swing trading success debit spreads workshop …...swing trading success(debit spread basics(•...

Identifying Key Support and Resistance Levels

presented by

Thomas Wood | MicroQuantSM

Swing Trading Success – Debit Spreads –

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Risk Disclaimer Trading or inves-ng carries a high level of risk, and is not suitable for all persons. Before deciding to trade or invest you should carefully consider your investment objec-ves, level of experience, and ability to tolerate risk. This content is subject to change at any -me without no-ce, and is provided for the sole purpose of educa-on and assistance in making independent investment decisions. ValueCharts.com has taken reasonable measures to ensure the accuracy of the informa-on contained herein; however, ValueCharts.com does not guarantee its accuracy and is not liable for any loss or damage which may result directly or indirectly from such content or from an inability to access such informa-on or any delay in or failure of the transmission or the receipt of any instruc-on or no-fica-on in connec-on therewith. Any past performance results are shown for illustra-on and example only, are hypothe-cal and as such have many inherent limita-ons. No representa-on is being made that any account will or is likely to achieve profits or losses similar to those shown. Past performance is not necessarily indica-ve of future results.

CFTC Rule 4.41 (Hypothetical Disclaimer)

U.S. Government Required Disclaimer -‐ Commodity Futures Trading Commission Futures and Op-ons trading has large poten-al rewards, but also large poten-al risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and op-ons markets. Don't trade with money you can't afford to lose. This is neither a solicita-on nor an offer to Buy/Sell futures, stocks or op-ons on the same. No representa-on is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indica-ve of future results. CFTC RULE 4.41 -‐ HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-‐OR-‐OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED WITHIN THIS SITE, SUPPORT AND TEXTS. OUR COURSE(S), PRODUCTS AND SERVICES SHOULD BE USED AS LEARNING AIDS ONLY AND SHOULD NOT BE USED TO INVEST REAL MONEY. IF YOU DECIDE TO INVEST REAL MONEY, ALL TRADING DECISIONS SHOULD BE YOUR OWN.

About Me… Formal info

•  1995 Graduate of Vanderbilt University

•  Full Broker at 23 with Merrill Lynch

•  12 Year Senior Advisor Vanguard Asset Management Service

•  27 months in Stocks & Op-ons Live Trading Room

Swing Trading

•  Importance of Time Frame

•  Swing Trading defini-on

•  The Hourly Chart

•  How to Swing on the Hourly chart

Swing Trading

•  Fine Tuned Trading – ½ Size Charts

•  Technical Analysis Pajerns that work on a 60 min.

Debit Spread Basics

•  What is a Debit Spread?

•  Trading Stocks/ETFs vs Debit Spreads

•  Basics of Debit Spreads – Strengths & Weaknesses

Debit Spread Basics

•  Debit Spreads – Key to trading Small Accounts

•  What you need to know to trade Debit Spreads well…

Debit Spread Construction

•  The Basics – buy op-on, sell further away

•  Where to place Strikes?

•  How Wide?


•  How long un-l expira-on?

•  Profitable, now what? … Staged Profits

Debit Spread Trading Plan

•  Setup your Trade Parameters

•  Searching for Opporuni-es

•  Leong the Trade Develop & come to you


•  Do the trade on the ½ Size chart

•  Execute the trade on the :45s

•  Set your StopLoss


•  Evaluate every :30 and :00

•  Take Staged Profits

•  Take care of the last 20%


•  12 Pages of Wow!

•  Put it all together…

Swing Trading

Swing Trading

•  Swing Trading defini-on

– Trades in a respec-ve Timeframe that lasts more than one trading day

– Usually “in a trade” across 2 – 4 trading days

•  The Importance of Timeframe

-‐  Timeframe – the length of -me per chart bar -‐  Bigger -meframes represent bigger Price Bars

-‐  Bigger Price Bars, bigger $$$ poten-al moves

-‐  Danger, Larger Stop Loss distances

Swing Trading

•  The Importance of Timeframe

-‐  Slower, more manageable Entry points (you have -me)

-‐  Tick charts : about 30 seconds a bar

-‐  Time Charts : 5min, 15minute, 60 minute bars

-‐  Easier to enter, flexibility to use ½ size Time charts

Swing Trading

•  Why Swing Trade?

