2017 Trade Like A Pro PDF

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Risk Levels DISCLAIMER

Tom Gentile ("Tom Gentile" or "Tom" or "we" or "us") is not registered as an investment
adviser. Tom Gentile relies upon the "publishers' exclusion" from the definition of
investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and
corresponding state securities laws. As such, Tom Gentile does not offer or provide
personalized advice. We publish information about companies in which we believe our
readers may be interested and this information reflects our sincere opinions. The
information that we provide or that is derived from our website is not intended to be, and
should not be construed in any manner whatsoever as personalized advice. Also, our
website and the information provided by us should not be construed by any subscriber or
prospective subscriber as Tom Gentile’s solicitation to effect, or attempt to effect, any
transaction in a security. Investments in the securities markets, and especially in options
and futures, are speculative and involve substantial risk. The information that we provide
or that is derived from our website should not be a substitute for advice from an
investment professional. We encourage you to obtain personal advice from your
professional investment advisor and to make independent investigations before acting on
the information that you obtain from Tom Gentile or derive from our website/emails.
Only you can determine what level of risk is appropriate for you.
All trading involves risk. Leveraged trading has large potential rewards, but also large
potential risk. Be aware and accept this risk before trading. Never trade with money you
cannot afford to lose. All forecasting is based on statistics derived from past performance
and past performance of any trading methodology is no guarantee of future results. No
"safe" trading system has ever been devised and no one can guarantee profits or freedom
from loss. No representation is being made that any account will achieve profits or losses
similar to those discussed. There is no guarantee that, even with the best advice available,
you will become a successful trader because not everyone has what it takes to be a
successful trader. The trading strategies discussed may be unsuitable for you depending
upon your specific investment objectives and financial position. You must make your own
investment decisions in light of your own investment objectives, risk profile, and
circumstances. Use independent advisors, as you believe necessary. Therefore, the
information provided herein is not intended to be specific advice as to whether you
should engage in a particular trading strategy or buy, sell, or hold any financial product.
Margin requirements, tax considerations, commissions, and other transaction costs may
significantly affect the economic consequences of the trading strategies or transactions
discussed and you should review such requirements with your own legal, tax and
financial advisors. Before engaging in such trading activities, you should understand the
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Tom Gentile ("Tom" or or "we" or "us") is not registered as an investment adviser. Tom
Gentile relies upon the "publishers' exclusion" from the definition of investment adviser
under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state
securities laws. As such, Tom Gentile does not offer or provide personalized advice. We
publish information about companies in which we believe our readers may be interested
and this information reflects our sincere opinions. The information that we provide or that
is derived from our website is not intended to be, and should not be construed in any
manner whatsoever as personalized advice. Also, our website and the information
provided by us should not be construed by any subscriber or prospective subscriber as
Tom Gentile solicitation to effect, or attempt to effect, any transaction in a security.
Investments in the securities markets, and especially in options and futures, are
speculative and involve substantial risk. The information that we provide or that is
derived from our website should not be a substitute for advice from an investment
professional. We encourage you to obtain personal advice from your professional
investment advisor and to make independent investigations before acting on the
information that you obtain from Tom Gentile or from our website. Only you can
determine what level of risk is appropriate for you. By using our site
you acknowledge you have read our full disclaimer located ABOVE and the CFTC
Disclaimer below.
CFTC DISCLAIMER
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.
Contents
Foreword
Part 1
• Goal Setting For The 1-percenters
• Setting Your Goals
• Setting Your Requirements
• Action Plan For Your Trading Plan
• Where You Sit on the “Food Chain”
Part 2
• The 1-percenters RB (Rules-Based) Opportunities
• 1-percenters Are System Traders
• HFT and LFT (High and Low Frequency Trading) Systems
• Robot Auto-Trade Systems
Part 3
• Options as an Alternative Strategy
• How Volatility Can Affect the Way You Match a Strategy to a
System
• Tom’s Top 10 Stocks to Trade Weekly Options
Part 4
• The 1-percenter Mindset
• Dealing with Losses
• Discipline for the 1-percenter
• Blocking Out negativity
• Keeping Focus
• 1-percenter Success Rules
• Avoiding Bad Habits
• Getting Cocky and Overconfident
• Winning Attitude
Conclusion
Glossary of Terms
Foreword
I would like to thank my wife, Gabrielle. I first met her at the American
Stock Exchange, and who knew then that a friendship in the 1990s would
ultimately grow into the life we share today? Though we still reside in
NY during the summers, its Florida we call home. The ability for me
NOT to go to work at the Amex, in what I call the craziest way to make
money in the world, but to go from my bedroom to my trading office
makes this the best job in the world. Between my career as a trader and
educator and her career as a landlord, things here are far from ordinary.
Our entire schedule is the reverse of the average family. Most people
have an average 45-minute commute to work, mine is one floor
downstairs. My family and I live in Florida most of the year, and in New
York a small amount of time, the opposite of the normal snowbird. I hit
the gym before 5pm, not after, and have no problem getting on the
machine of my choice. As for dinners, well if we do go out to eat, the
place must be open after 9pm. Yes… Far from ordinary is just fine by
me… This alone makes me a 1-percenter.
Next, I want to thank the many partners, employees, and contractors of

the former company I co-founded back in the 90s, Optionetics. Nearly
everyone associated with Optionetics had one goal in mind—to bring
options education to the public. At the time, we started Optionetics, there
was a handful of other people who taught trading to the public, and I
knew them all. Since the 1990s, the educational gurus who mysteriously
popped up were exponential. As we continued to advance in options
education and teach new twists on old strategies, the copycats were not
far behind. I chalked it up as flattering that our innovation was being
duplicated elsewhere.
I want to also thank my mentor and partner, George Fontanills. Many of

you know he died of a heart attack back in 2012, but there’s not a day that
goes by that I don’t think of George, as if he is still here. Though many
people contributed to the company, George Fontanills in my mind was
the face of Optionetics. I was just lucky enough to be a part of it from the
get go. Though we debated quite often on everything from systems to
strategies, one thing was certain; George never did anything because of
popularity. Right or wrong, George either believed in it or he wasn’t a
part of it. One of the reasons George left so soon after his contract was up
was due to his belief that being part of a public company wasn’t his
vision. His untimely death just after starting something new will keep us
always guessing what was to come. I remember George from the first
day I met him to the last conversation we ever had, and everything in
between. So many non-published stories I could share about George, but
that’s another day and another book. One day perhaps…
Finally, I want to thank the hundreds of thousands of students and

friends I have had the pleasure of teaching along the way. You have
taught me as much as I have taught you, you just didn’t know it. I
learned the most not during seminars, but the breaks and lunches
between when you thought I wasn’t listening. Conversations between
attendees gave me answers to problems, which birthed new trading
systems and strategies. I have long considered myself a teacher who
continues to learn, and I thank all of you for that!
As for dedications, this book is dedicated to those I have mentioned
above. For those who all strive to Trade like a 1-percenter, although this
book is about being a 1-percenter in trading, it applies to all aspects of life
itself!
Regards,
Tom Gentile, founder
www.tomgentile.com
Part 1
Goal Setting for the 1-percenters
This book is not for novice trader. If you are just beginning to get into
trading the markets, STOP and put this book down. You’re not ready for
it yet. There are plenty of books you need to be reading beforehand,
some of which I have co-written. Here are some ideas for you:
The Stock Market Course, and The Stock Market Workbook, by

