

If you agree that it pays to follow what the smartest investors are doing – the ones who probably wouldn’t invite us to

their parties – then why do the financial television channels hardly ever discuss it, as a reason to invest in any particular

stock… option… or ETF?

Because that kind of thing just doesn’t hold the attention of the viewer.

So the good news might also be considered the bad news, and that is: This may not be the most entertaining service...

and I may not constantly update you on some huge “market-moving” event being discussed in the news. They report

because they get paid to report. And sometimes they’re correct about why markets are moving and other times they’re

not, but they still need to report something. There are only two reasons markets move:

1. “Much more supply than demand”, or...

2. “Much more demand than supply”.


That, literally, is “it”.

I don’t “predict” or “forecast”. If you ever hear me talking about what I think will probably happen in the future, it’s prob-

ably based on the way I’ve recently seen money flow around in the market (which is based on price behavior).

In fact, whenever I find myself in a conversation about what I think will happen next, and my opinion is based on the

direction of the world, I’ll say “What I’m saying right now has nothing to do with how I invest, it’s just what I believe the

odds favor”.

There have been times when I think one company or industry or economy will do one thing but I’ll actually have myself and

my followers/investors positioned in the opposite way. That’s because the pricing data calls for that sort of positioning.

I realize most of the people reading this will second-guess my approach and my actions at some point. As I type this, I’m

actually 15 for 16 in winning trade ideas so people love me now. At some point, I’ll have a bad run or losing trades. That’s

when people will start saying the investment/trading approach is a bad one.

I know this because I’ve been managing investors’ investment portfolios since I was old enough to do so. And eight years

later, in 2004, I got into this business, providing investment expertise on a subscription-basis.

I know some percentage of the readers will not renew their subscription even though I’ll say this, but the fact is that the

world’s best traders/investors with the greatest investment approaches do experience strings of losing investments. It

doesn’t make the investment approach a bad one. It’s just a numbers game.

You can flip a coin and land on heads 10 times in a row, even though it’s not probable. And you can raise kids with “in-

telligent genes”, in a good environment, and send them to to the best schools... And they might still wind up working for

CNN! (I’m teasing. But you get my point.)

Well, investment approaches are even less predictable than that. So the last thing I’ll say, before writing this “quick-start”

guide is that I implore you to use a responsible risk-management approach. There are many ways of doing this.

My favorite way is: Never risk any amount of money that you can’t afford to lose. I invest using options contracts. Options

contracts, by themselves, provide an entire world of ways to hedge off risk. This can be done in many ways, with many

combinations. They provide very specific types of risk management. More on options, below.

If you’re interested in learning about them, then I’d recommend you sign up for Costas Bocelli’s “Options Soup” options

course.


Other important ways to employ sound risk-management include:

• Having a strict position sizing method. (Don’t allow your confidence level to drive you to invest either more or less

than your plan dictates.)

• Diversifying across more than one asset class and or across several different sectors.

• Taking both bullish and bearish positions, separate from one another. You might own a handful of stocks or call

options (“bullish positions” because you want the stock to go up). But it doesn’t hurt to, instead, have 80% of

your investment capital in bullish positions and the remaining 20% in bearish positions -- such as short-stock or

put options (which profit when the price declines). This can reduce the “market risk” of your portfolio.

• Taking “market neutral” positions, such as a “pairs trade”. This is a one-to-one position where you have the same

dollar amount invested in two different positions, one bullish and one bearish. This might mean you buy $5,000

worth of Apple Inc. (AAPL) and you sell-short $5,000 worth of Microsoft (MSFT). In this case, your stance would

be that you think Apple stock will be stronger than Microsoft stock, that Apple will either go up by more or down

by less than Microsoft. That is, your stance is that Apple will show “positive relative strength” to Microsoft.

At the time of this writing, the average holding period of my closed Deep Market trades ( the ones I put on as part of a

pilot program) is 75 days. The average gain is 57%.

When I see something in the market data that causes me to send an alert, whether it be bullish or bearish, I’ll send you

an email with two trades: a stock trade and an options trade. Bullish alerts will have instructions to buy the stock or to

buy the call option. Bearish alerts will have instructions to sell-short the stock or to buy the put option (these positions

increase in value when the stock declines in value).