-‐  Even on Swing Trades, stocks don’t move in straight line

-‐  Fibonacci levels work very well on 60 minute charts

-‐  Plan for a “measured” move & structure Debit Spread accordingly

Swing Trading

Swing Trading

•  Why Swing Trade?

à TREND TRADES ß -‐  Trend Trades / Breakouts are more plen-ful

-‐  Trending moves are more plen-ful on longer -meframes

-‐  See the trend on 60minute & Daily charts

-‐  Trends tend to persist within those frameworks.

Swing Trading

Swing Trading

•  The Hourly Chart –

– The best chart to use for swing trades that last 2 – 4 trading days is the 60 minute (Hourly) chart.

– There are 6 – 7 Bars a day, each trade move is 12 – 24 bars

Swing Trading

Swing Trading


– Very commonly used -meframe. – Hourly Support & Resistance levels

– TA Price Pajerns usually are successful because everyone sees them and trades them

Swing Trading


– Op-mize Trading by adding

– “Higher TF” Daily EMAs (8 day, 50 day)

–  Support & Resistance levels from Weekly & Monthly charts

Swing Trading

Swing Trading

•  Fine Tuned Trading – ½ Size Charts

– When using 60 minute charts for TA pajerns,

– Use a 15 & 5 minute chart to get a “headstart” on the entry bar

– Evaluate entrys at (x:45), using 60, 30, 15, 5 minute charts

Swing Trading

Swing Trading


Reversals : Divergences Fibonacci Retracements

Swing Trading


Trends : •  Bullish Breakout, push higher through Resistance level

•  Bearish Breakout, push lower through Support level

Swing Trading : Quiz

Swing Trading

1.  How many Hourly Bars are there in a typical “Swing Trade?”

Swing Trading

Q1. How many Hourly Bars are there in a typical “Swing Trade?”

•  Answer : typically 12 -24 – Swing Trades last 2-4 days, with around 6

bars hourly per day, should be 12-24 bars for the expected trade move from the entry bar.

Swing Trading

Q2. True or False. “Trending Trades appear a lot less frequently in the Hourly timeframe. “

Swing Trading

Q2. True or False. “Trending Trades appear a lot less frequently in the Hourly timeframe. “ •  Answer : FALSE

– Swing Trades are more frequent in the Hourly timeframe than the intraday timeframes of 1, 3, 5 minute timeframes. Almost even 50/50.

Swing Trading

Q3. Name one way to reduce the Entry Trade risk when getting into a Swing Trade.

Swing Trading

Q3. Name one way to reduce the Entry Trade risk when getting into a Swing Trade.

•  Answer : use a Smaller Timeframe – Swing Trades are usually done on an Hourly

chart. Use a 30, 15, or 5 minute chart to get a “headstart” around “:45”, before the close of the bar.

Debit Spread Basics

Debit Spread Basics


-‐  Basic level of Op-ons knowledge -‐  Deriva-ve of stock -‐  Delta : value changes with stock price -‐  Theta : value decreases with -me to expira-on

Debit Spread Basics


-‐  Simultaneous long/short posi-ons of op-ons… -‐  Same underlying stock -‐  Same op-on type : call, put -‐  Same expira-on date

•  Debit Spreads – the Basics

-‐  Debit Spread, pay for spread once placed

-‐  Loss is limited to amount invested.