George Fontanills and Tom Gentile – This book contains
everything you need to know about getting started in the
stock market, along with a companion workbook to quiz
you.
The Options Course, and Options Course Workbook, by George

Fontanills and Tom Gentile – This book has everything you
need to know about the options markets and using options
as alternatives to stocks in trading. The companion
workbook also makes a great tester to your studies in
options.
The Volatility Course, and Volatility Course Workbook, by

George Fontanills and Tom Gentile – Another book that I
co-wrote with George, this one focusing on volatility, and
using volatility to your advantage as a trader. The
companion workbook contains tests and answers.
The Index Course and Index Course Workbook by George
Fontanills and Tom Gentile – This book focuses on the
ever-growing investments in indices and popular ETF
industry, trading strategies as well. There is a companion
book with test questions and answers.
All of these books were published by Wiley and Sons, and can be found
on great websites and local bookstores everywhere. There are also many
other great books in the Wiley collection, be sure to check them out.
Also, if you want to see some of my present day articles, you can look no
further than my website, http://www.tomgentile.com or find me on social
media, as I post all my articles online. Links to my social media pages
can be found at my website as well.
Now, if you have some knowledge in trading but your knowledge

hasn’t produced the profits you want, produced any profits, or you have
blown up an account or two (I depleted my first account in 1987) then this
book is definitely for you! I went from the outhouse to the penthouse in
this business, and the majority of what got me there is right here in these
pages.
My goal here is to show you not so much what works in the markets, but
how you make it work for you! My goal is not to teach you a winning
trading system, (though there are some good ones here) but how to create
a winning system! My goal with this book is not to teach you how to
trade alternative strategies as a replacement for stocks, but why to use
them, as well as why not to use them! My goal is to help you get to the
point where you are “Trading like a 1-percenter”! Now let’s get to work!
First - I have some bad news for you, so let’s get that out of the way
first… Trading is one of those few things that the barrier to entry requires
nothing more than a brokerage account. The problem is that there is no
certification stating you are qualified to trade in the stock markets. I
looked up the Top 10 list of highest paying jobs on askmen.com and
here’s what I came up with, without the boring details:
10 – Industrial Psychologist
Annual mean wage: $124,160 
Training time: 8 years
9. - Computer IS Managers
Training time: 4+ years
8. – Marketing Manager
7. – Natural Sciences Manager

6. – Engineering Manager
5. – Lawyers
4. – Petroleum Engineers
3. – Chief Executive Officers

2. – Dentist / Orthodontist
1. – Doctors / Surgeons
(Source, www.askmen.com 2012)
Most people look at this list and think to themselves that trading can offer
a salary through trading profits that exceeds many of the careers above,
with nowhere near the work. So what’s the problem? The problem is the
lack of structure for 90% of traders out there. Of the top 10 careers above,
the minimum training requirement is 4 years, with the maximum training
requirements at 11+ years. I have been trading now for over 25 years and
I still learn something every day.
Ok, now the good news, trading is a high paying career if you get it right.
Nowhere on Earth can you make as much money as a trader, but there’s a
risk of ruin too. I think using the term career is a good start if you want
to succeed at this full time. Let’s discuss failure first, as it’s bound to
happen to the majority of novices who venture into this arena.
How To Be a Failure As a Trader
If you want a losing formula I have one for you:
Recipe for Trading Disaster (Ingredients)
 1 part lack of knowledge

 1 part lack of experience
 1 part intuition
 1 part “hopium”
Mix all of these together one at a time and slowly bring to a boil. First, a
trader will be led to believe that this is easy to do, much easier than
following rules at some job. They learn the least amount required to
trade, perhaps believing that a stock they see on TV is about to jump, and
though lack of knowledge, and they start small. Most traders learn just
enough to be dangerous, but they do start out small. It’s what comes next
that starts to hurt them. Lack of experience will keep them from
understanding and learning from their mistakes. God forbid if they win
a few times, because then intuition sets in and more than likely they will
start risking more than they should at the wrong time. That’s because
they may get to the point that they believe they are right and the markets
are wrong.
So what’s Hopium? Like opium, it’s an invisible drug in the mind that
causes traders to believe that the rules don’t apply to them. Hopium is
what keeps the traders believing that their ability to pick winners from
their head is real. Hopium becomes a religion when their stock goes
against them, and they HOPE it goes back up. Winning every now and
then will continue to give them an ample shot of “Hopium” to keep them
in the game. When traders on hopium lose, they believe it was due to the
markets and no fault of their own.
This, in turn, keeps them going, re-depositing money into their accounts,
and doing the same thing over again, expecting a different result. In fact,
Hopium traders are what we call the “donators” and these traders
account for a lot of money made by professional traders. In the game of
poker, it’s said that, if you sit down at the table and you can’t spot the
sucker in 15 minutes, guess what? You are the sucker. Too bad traders
can’t understand this when it comes to hopium.
There are a few things that I do like most people. I wake up in the
morning; I grab my cup of coffee, check the morning news, and fire up
the computers (if not already on) and get ready for the day. That’s
because, as stock traders, we are bound by a few rules already. The
markets open and the markets close and if I want to trade US based
equity and stock options, I must trade them between 9:30 and 4:00EST.
We all live by that rule. Also the markets are closed on Saturday, Sunday,
and any market holiday, so we can’t get around this rule either. I could
go on and on, but we are all bound by a few rules. Other than that, it’s
anyone’s business how they operate in a no rules environment. So how
can you make money in a no-rules environment? Well, I will get to that,
but before anything else, we must create an overall set of rules that
govern us as traders before we hit the first BUY or SELL button.
Setting Your Goals