Keep in mind that the call and put options are positions that can very easily decline 50%. In some cases they might lose

all of their value. Again, position sizing and diversification are very important. You’ll only ever have money to invest in

those “grand slam” winners if you have money in the first place. So never risk blowing up your account by over concen-

trating your positions. And NEVER use leverage irresponsibly.

Bullish and Bearish

Professional traders – I mean good professional traders – tend to think more about whether something is “oversold” or

“overbought” than about what’s going to make something go up or down. The prices of stocks and funds tend to “re-

gress back to the mean”, meaning they tend to revert back to their average trading range.


If you’re reading this then you must already know enough to know that nothing is guaranteed in the financial markets. But

we want to stack the odds in our favor as much as possible, and there are many ways to do that, beyond just being right

about whether something in the future might push a price up or down.

We want to “swim with the current”. We want “the wind at our sails”. In either of these analogies, even if you were to stop

trying to move, you would still keep going in that direction.

When an investor says we are in a “bull market” or “bear market”, the investor is discussing the long-term trend (usually

a multi-year trend). But within the large trends are lots of smaller trends. Different traders use different terminology so I

like to stay flexible with my definitions.

Long-term = months to years.

Intermediate-term = weeks to months.

Short-term = days to weeks.

In the financial markets, the shorter the time frame is, the more “random” the price behavior is. Long-term price trends,

such as a bull market or a bear market, are happening for major reasons that don’t just go away.

That’s why short-term trading is of much higher risk than long-term investing. There’s less rationality, and the trends are

less steady.

But my happy medium is the intermediate-term trend. Within long-term “bull markets” or “bear markets”, are many inter-

mediate-term price trends we can easily exploit.

And sometimes, the smaller trends coincide with larger trends. We may see, in a market that is long-term oversold, that

in the intermediate-term, prices are also oversold… and in the short-term, prices are oversold. This is something that we

see every few years, like in the second half of 2011 and the beginning of 2016.

With this service, we profit from both downside moves as well as upside moves. The thing you should understand about

this is downside moves typically happen three times faster than upside moves. The profit, when you’re on the right side

of that trade, comes faster. Stocks also tend to rebound (reverse back up) 2-3 times as fast. So, when taking bearish

profits, we have to be more nimble and we have to be willing to “cut-bait” and just take the profit, even if we know there’s

likely even more price declines to come.

The downside moves are also messier. Don’t be afraid of “leaving profit on the table” with downside moves.


Stock Leverage

If you’re a stock trader then you’re probably familiar with how margin works. If you’re trading on margin then you’re bor-

rowing money from your brokerage firm to take a larger position size. The traditional way is you put up half the money

and your brokerage firm puts up the other half. That 50% margin is typically the firm’s maximum allowable margin. If you

have day trading authorization the margin can be more, so you should make sure you’re very well informed on how that

works, because margin can present some very dangerous situations.

If you have $10,000 and you want to use margin to take a $20,000 position, then a stock going from $10.00 - $12.00 can

provide a $4,000 gain (40% upside on your $10,000). But if it goes from $10.00 - $8.00, that’s a $4,000 loss (40% loss

instead of a 20% loss).

If you’re taking a bearish position on a stock, then you might use $10,000 and tell your broker you want to sell short

XYZ. This can be done online but if you’re not familiar with it, then call your broker and ask questions. Also, just because

you’re trading in a margin account, that doesn’t mean you have to use leverage. In other words, if you have $10,000 in

the account, you can sell short $10,000 worth of stock. It will be in a margin account (because, technically you’re bor-

rowing stock from someone, selling it, and then seeking to buy it back later, and return it).

In that case, you don’t have to actually use leverage.

Therefore, if the stock goes from $10.00 to $8.00, your gain is $2.00 (or $2,000).

If it goes from $10.00 to $12.00, since you’re short, you’ve lost $2.00 ($2,000).

If you’d like to use margin, ask your broker about it and ask your advisor if it’s appropriate for you.

Option Leverage

When I mentioned risk management, above, I said options can be used to hedge off risk. But they can also dramatically

increase risk.