-‐  No need for “margin”

Debit Spread Basics

Debit Spread Basics

-‐  Bullish : Call Debit Spread

-‐  Profits when price moves higher

-‐  Maximum profit @ expira-on -‐  when price is higher than long call strike

Bullish Call Debit Spread

Debit Spread Basics

-‐  Bearish : Put Debit Spread

-‐  Profits when price moves lower

-‐  Maximum profit @ expira-on -‐  when price is below than long put strike

Bearish Put Debit Spread

Debit Spread Basics

•  Trading Stocks/ETS vs Debit Spreads

– Trading stocks/ETFs •  Easier entry, simple brokerage order •  Smaller Bid/Ask spread •  Cheaper “stocks” commission rate •  Rela-vely simple % return

Debit Spread Basics

•  Trading Stocks/ETF

•  $200 priced stock/ETF x 100 shares = $20,000 cost

•  $5 move to $205 x100 shares = $500 profit

•  % Return = $500/$20,000 = 2.5% return

Debit Spread Basics

•  Trading Stocks/ETS vs Debit Spreads

– Trading Op-ons / Debit Spreads •  More complicated order entry

–  Need to watch op-on volume

•  Bid/Ask spreads both help & hinder order fills

•  Because two op-on orders, 2x commission cost

•  BENEFIT : LEVERAGE !!!

Debit Spread Basics

•  Trading Debit Spreads

•  $200 priced stock

•  200/205 Call Debit Spread = $1.50x100 = $150 cost

•  $5 move to $205, Spread value $3.00x100 = $300 value

•  % Return = $150 cost /$150 profit = 100% return

Debit Spread Basics

•  Basics of Debit Spreads – Strengths & Weaknesses

•  Debit Spreads – the STRENGTHS

-‐  LEVERAGE : Average trade profit is 50% or higher

-‐  Small cost to entry. Most $5 wide spreads cost $1 or $2

-‐  Easy to enter and exit in highly liquid stocks

-‐  S-ll have poten-al trades in less liquid stocks

Debit Spread Basics

•  Debit Spreads – the Weaknesses

-‐  You are Long Op-ons, some Theta effect

-‐  Timing of entry & exit are important parts of trade

-‐  Moves need to happen rela-vely soon

-‐  Don’t hesitate to take profits when they appear

Swing Trading Success

Debit Spread Basics


-‐  Debit Spreads are “CHEAP” -‐ $100 -‐ $200 for $5 wide spreads with 14 days

-‐  Maximum risk is limited to Debit Paid

-‐  Control risk per trade to foster steady account growth

Debit Spread Basics


-‐  Can be applied to “Big” stocks with no addi-onal cost – allows par-cipa-on in explosive moves

-‐  Also, wider universe of Stocks & ETFs can be traded on Swing Trade -meframe with no “penal-es”

Debit Spread Basics: Quiz

Debit Spread Basics

Q1. When Constructing a Debit Spread, the following is true.

•  Debit Spreads is both long and short the same “type” of option

•  They have different expiration dates •  They have to be $5 wide spreads

Debit Spread Basics

Q1. -

•  With Debit Spreads, both long and short options are the same “type” of option

Debit Spread Basics

Q1. Answer

•  Debit Spreads is both long and short the same “type” of option

•  TRUE •  Bullish : Long/Short Call Options •  Bearish : Long/Short Put Options

Debit Spread Basics

Q1. •  They have different expiration dates

Debit Spread Basics

Q1. Answer

•  They have different expiration dates •  FALSE •  The Spread must have the SAME option

expiration date

Debit Spread Basics

Q1. •  They have to be $5 wide spreads

Debit Spread Basics

Q1. Answer

•  They have to be $5 wide spreads

•  FALSE •  The Spread can be any distance between

the strike prices. (within reason – usually $5,10, 15, 20 wide)

Debit Spread Basics

Q2. Why are Debit Spreads well suited for trading Smaller Size Accounts?

Debit Spread Basics

Q2. Why are Debit Spreads well suited for trading Smaller Size Accounts?

•  Answer : –  Debit Spreads have a very low cost to enter

a position : $100-$200 a spread – Debit Spreads have a known “maximum” loss – Debit Spreads have a very nice potential

returns of 75%, 150%, +200% returns.

Debit Spread Basics

Q3. One major concern for Debit Spread trades is Theta, or Option Decay.

Debit Spread Basics

Q3. One major concern for Debit Spread trades is Theta, or Option Decay.