First things first, we need goals and we need a plan. Without these two
things, we are helpless, and might as well treat this no differently than
Las Vegas. In fact, if this is how you are going to treat your trading
account, then STOP HERE. I would rather you go to Las Vegas, or the
closest casino and spend what you would have put in your account there.
The atmosphere is better, spectacular views if you are in the right casino,
and the drinks are free (at least you think they are). Odds are against
you, and eventually you will leave with your pockets empty. It might
hurt, but not as much as the hurt you will receive trading in the stock
market without a plan. In the casino world, we know deep in our
cranium that the odds are against us. In the stock market, people actually
believe their power of thought can push the odds in their favor, until they
get hurt financially. That kind of hurt ultimately gut checks you hard,
and can demoralize you much worse than a casino ever would.
So what’s the goal of the 1-percenter? To treat this like a business, and
every business needs a business plan. For a trader to be successful, you
must start at the bottom and build the foundation. Just as a builder wants
to be successful, he must start at the bottom and survey the land before
any work is to begin. You must take stock of yourself as a trader and ask
and answer these questions:
Setting Your Requirements
What do you want out of trading? If your answer is money, then run,
don’t walk away. Money is the result of a successful trader, but it should
not be the goal. Money is just the icing on the cake of trading. The
problem with money is that it has emotional value for just about
everyone in the world. Why is this? Well, because we have been trained
our whole lives that money can buy different things at different times. A
loaf of bread might cost a certain amount one week and be a different
price the next. This is true for any goods that are bought and sold. It is
also true of the stock market.
The real answer to this is that you look to trading as something you love
to do. You trade because you want to better yourself, or maybe you want
to create a business of trading. Profit is a goal, but too much greed can
ruin a good trading plan. Your desire to be a great trader should keep
you interested and highly engaged. This is what keeps successful traders
consistently profitable.
What are you going to sacrifice in order to get to your goal of a 1-

percenter? Ok trading doesn’t come without a price. There are two
things I believe a person will sacrifice over time to be a great trader; time
and money, and not necessarily in that order. It’s been said that, if you
think the cost of education is high in the world of trading, try the cost of
ignorance. I know some people who simply will not invest any money or
time into their education of the markets. I think an investment of both
will save you a bundle over time. Education means spending time away
from something else that you might want to do, but again, we are looking
for the rewards over time.
How much time are you going to commit to the style of trader you want
to become? Ok, assuming we have some basic knowledge under our belt,
we need to figure out at some point in our lives what type of trader we
are going to be … Directional or Non-Directional? Maybe both. I don’t
know too many people who can talk out of both sides of their mouth, and
I look at trading the same way. Either you are directional or non-
directional. This means either you are looking at patterns in the stock
market or patterns in the options markets. A few people can get good at
both, but most have to pick a side and get good at one style of trading.
Next would be time frames. Are you going to be a day trader, a once a
year trader, or someone in between? Think hard about this one before
you answer it, because your life has something to do with the answer. If
you work 60 hours a week, it’s impossible to be a day trader, too.
Something will fall. I know a guy who used to work for a big company
who tried to be a day trader. Guess what happened? He half-assed
everything and lost both his trading account and his job.
What markets are you going to trade? The choices are securities, futures,
commodities, options, forex, and options for each. I have seen and heard
a lot of people say, “I trade everything,” or “I trade whatever is
profitable.” Folks, there is no such thing as everything and profitable in
the same sentence. That’s like being the clerk, stock boy, butcher, bakery
person, cashier, and manager all at the same time. You will run yourself
ragged and not make a dime on anything. My mentor, George Fontanills,
used to say, “Get good at one or two things, and become a master.”
How are you going to breakdown your days or weeks into a plan in
order to reach your goal as a 1-percenter? Ok, this is called building a
trading plan. Your plan will involve lots of things such as assessing the
markets you want to trade, creating and back testing trading systems or
option strategies around the said markets, creating a sound risk
management and money management plan for both the individual trades
and the entire account. I’m not done yet… As you trade, you will also
have to take into account altering systems, entries and exits, and finally
building a business plan around all of this.
How often are you going to read and reread your plan, and alter it as
you move toward your goal as a 1-percenter? This means constantly
evaluating your business plan as the markets change. Perhaps you add
an additional system to the one you’re currently trading to smooth down
your equity curves. In any case, markets change, so be ready to adapt
and change your trading plan. The following is a roadmap to success
that we feel cannot be short cut or altered. It’s important that the trader
realize that, before the first trade begins, a roadmap must already be in
place. This road map will tell you exactly how you plan on making your
trading business grow.
Last question – Can you take responsibility for your own actions?
Here’s one that the 1-percenters know well and that 90% of novice traders
fail to learn. This one can also be broken down into two pieces.
• Taking responsibility for your education. That means taking

notes, regardless of whether you are at a seminar or listening to a
web cast. If you don’t understand something, ask. Also that
means understand the strategy before you sink any of your own
money into it. I am amazed by the amount of novice traders who
will sink good money into something they have no understanding
of. For instance, if you are going to buy a bull call spread on
Alphabet, Inc. (GOOG), then you better understand your
maximum risk, and maximum reward, but that’s just the start.
You need to understand what the price movement (delta) of
Alphabet, Inc. (GOOG) can do to your spread. You need to
understand what the other greeks can do also. You need to
understand what’s going to happen if you hang on to your spread
through expiration. You need to understand what happens if the
price of Alphabet, Inc. (GOOG) is below your strikes, above your
strikes or between your strikes on expiration day. You need to
understand exercise and assignment of options and how it will
affect your position.
• Take responsibility for your actions. Here’s another one that most
people miss the mark on. I remember watching TV, and taking a
position in the markets based on what someone else was saying
about a stock. I remember cursing that individual after the trade
became a loss. In reality, what I just did was push blame onto
someone else. STUPID! What I should have done was say to
myself that it was my responsibility. It was my responsibility that
I took the trade without any research. My responsibility that I
took the trade during periods of high volatility, and my
responsibility that I leveraged myself to the hilt, resulting in my
first and only margin call. Regardless of where you get your
information, you and you alone enter and exit the trade.
When you accept total responsibility for your trades and your actions
resulting from trading, you close the door to excuses. That is one giant
leap away from the crowd and one giant leap towards being a 1-
percenter. Imagine for a moment Peter Lynch losing a few million dollars
and then blaming his analysts for giving him bad advice. It’s just simply
not going to happen. Why? Because Peter Lynch takes responsibility for
his own actions, that’s why. Taking responsibility for your own actions
also means a less likely chance of repeating the same mistake twice.
Action Plan –
Building a Trading Plan Around Your Goals
Are you still here? Good! Now we need to create a Trading Plan
Blueprint around our Trading Goals above. There are 12 different points
we need to address in our trading plan, some we can address now and
some we won’t address until well into our careers as a trader. A Trading
Blueprint can be very detailed but can be summarized like this:
Business Plan – As with any business, what will your starting capital be
and what do you intend on returning with this investment? What will
the costs be in time and money?
Trading Objectives – What are your objectives? This answer will have a
lot to do with what your starting capital is. If you’re starting with $5000
and have no desire or ability to continually increase this amount, then
you will be limited to what can be done.
Trading Style – Investor or Trader? The first is longer term; the latter is
shorter term. Though our government, mainly our Internal Revenue
Service, considers anyone who buys and holds for less than a year an
income trader, I think in a substantially shorter term. For you to be a
trader in my book, your buy and hold time is 30 days or less. If you are a
landlord, how often do you collect a rent check? I hope its monthly, or
you are not doing a good job of managing your business.
Note that there is nothing wrong with being an investor. Some of my