There are many ways to construct options positions and some increase risk while others do the opposite. This speaks to

the specific type of options position the trader creates. At Deep Market Trader, I use one, and only one, type of options

strategy called the “stock replacement strategy (SRS)”. You won’t have to get the hang of multiple strategies here. It’s

very straight forward.


But the type of options strategy is one thing, and the way we use this strategy is another. I just said I use only one type

of strategy – the SRS. It tends to provide leverage at a multiple of approximately seven.

In other words, you can probably control about $70,000 worth of stock using just $10,000. These are approximate num-

bers, and it’s always slightly different.

Before I continue, do understand that you don’t have to use leverage to take a position that’s 7x bigger than what you

typically take.

Leverage can be used in one of two ways:

1. A trader can use leverage to take the same position size that he or she would normally take. Sticking with the

$10,000 example, in this case the cash outlay would be $1,429, because $1,429 x 7 = $10,000.

2. A trader can use leverage to take on a much larger position with the same cash outlay (using $10,000 to control

$70,000 worth of stock).

Options leverage is very different from stock leverage. If you were to somehow use margin to borrow 7x your cash outlay

to buy 7x worth of stock, then you could end up owing your firm lots of money.

This would be similar to buying a house and taking out a mortgage for most of the cost. If you lay out $100,000 and bor-

row another $600,000 to buy a house, then what happens if real estate declines by 25%?

Your home value declines by $175,000 to $525,000. If you’ve only laid out $100,000, then you’re actually “on the hook”

for, or “in the hole” by $75,000.

In the case of the real estate, you’ve lost even more than your original cash commitment of $100,000. But that isn’t going

to happen with the options strategy that we use. When you are trading a “long option” – you buy it… you own it… then

you sell it to exit the position. You can’t lose more than the original cash outlay.

You can take bullish or bearish positions using long options.

Instead of buying the stock (bullish), you would buy the call option. Instead of selling short the stock (bearish), you would

buy the put option. At no point would we sell short an option. It’s just not what we do at Deep Market Trader.


I said leverage can be used in one of two ways:

1. A trader can use leverage to take the same position size that he or she would normally take...

2. A trader can use leverage to take on a much larger position with the same cash outlay.

Now, to make this nice and simple, an investor can commit about 15% - 20% of the typically invested dollar amount to

any of the Deep Market Trader positions and still be the trader in example #1.

The higher you go, above the 15% - 20%, the more leverage you’re using. In the example, above, the closer you get to

that $10,000, the closer you are to using about 7x leverage.

You’re probably doing the quick math here and thinking that I’m oversimplifying this. And you’d be correct about that.

But I’m avoiding turning this fast-start report into a long, in-depth options course. As always, I’ll say more on this subject

over time.

The options can decline to zero. They probably won’t. But it’s important to use responsible risk management. So it’s

best to start off light and set your rules about leverage ahead of time, and to stick to those rules. Don’t get overly confi-

dent and increase your leverage to dangerous levels.

Only you and your advisor know what makes sense for you. So when I send alerts, if the opening alert is to buy a stock

at $100 or the call option at $15.00, and then three weeks later I send a closing alert to exit the stock at $120 or exit the

call option at $30.00, then the gain on the stock is recorded as 20% and the gain on the call is recorded as 100%.

The Theory behind Deep Market Trader Recommendations

We’ve all been in the position of seeing the market decline while we hold lots of stock positions and little cash on the

sidelines. We smack our forehead in regret and ask ourselves “Why didn’t I sell at least a little bit near the high? I would

have had some cash sitting on the sidelines to buy stocks at now steeply discounted prices.”

At Deep Market Trader we believe a trader’s typical returns can be multiplied by creating trades that will profit for three

reasons:

1. The obvious: By short selling stocks and buying put options on stocks, we can grow the value of the investment

as prices decline. It just feels good and feels smart to actually make money when most people around you are

complaining that they’re getting beaten up in a declining market.


2. I can buy a $10,000 worth of stock and wait for it to go higher. But if the stock price is cut in half, then I can buy

twice as much stock. So I can wait to see if the stock price does get cut in half and buy twice as much. By the

time the current buyers are breaking even, I would be up 100%, and worth $20,000.