•  Answer : FALSE – With a well constructed Debit Spread, with

enough time left until expiration, Theta or Time Decay is nullified by having long and short positions, until a point where there is less than 7 days until expiration.

Debit Spread Construc-on


•  Process the Poten-al Move •  Iden-fy the Profit Target Zone

•  Iden-fy the Stop Loss level


•  Process the Poten-al Move – With guidance from the Daily Chart –  Iden-fy how far the trade could go on 60 min


•  Iden-fy the Profit Target Zone – Use TA Guides

•  Fibonacci Retracement Levels (38.2%, 50%, 61.8%) •  Daily 8EMA, Daily 50EMA • Weekly/Monthly Support & Resistance levels

– “Bracket” a reasonable $5 or $10 wide Target Profit zone

Target Profit Zone


•  Iden-fy the Stop Loss level – Within the 60 min chart, iden-fy price level in which to set Stop Loss

•  For Reversals: previous high/low levels

•  For Breakouts: – Fall back below resistance, or above support – Pullbacks into consolida-on zone


•  The Basics – buy op-on, sell further away



•  Strike Prices of Debit Spreads should bracket the Profit Target Zone of the trade

Picking the Strike Prices



•  Strike Prices of Debit Spreads should bracket the Profit Target Zone of the trade

•  Conserva-ve – ATM/ITM strike & OTM strike

•  Aggressive – OTM strikes near Profit Target $

Conservative vs Aggressive Spreads


•  How Wide?

•  Wide –

•  Mix of ATM/OTM –

•  Easier to profit, overall smaller % return


•  How Wide?

•  Narrow – finely tuned,

•  Aggressive OTM, biggest profit poten-al

Wide vs Narrow Spreads


•  How long un-l expira-on? •  Need just enough -me to complete the trade but not much more

•  Normal Trade •  Swing Trade : 2-‐4 days •  Add 7-‐10 more •  Target “days to expira-on” : 9-‐14 days



•  Conserva-ve Trade •  Normal “days to expira-on” : 9-‐21 days •  (Add +7 day buffer) •  Conserva-ve “days to expira-on” : 14-‐21 days



•  Aggressive Trade •  Swing Trade : 2-‐4 days •  Add + 4 days

•  Aggressive “days to expira-on” : 6-‐8 days


•  Sample Calcula-on: Projected trade – 3 Days •  Calculate Normal •  Conserva-ve •  Aggressive


•  Profitable, now what? … Staged Profits


•  Staged Profits •  Along the path of the Profit Target Zone iden-fy…

•  Support & resistance price levels •  Daily moving averages •  Fibonacci levels

Staged Profit Plan


•  Support & resistance price levels – Daily & Weekly price levels

•  Daily moving averages – 8 Day & 50 Day Exponen-al Moving Averages


•  Fibonacci levels

– On retracements : 38.2%, 50%, 61.8%

– On extensions : 127%, 162%


•  Staged Profits

•  Iden-fy 2 or 3 “proven” levels, that have had previous interac-ons of stock trend

•  Divide posi-on into 2 or 3 groups to ini-ate sells

Staged Profit Plan


•  If enough shares/contracts…

•  Leave small por-on as “runner”, placing a lock-‐in profit stop loss.

•  This “runner” might be start of a very large move.

Interac-ve Exercise

Interactive Exercise


•  Type of Poten-al Trade?


•  Where is the Profit Target Zone?


•  Iden-fy Poten-al Strike Prices.

•  Iden-fy Stop Loss Level


•  What is your Entry Point?


•  Where are your Staged Profit Points?

•  What is your Profit Taking Plan?

•  Runner?


•  Walk-‐Through Trade one more -me…

Debit Spread Construc-on: Quiz


Q1. How do you decide what Strike Prices to use for your Debit Spread?


Q1. How do you decide what Strike Prices to use for your Debit Spread?

•  Answer : –  The Profit Target Zone, the price level where

your believe your trade will move to, will determine your strike prices.

– Also, how aggressive or conservative you be in your trade, affects your selection


Q2. Why do more Aggressive Trades have shorter “days until expiration?”


Q2. Why do more Aggressive Trades have shorter “days until expiration?”