BEST systems involve the 6-month to 2-year time frame. It’s really up to
you to decide where you fit into the world of trading and investing.
Preferred Markets – Ok, so maybe you figured out what your trading
style is going to be, but what markets are you going to specialize in?
Most of us feel comfortable with the stock market, but there are other
asset classes to consider. I first started in stocks back in the early 80s, but
moved on to more exciting assets. Here’s an example of what I am
talking about:
The farther up the pyramid you go, the more volatile the asset becomes,
but potentially the greater the rewards. Remember, you don’t have to eat
from the same chow line, but it’s important to specialize in something.
Yes, I have traded it all, but with over half my life in this business, I like
variety. I have my feet in a little of everything. My markets have to do
with the next bullet point.
System Development – Systems are classified into several groups. There

are Long Term Systems, Short Term Systems, Directional Systems, Non-
Directional Systems, Technical Systems, Fundamental Systems, Seasonal
Systems, and many more that could fill up pages in this book. Some of
these can intersect with each other, but they all share one common fact.
Systems traders are rules based traders, meaning that each trade will live
or die on an objective set of rules. Below are a few of the systems that I
follow.
Robot
Systems
Intraday /
Daily Systems
Short Term
Bi-Directional
Stock Systems
Medium Term
Stock /ETF Systems
Longer term ETF

and Index Systems
My longer-term ETF and Index strategies are in the 6-month to 2-year

time frame, are almost always directional in nature, and require little
work on my part to manage. Medium Term Systems are those that are in
the 1-6 month time frame, are also directional, and require a bit more time
on my part. Short-Term Systems are 1-30 days in length, can be
directional and non-directional, and now you have to manage these
positions a few times a week. Intraday / Daily Systems are both
directional and non-directional, but now you’re talking a full-time job in
terms of management. If you really want intraday trading without the
management, that’s where an automated system such as a Robot System
comes in. Robots, when used properly, can enter and exit trades
automatically, without the headaches of human management.
Again, where do you fit into the pyramid? Although aspiring full time
traders want to get to the top floor as fast as possible, it’s best to start at
the bottom and work your way up after mastering each step.
Preferred Strategies – Many of you know I like options trading. What

many of you don’t know is that I trade them completely differently than
the crowd. Like I said before, if you want to be a 1-percenter, then you
have to do things differently than the other 99. The basic reason I use
options is for the leverage and fixed risk on the buy side, and the
probabilities on the sell side. That’s the only reason to use them. If I am
trading intraday, I actually look for reasons NOT to trade options, and
day trade a more liquid asset instead. Although, as of this writing, one
look at Facebook options and you have to throw that logic right out the
window, I have often seen FB trading more daily volume than the SPY.
Makes sense, seeing how those near money options are so liquid and the
bid/asks so tight.
Entries, Trade Management, and Exits – These have to do with the way
you place orders, how you deal with the trade if you need to adjust it,
and how you exit the trade. Twenty years ago I called in my orders, but
today things are quite different. Forget about market or limit orders,
today’s brokerage firms offer contingent orders and even time-based
orders. One of my trading systems has me getting out of a trade 35
minutes after I enter the order and with today’s platforms, it can be
placed ahead of time.
Risk Management – This is based on a trade-by-trade basis. Most people
use some type of fixed amount in the markets like $500 a trade, or a
percentage of their account, or it could even be a fixed number of shares
or contracts traded. I typically do not risk more than 0.5% (half of one
percent) in any one trade if it’s a short-term trade, but again this is based
on the personality of the trader, capital account size, and assets used.
Money Management – The difference between money management and

risk management is that with risk management we are talking about the
trade in general, with money management I refer to the account used for
trading. As with risk management, there are several factors that traders
use to determine what’s best for their accounts. I use a 2/5/10 formula for
maximum account risk. I take 2% maximum account risk per day, 5% per
week, and 10% a month. If my risk exceeds these levels anytime, I stop
trading for the day/week/month. Putting this in place allows me to know
the worst-case scenario (maximum adverse excursion or drawdown) I
should have. I accept that this could happen, and it takes a lot of the
drama out of what could happen.
Trading Plan Assessment - I have this here because each quarter you will
want to revisit the above points of your trading plan. You will want to
evaluate everything from your systems and strategies to the winners and
losers for the quarter, as well as the run ups and drawdowns on every
trade. This information will tell you whether you are on track, or need to
fine tune or adjust your plan.
Where Do You Sit On The Food Chain?

When we look at evolution, each life form on this planet has its place in
line. By that I mean, we have a basic understanding of who our predators
are and who our prey are; I don’t necessarily mean in terms of kill or be
killed, but in the social structure as well. The same is true when it comes
to a barbaric business such as trading, so I want to first give a few words
about the social structure of the one who we intend on making our
money from—Retail Traders.
Types of Retail Traders