But if I first double that $10,000 by taking a bearish position on something else and the stock market causes a

sharp decline in that stock... then I could double that $10,000 on the way down, and then sell out of the bearish

position. Then I can take that $20,000 and, because the stock market caused that first stock that I like to get

cut in half, I can invest that $20,000 into the stock. If it doubles, then those who bought it in the beginning would

break even. But I would have quadrupled the original investment to $40,000.

3. Believe it or not, there’s an even bigger benefit. You see, investors tend to lose money in the market or underper-

form benchmarks, not because they don’t know a good stock when they see it, but because they are emotional

and panic-sell near the bottom.

But if you have some bearish positions while the stock market is falling, you’re less likely to be unnerved by stock market

turmoil. You’ll know that at least some positions are working. And even if one bearish position is profiting for every three

bullish positions that are losing money (in a market decline), consider the effect of #2, above. If you exit that bearish posi-

tion near a low, before a rebound, you’ll not only profit from the bearish position but you’ll use that new cash to buy near

the bottom. The effect is actually a huge difference.

I look forward to guiding you. I’m not a magician and I will have a string of losers here and there. But I’ve proven to be a

great trader over the years I’ve been at it (since 1995).

And, once again (because I can’t say it enough)... Please be sure to use responsible risk management.

See you on the inside!

Chris Rowe

Creator, Deep Market Trader


DISCLAIMER

The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and

needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific

advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. True Market In-

siders LLC is not an investment advisor and is not licensed to give specific financial advice. The chairman of True Market Insiders, Chris Rowe, is

also the CEO, CIO and owner of Rowe Wealth Management LLC, which is not owned by and is not the owner of True Market Insiders.

Information contained herein is based on data obtained from recognized statistical services, issuer reports or communications, or other sources

believed to be reliable (“information providers”). However, such information has not been verified by True Market Insiders or the information pro-

vider and TMI and the information providers make no representations or warranties or take any responsibility as to the accuracy or completeness

of any recommendation or information contained herein. TMI and the information provider accept no liability to the recipient whatsoever whether

in contract, in tort, for negligence, or otherwise for any direct, indirect, consequential, or special loss of any kind arising out of the use of this

document or its contents or of the recipient relying on any such recommendation or information (except insofar as any statutory liability cannot

be excluded). Any statements nonfactual in nature constitute only current opinions, which are subject to change without notice. Neither the

information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange

traded products. This document does not purport to be complete description of the securities or commodities, markets or developments to which

reference is made.

For purposes of any offers, “Lifetime” refers to a term not less than five years from the date of purchase. Any refunds will be prorated on a five-year

basis.

Unless otherwise stated, performance numbers are based on pure price returns, not inclusive of dividends, fees, or other expenses. Past perfor-

mance is not indicative of future results. Potential for profits is accompanied by possibility of loss. You should consider this strategy’s investment

objectives, risks, charges and expenses before investing. The examples and information presented do not take into consideration commissions,

tax implications, or other transaction costs.

The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instru-

ment or to participate in any trading strategy.

Some performance information presented is the result of back-tested performance. Back-tested performance is hypothetical (it does not reflect

trading in actual accounts) and is provided for informational purposes to illustrate the effects of the True Market Insiders LLC strategy during a

specific period. The relative strength strategy is NOT a guarantee. There may be times where all investments and strategies are unfavorable and

depreciate in value. Relative Strength is a measure of price momentum based on historical price activity. Relative Strength is not predictive and

there is no assurance that forecasts based on relative strength can be relied upon.

Back-tested performance results have certain limitations. Such results do not represent the impact of material economic and market factors

might have on an investor’s decision-making process if the investors were actually managing money. Back-testing performance also differs from

actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hind-

sight. True Market Insiders believes the data used in the testing to be from credible, reliable sources, however; True Market Insiders makes no

representation or warranties of any kind as to the accuracy of such data. All available data representing the full platform of investment options is

used for testing purposes.

Copyright © 2016 True Market Insider, All rights reserved.

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