•  Answer : –  Normally, options with less “days until expiration”

are more affected by Delta price moves in the underlying.

– Also, max profit in an ITM spread occurs at expiration, because the Theta effect is stronger on short option than the ITM long option – widening the value of the spread.


Q3. What is the process that I use in taking profits that helps me boost my “win ratio”?


Q3. What is the process that I use in taking profits that helps me boost my “win ratio”?

•  Answer : –  I take profits, in a Planned Staged Profits

process. By using 2 or 3 logical points in the projected move towards the Profit Target Zone, I take profit “winners” by selling some percentage of my overall positions at the “profit sell points”

–  I also move my stop losses to breakeven trades when there is a profit, then eventually lock-in some profits with trailing stops.

Detailed Debit Spread Trading Plan


•  Setup your Trade Parameters

-‐  Determine appropriate trade size -‐  For me, define risk of loss at 50% spread -‐  Divide total max loss by amount of 50% spread = # contracts


•  Searching for Opporuni-es

•  Search on the :45s – Look at 60min, 15 min, 5 min charts

Swing Trade Entry Charts


•  Leong the Trade Develop & come to you

•  It might take 1 or 2 days for a poten-al trade to develop enough to take a posi-on

•  Maintain an ongoing “watch list” of poten-al opportuni-es 1-‐2 days out


•  Do the trade on the ½ Size chart

•  Once you see a poten-al trade to develop on the 60 minute chart

•  Iden-fy the parameters to “pull the trigger” on the trade


•  Execute the trade on the :45s based on price ac-on on the 15 minute or 5 minute charts

•  Use limit orders to fine tune entry price

•  Don’t rush, watch for 2nd chance entrys – Breakouts : last kiss pullbacks – Reversals : sideways bounces, 3rd top/bojoms

Swing Trade Entry Charts


•  Set your StopLoss

•  Beware the big stoploss move

•  Enter on smaller TF opportunity


•  Watch for Opposite Trend develop in smaller -meframe which may give clues to “wrong” trade

•  If small TF says “wrong” but Large TF says “right”, it is OK to reduce posi-on size


•  Evaluate Posi-on every :30 and :00

•  Remember this is a bigger TF opportunity

•  Don’t “stare” at the trade for the next 4 days

•  Don’t watch your P&L


•  Check it every 30 minutes.

•  Con-nue to watch the Indexes, usually you are trading in the same direc-on

•  Again, Don’t watch your P&L – this leads to rash decision making


•  Take Staged Profits •  Set out your 2 or 3 “Planned” profit taking levels

•  As you approach your levels, start to watch on 5 minute charts

•  Use limit orders to “sell into strength”


•  Take care of the difficult last 20%

•  Through experience, you’ll find out that the first 80% of a well thought out trade is an easy trade – prices moves quickly, easy to take profits selling into strength

•  The last 20%, especially when prices start to encounter some resistance, it may be more challenging to sell at your price. You may have to be a lijle more aggressive with price to get out.

Debit Spreads Summary

Ques-ons & Answers

Debit Spread Trading Plan Checklist

•  Next Steps…

1st Time Around – Review Workshop recording

•  Setup 60min/Daily Scan charts

•  Look for trades on daily chart, and 60 minute


•  When poten-al Swing Trade setups start to form

•  Iden-fy 2 – 4 day move, Target Profit Zone

•  Structure your Debit Spread Strike Price levels and Time Un-l Expira-on.

•  Iden-fy Entry point, Use 5min & 15 min charts to enter the posi-on


•  Once your “in the trade”

•  Set stop loss

•  Setup your 2 – 3 Profit Taking Levels

•  Watch Trade every 30 minutes, Watch indexes


•  Carry out Profit Taking Exit Trades, as each level is hit.

•  Adjust to Break-‐even & Profit Locking Stop loss Order at each planned Exit

•  Leave “runner” on with logical Stop Loss

Example Stock List for Debit Spreads

Thank You

swing trading success debit spreads workshop …...swing trading success(debit spread basics(•...

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