Discretionary Traders
Indicator Junkies
Systems RBT Traders
There are many classifications of traders in the world but they all boil
down to one of these three types:
1. Institutional traders
2. Large speculators
3. The retail public
• Institutional traders work for large firms or banks, brokerages,

mutual funds, and hedge funds, and have 100 million or more to
work with. They make their money through long-term
speculation, arbitrage, and hedging. They also make money
taking the other side of large trades, so long as they can lock in
small profits from these trades. The last thing institutional traders
do is look at low risk global opportunities and trade them. Mostly
currency or interest rate trades, but they do include equity
positions as well. These guys make up about 2-3% of the players
but wield a powerful amount of volume with their deep pockets.
• Large speculators are traders who have larger than average
pockets, usually a million or more to trade with. They know
enough about trading to make a living, and a good living at that.
These traders both work for himself or herself or a small firm, and
focus primarily on trading the way the institutions do, but with
smaller pockets. They represent 7-8% of the entire investors out
there.
• The retail public makes up the rest of the pot. This is everyone
from your average retiree with a 401k plan or an IRA, to the
executive who trades (and loses) on the side, to novice traders
trying to make it to the level of large speculator.
Know Before You Start - Everyone starts from the bottom in nearly every
business. It takes time to go from the stock boy to the manager, so why
wouldn’t it take time to go from a novice trader to a seasoned veteran?
Yet I didn’t think of this when I first embarked on my new career. $5000
and an individual account later, I was off and running. Interesting thing,
I actually started making money in the beginning. That was probably my
first mistake—making money and not knowing what I was doing. Then
the ultimate Bermuda Triangle happened to me. I decided to listen to a
stock market analyst on TV (my system) and put my entire trading
account into one trade (my money management). I lost it all and then
some (margin call) on a typical Monday afternoon (Black Monday, 1987).
Don’t think it can’t happen to you … it can. It probably did when you
fast forward 20 years and it happened again, it just took longer thanks to
the circuit breakers in the markets. Think about these statistics for a
moment.
The Problem - 70% of all traders lose all their money trading (those who
trade inside of one year). Now who in the group above do you think that
is going to get eaten up, the Institutional Traders, the Large Speculators,
or the Retail Public? You guessed it! Institutional traders and large
speculators have two things going for them. Money and Experience, and
they go hand in hand. They may have spent years perfecting their craft,
and it’s not going to go away easily. The retail public, however, are
sitting ducks when it comes to trading. Why? Because Retail Traders
approach it all the wrong way. They don’t trade with a plan, they trade
with emotion. They are all looking for an emotional high, and short term,
high stakes trading provides it for them.
The Opportunity – Ok, so if 30% make money, then who makes what?
Well we know that the institutions make most of that money, followed by
the large speculators. If that is the case, then perhaps less than 5% of
retail traders can make money over time. Now I know you’re probably
wondering where the opportunity is. Here it is; it doesn’t take much to
get to that 5%. You see, most retail traders are stupid because they don’t
follow any set of rules. They buy and sell without rhyme or reason, have
terrible risk controls, and basically hold losers and sell winners too soon
for self-gratification. If we can pattern ourselves opposite the retail
trader, we will win over time. BTW, of that small percentage of retail
traders, the 1-percenters make the majority of the money.
The Challenge – The challenge is a clear one. To Trade like a 1-percenter,

we need to develop and trade by a set of rules to get us through the
critical phase of trading, what I call the survival phase. There is a
learning curve to get through, and being able to develop and trade an
unemotional trading system is a big step in completing that challenge.
Imagine taking a few karate lessons, and then having to face a 5th degree
black belt in the ring for 3 rounds of total contact karate. Or how about
taking a few golf lessons, and then facing Tiger Woods in front of a large
crowd at a PGA tournament? I could go on and on, but trading is like
any sport or business. It takes time and training to become elite. Once
you understand the rules of engagement, system trading is the beginning.
The Trading Skill Chain
If you are a NOVICE, then you are an UNCONSCIOUS

INCOMPENTENT and start at the GREEN box. Shockingly, this is not
the worst place to be, and you’re more likely to be cautious with your
approach to trading. Hopefully you don’t catch a string of winners too
soon here, it’s likely to go to your head.
CONSCIOUS INCOMPETENTS face the most dangerous obstacles as

traders. They now understand the rules, but still do not have the skills to
consistently succeed. This is where greed can make you go broke if
you’re not careful. Most conscious incompetent traders use no more than
indicators, believing they themselves are systems traders. When they fail,
they blame everything but themselves and take no responsibility for their
actions. Finally, birds of this feather flock together, as misery loves
company. When you are aware of your incompetence, it is best to re-
evaluate and learn why you failed and to improve your skills to get out of
this box as soon as possible.
CONSCIOUS COMPETENCE means your skill sets as a trader are

starting to come together. You have a plan in place, but must consciously
be aware at all times what constitutes a trade, placing the order, and
exiting with no distractions. You are starting to use RBT in your trading,
but must focus on your systems and rules to implement them. If you can
successfully move through the first 2 skill sets, you are now beginning to
sit with the 1-percenters.
UNCONSCIOUS COMPETENT means that you are now following the

rules, picking trades, placing orders, etc. without having a conscious
awareness in your trading. You do this like clockwork, without knowing
the outcome, but sure of yourself when it comes to following your long
term plan. In this category of trading, you are more than likely alone, as
there is no crowd at this level. Being a 1-percenter is lonely, but lonely
has its privileges.
Part 2
The 1-percenters Are RBTs (Rules Based
Traders)
Ok, let us assume for a moment that you digested the information in Part
1, and have created your goals, as well as a business plan for your
trading. You know what markets you want to trade, what time frame
you want to trade, and have an idea of how you intend to grow your
capital. Now it’s time to map out a strategy for trading, as well as a set of
rules to trade by. I firmly believe that, if more people looked at trading
like a job, they would immediately recognize a dramatic change in how
they handle trades, and how their balance sheet would look.
If you remember Part 1, we quickly broke down our retail trader into 3
categories. Let’s rehash this, but with reasons why 2 of these 3 won’t
make it past a year of trading by either blowing up their account, or
complete boredom from not making any consistent money. I don’t count
a novice because they are brand new, know nothing, and until they
actually think they know what they’re doing, won’t risk much in the
markets, if any. Let’s assume our trader has some knowledge beyond the
novice, and will now fall into one of these three categories. I must stress
that nearly everyone hits them all in the order below:
Discretionary Trader – A discretionary trader is one who trades based on

someone else’s work, regardless of the source. A discretionary trader
could be one who takes a trade based on a ‘hot tip’ from their friend or
family member. A discretionary trader could also be one who takes a
position based on hearing the news on the radio on their way into work
that morning. As I am writing this, Facebook just announced earnings,
and the stock immediately rocketed up in the first 15 minutes of the day.
The news stations are all over this, and I am getting tweets on my phone
that Facebook is up to all-time high now, and the analysts are going crazy
saying things like the stock will be worth 5 times more than it is today in
just 5 years. These are the kinds of things that ignite the emotions of a
discretionary trader. Emotion drives this trader, as ‘Greed’ kicks in and
makes this trader do things that he shouldn’t.
Technology has come a long way in 20 years, and access to good (and
bad) information is at warp speed today. Today’s social media brings
you person-to- person news like never before, emails, texts, tweets, all
attempting to shortcut hard work by offering up that ‘Buy Now or Lose
Out’ choice to these traders. Some know better; most don’t. The
discretionary trader has access to information, good and bad, and can
trade based on someone else’s opinion like never before. Be very wary of
where you get your information from, especially if it shows up
unsolicited by email, text, or social media. Some companies have actually
been found to ‘advertise’ stocks simply to draw attention to them,
regardless of the company’s health. These companies are paid either a fee
in cash or stock to promote them, and it’s in their best interests to ‘pump’
the stocks higher, so they can sell off their stake as a form of payment for
their services. Several smart traders I know actually look to take the
opposite side of these services, knowing that a short term gain today in
the stock may actually become a long term loss for the buyer.
Some discretionary traders are what we call ‘guru watchers’, meaning

they take advice from any analyst, TV personality, etc., without fully
realizing the following: MOST OF THESE PEOPLE DON’T TRADE…
That’s right, a lot of them can’t, it’s in their employment contract. And
the ones who can trade won’t, because they don’t want to appear wrong.
The only people in this business worth following are ones you have done
your homework on. Ones who have a track record of profits AND losses,
because nobody is always right. What’s worse than a discretionary
trader? One who bets big on the gurus. It’s a quick way to losing your
account. I did this in 1987. October 19th, 1987 to be exact. System:
listening to my favorite financial channel (back then there was only one)
and taking advice from the loudest guy on the camera. That day there
was a lot of noise. Result: Margin call. It was a tough day for me, but
one that keeps me from doing the same thing to this day. My suggestion?
GET PAST THIS PHASE AS QUICKLY AS POSSIBLE.
Indicator Junkie – Ok, here’s a group that finds a set of indicators and
feels that he or she has just discovered the holy grail of trading. I did.
1989 was the year, using a Compaq 386 computer and metastock. I found
this magic indicator and thought that was the end of my search; it was
time to make millions! Problem is that it didn’t work as well going
forward as it did looking back. There are 1000 different indicators out
there when you mix the common ones with the Guru indicators, and my
conclusion on this is that most of them are lagging, due to the nature of
the math behind the indicator.
Indicators are merely calculations of price and or volume, to give the

trader a technical view of the markets. Most indicators, but not all, are
divided into one of four classifications:
(Moving Average Crossover as a trending indicator)
Trending Indicators – These indicators are designed to work as a stock or

market trends in one direction or another. Indicators like moving
averages and the ADX (average directional index) are great trending
indicators. They offer up big profits when they are right, but in a choppy
market can take losses.
(Candlestick Patterns, as a channeling indicator)
Channeling Indicators – These indicators are designed to find

overbought and oversold conditions, allowing a trader who uses these to
attempt to ‘buy lower and sell higher’. These include oscillators,
stochastic, and even candlestick indicators like above, as they attempt to
chart movement outside of a mean average, creating turning points.
Though these indicators work great in a sideways or channeling market,
they do not work in trending conditions.
(Bollinger Bands as a breakout indicator)
Breakout Indicators – This type of indicator is often less used in the

community because they are less understood. A breakout indicator looks
for conditions where the market is ready to move big, but the direction is
unknown. Indicators like Bollinger Bands are used for breakout
conditions. As the bands contract, this means the market is ripe for a
breakout. If they are very wide, it means the markets are ready to calm
down.
(Elliott Wave and ABC, with Fibonacci as a contrarian indicator)
Contrarian Indicators – These are the least understood indicators as they

attempt to profit by taking the other side of the crowd at opportune
times. They utilize analyses such as Elliott Wave and Fibonacci to look
for both trends and countertrends in the marketplace. These can be
everything from wave counts, to what is called ‘The Golden Ratio’
looking for turning points in the markets to maximize returns through
contrarian analysis.
Now I don’t want to beat up moving averages but, COME ON, this is
grade school stuff. In fact, anything that takes historical data to produce
a lagging indicator is what the 99% use. Moving averages, crossovers,
Stochastics, MACD, all utilize past data to give a current readout. In fact,
every pattern seen above including Elliott Wave looks at the past to
predict the future. Now this stuff was good in its day before computers,
but today we have to work with things that only 1% of traders would
even consider looking at. Of the longer-term indicators, Elliott Wave and
Fibonacci are my favorite, but what about shorter term trades?
A few short-term indicators I like… Ok, so rather than continue to talk
about the indicators that I don’t like (there are so many) let’s talk about
the ones I do like… I like anything that uses volume, volatility, and
support / resistance points based on past highs and lows.
This chart is an example of my EUR/USD page, plotting highs and lows,

as well as plotting the highs and lows of different time frames, and
looking at a range of where this market is in relation to those highs and
lows.
Here is another one of my charts, this from my RORO strategy. RORO
stands for RiskON, RiskOFF. One of the first things I look at is various
ETFs, and I plot a short-term range on the chart. Based on what I feel the
real breakout points are for the day, I will have either a bullish day or a
bearish day. If I get a bullish day, I will then look at stocks that I would
like to buy. If bearish, I look to short stocks on that day. Notice the
breakout of this range at 3:30pm, and the run-up that occurred
afterwards. This was a bullish day in the markets, and this indicator let
me know early on.
Whatever indicators you decide to use, make sure they fit your trading
style and time frame. My time frame is typically less than 30 days, with
many of my charts set to intraday, as are the charts above. Also, you
have to believe in the indicators, meaning you have to actually test them
to make sure they work. This could mean watching them day by day as
the market moves, or getting a piece of software that allows you to create
entry and exit rules using your indicators. Doing this puts you into the
next category of trader, the System Trader. Not doing this? Well you
could get a job as an analyst, though I believe there are enough of those in
this space.
1-percenters Are System Traders

So what is a trading system? To me, a trading system is the research of a
pattern or patterns in the market that take place repeatedly, and being
able to trade them for profit. These patterns can be trending or
channeling, they can be volatility breakout patterns or contrarian patterns
such as Elliott or Gann. They can be used on 5-minute bars, or monthly
bars. Whatever your system is, it needs to be rules based, something that
cannot be second-guessed, and contain both rules for entry and for exit.
Let’s first take a look at a selection of what’s available in the world of
charts and indicators with rules applied to them.
This is a snapshot of an afternoon in AAPL, using a volatility breakout
system with a tight stop. Notice the numerous signals and exits on the
way up. Too many entries and exits cause only your broker to get
wealthy. This is part of system building, trying things can only cause you
to find what doesn’t work, and ultimately leading to something that does.
Edison didn’t invent the incandescent bulb right away.
This system on the Japanese Yen is a Support / Resistance breakout with a

trailing stop. Notice daily support was broken to the left, and the market
continued to drop, finally reversing and stopping out just before 8am.
And who says markets can only be traded during US trading hours?
Multiple Time Frames is something that looks back at support and
resistance on multiple time frames. Just gives you an idea of where
different time traders are viewing support and resistance. My theory
here is that, if we have bunching (lots of support or resistance times in the
same place), the market will break from that spot. This chart shows
bunching on 5/12 and again on 6/16. Notice the price of Alphabet, Inc.
(GOOG) at that time. Both cases broke out to new highs.
Finally, the pièce de résistance! I call this one my LFT (Low Frequency
Trader). This chart is a bit of everything (Breakouts, Multiple Time
Frames, and moving stops). I use it on a 5 minute bar, so it’s very short
term. Again, nothing is perfect; quit believing that it is and you move to
the mind of the 1-percenter.
Whatever system you decide on, just having a system will not do. You
need to have a system that fits your lifestyle. I was quoted in the Financial
Times recently, saying, “It does no good for a full time executive to learn
how to day trade. He will lose both his trading account and his job.” The
1-percenter finds a system that not only works, but works within his or
her own lifestyle and personality.
But maybe you don’t think you need a system. Yes, that’s right, all you
need to do is think about what might go up and buy a bunch of call
options on it, right? WRONG. I see traders who lose money regularly
and the top 3 reasons why they lose money are as follows:
1) Guessed the market direction based on emotion

2) Bought a bunch of OTM call options
3) Bought ATM or OTM options with short-term expirations.
If you only did the opposite of these guys you would hardly ever lose
money! So what can we do differently? Well, 2 out of those top 3 are
very easy. First, buy quality options, not the OTM ones. Second, give
yourself enough time to be right. It’s that first one that’s going to make
you work for it. It takes time to build a good system, let alone find one
that fits your trading style.
Whether you are going to build your own system or you are looking at a
system to buy, you need to ask yourself these questions before
continuing:
1. What type of trader am I? Am I directional, non-directional, or

both?
2. What time frame do I like as a trader? Do I trade once a year, once
a day, or somewhere in between?
3. What type of options strategy are you going to use to cut your risk
down, yet keep the integrity of the system in check?
4. Do I have a broker who can execute for me so the reality of the
system comes as close as possible to the past hypothetical results?
I am often asked if it makes sense to buy a system. If you understand

who you’re buying it from and if their trading fits your style then, yes, it
will save you a lot of time programming and back testing and tweaking
until you get it right. Just make sure of the following if you intend on
purchasing a system.
1. Make sure you understand the trader before buying his or her
system. If you don’t understand how they trade, how are you
going to have the discipline to follow the system?
2. The system you intend to buy must have objective entry and exit
rules. If it doesn’t, then run, don’t walk, away. Subjective trading
systems with rules of mystery don’t do anything to help you make
money. All they do is confuse you more about what you’re
supposed to do.
3. The system must have a positive track record with at least 5 years
of back testing. Any programmer can optimize a system over 1 or
2 years and show you the moon and the stars when it comes to
profits. A system with 5-10 years of back data should be
sufficient.
4. Beware of ‘curve fitted’ systems. These are systems that have
been optimized to show the greatest rewards over a certain
period. This only means that the past was exceptional but the
future can’t be certain. NOTE – We all know the future can’t be
certain for any system, but systems that are not optimized stand a
far better chance of holding up in the future than those that are.
5. Commissions and Slippage need to be built into a system. I have
seen great systems completely fall apart when commissions and
slippage are subtracted from the trades. This is a must for short
term trading systems. The shorter term the entry and exits, the
more important the need for commissions and slippage to be built
in.
Before I trade any of my own money, I want to get a system and back test
it for reliability, not only for the entire duration of the system (total
results) but the year-by-year performance as well. Don’t get all excited
when your buddy shows you a system he created that takes 10,000 to 1
million dollars in 5 years. Examine his system, and look at the year-by-
year performance. If in one of those years he made 2 million, and lost 1
million over the following 4 years, stay away. This system is not realistic.
Look at the system’s drawdown. Drawdown should not be more than
you can tolerate.
This book has in it some of my favorite position trading systems, which I

will now reveal to you.
Presidential Pattern to Presidential System

Let’s look at how we turn a pattern into a trading system. This will be the
first long-term system that we discuss in this book, but it’s important to
understand the steps taken to get to a full-blown trading system.
The idea – This is the pattern that you have spotted that MIGHT allow
you to profit from its future repetition on a stock or market. So, the first
question I ask myself before the research begins is this: Is there a
repeatable pattern here, be it technical or fundamental, and is there a
possibility that I can profit from it?
Our preliminary research behind the Presidential Pattern is that every 4

years we elect (or re-elect) a US president. If you look at the long-term
track record of the stock market, you might see what I see. That is, the
markets themselves seem to be weaker the first two years of a
presidential term, and stronger during the last two years. Why is this?
Well as traders, we don’t have to understand why, but for those of you
who have the need for knowing, here are some opinions behind the
pattern.
During the first two years of a 4-year presidential term…
• A new president and vice president, as well as a new cabinet are

in office.
• New Senate and House of Representatives are seated as well.
• A new agenda, as the first 100 days in office are documented by
the press.
During the last two years of a 4-year presidential term…
• Campaigning starts to try to get re-elected.

• More public programs get pushed to Americans.
• This helps stimulate the economy … people remember this.
So, statistically, the market should be weaker for the first two years of a
new government term and stronger for the last two years. In fact, almost
every last two years the markets were positive! Look for yourself! In my
lifetime, only the years 2007-2008 were not positive. This in itself
represents a great pattern to profit from. Not sure for yourself? Look at
this spreadsheet of the performance of the DOW since 1964…
Election 1st Half 2nd Half

Performance Performance
1964 2% 42%
1968 -8% 18%
1972 -19% 27%
1976 -31% 42%
1980 -14% 16%
1984 10% 18%
1988 52% 13%
1992 17% 31%
1996 17% 60%
2000 48% 22%
2004 -18% 13%
2008 +15% -36%

2012 30% 14%
2016 38% 10%
So how do you turn a pattern into a system? Looking at both the first two
years and the last two years of this pattern, one can assume that buying
and holding the last two years is the safer play. Now it’s just adding a set
of ground rules to the pattern such as this:
On the first trading day of January in Year 3 of the 4-year cycle, I will buy
and hold XXX until the last trading day in December of Year 4. Basically
you are buying and holding the last two years of the 4-year cycle, but it’s
best to have specific rules to follow. This gets even more important as
you trade shorter term. The following are the charts for the most recent
Presidential Patterns:
A GREAT PATTERN
As you can see here, the ETF for the DIA (Exchange Traded Fund for the
Dow Industrial Average) climbed up 31% during the 2003-2004 pattern.
A NOT SO GREAT PATTERN
2007-2008 didn’t fare so well, as the ETF for the DIA lost 36% during the
biggest drop in the stock market in decades. Over the long term,
however, this pattern is robust.
A few things to note from this long-term system:
• The last two years of all pre-election and election years since 1844
produced over 718% in market gains vs. the first two years of
273%.
• Cost of ownership in stocks and in this case indices can be
expensive, and with a higher dollar cost comes higher overall risk.
Later in this book we will show you a few ways of lowering this
cost without sacrificing upside.
• Nothing is 100% as was seen in the 2007-2008 cycle, but over the
long term the results are certainly interesting.
Computer Backtesting a Trading System
This is a system that I refer to as the Triple Threat System. It’s a trending
system with a few filters in it to cut down on the noise that occurs with
most trending systems. With a strategy such as this, it is price based, and
not time based like LIFO.
Don’t ask me to decode it; this is for general system building purposes
only, but I will decode it for you at an online event in the future. I am
using the system builder in Profitsource to demonstrate. You can find out
more about this software at www. Profitsource.com
If you are going to attempt to build a directional trading system, then

your system will either take long signals only, short signals only or long
and short signals together. The screenshot above shows a trading system
being built to take both long (bullish) and short (bearish) trading signals.
Stops can be placed in your system as well, which I have done. Ok, so this
is the basic area to set up my trading system. Let’s see what else goes into
a trading system.
Now it’s important to know that not all systems work in all markets. You
need to decide whether or not your system will trade equities or indices,
or futures or forex. The list goes on and on. Let’s say you want to create
a system for trading stocks. Will it be one stock or a whole group you
will trade? There are some systems designed for the entire market, and
your buys and sells, although few on a stock by stock basis, can be found
every day when searching the entire market.
Some systems can best be tested on certain stocks. In the example above,
we will test our Triple Threat System using Alphabet, Inc. (GOOG), to see
the results. We want to look at a minimum of 5 years when back testing
any system. Another thing we can do to personalize the system is start
with an account balance, and add in trade sizing (how much to risk) as
well as customizing our system to take more than one trade, etc. To me
this isn’t important in the short term but becomes VERY important when
we find something we like, and want to add money management
strategies to enhance performance. We will get into that in a later
discussion.
So we have set up our system and run a performance backtest on
Alphabet, Inc. (GOOG). So far results are not bad, not bad at all. Profits
are much larger than losses, and contrary to the average, a trend system
can win. This one is doing very well. What problems do you see by
looking at this initial backtest? It’s a great start, but with a bit of work on
the system and money management, we can easily double these efforts
with NO MORE RISK in the trades.
Triple Threat first build… Nearly 65% profitable with the average trade
(both profits and losses combined) at $638. Let’s make it better.
There are several things we can do to try to improve the system. One is
that I can change the entry rules. Perhaps adding additional rules to the
system to make it better. I personally teach several standalone systems
and I can say that, when I take 2 systems and put them together, a lot of
times I get better results. Another thing you can do is change the stops
around as well. Sometimes, however, changing the stops will cause your
system to change as well. Your profits might go up, but your win loss
ratio may drop, etc. Trying to get rid of a large loss might in fact get rid
of some profitable trades as well.
Triple Threat build 2, with stop losses… Same 65% winning trades
percent, but by adding in a stop loss, we have improved the overall
performance slightly. Stop losses are great additions to your system
rules, so long as they don’t wipe out your profits by being too tight. As
you can see above, the win loss ratio is still the same. Let’s see what
adding some money management rules will do.
Triple Threat build 3, with stop losses and money management rules…
Same number of trades, same winning percentage, but look at the
increase in Total Profits and Average Trade Profit. One of the best ways
to increase profits and decrease risk is to simply change your money
management rules that you have built into the system. Above, we
altered the entry prices a bit and look at the difference. This build
resulted in $40,000 more in profits without losing any of the win loss
ratio. I thoroughly believe that Money Management can do the most to a
system, and that’s why we will be devoting a show to this subject.
The one thing I can guarantee you is that one style of trading does not fit
all traders. I would bet the farm that, if I were to give the same system to
10 different traders and ask them to trade it for an entire month, I would
get back 10 different account statements. It’s human nature for most
people to try to out-trade the system. Bad mistake. Again, by answering
the questions above, you will get an idea of what will work for you. I
know a guy who trades one strategy exclusively, and makes money
almost every month. He came up to me and asked me if he needed to
buy anything else or trade anything else. My reply to him… “Just keep
doing what you’re doing.” Don’t change a thing. Why in the world
would anyone want to change a profitable trading system? You would
be amazed how many people will do just that.
What are my thoughts for those of you who are just getting started and
don’t know much about trading a system, let alone building one? Let the
software do the work for you. There are several trading platforms out
there that allow you to create, build, and backtest trading systems before
you spend your first dollar on the signals. Profitsource is just one of
those trading systems that I use… and what a pleasant surprise for those
of you who are medium to longer-term traders—these programs can filter
indicators down to just the rules based trades.
Seasonal Trading Patterns

Seasonal Analysis is the study of market prices over particular time
periods each year. It’s been said by many a commodity trader that, if it
comes from the ground, it’s got a seasonal tendency. Some might argue
that it goes beyond commodities to currencies, and other instruments
including stocks. Here is an example using the Index Markets with a
seasonal tendency.
I wrote an article for Stocks and Commodities some time ago related to a
seasonal pattern called ‘Buy in November, and go away in May’. Here
are the guts of this seasonal pattern. Many of you have heard the phrase
“Buy in November, and go away in May” in circles of traders that you
know. Where did this phrase come from, and how can an option trader
use it?
Sell in May is a cycle first published by Yale and Jeff Hirsch, authors of
the Stock Market Almanac. Besides ‘Sell in May’, Jeff and his father, Yale,
discuss seasonality and cyclical trends that have happened in years past,
as well as historically the best time to be long or short the market, as well
as sectors, during the course of the year. The chart above shows how well
this has performed in the last few years. The chart is divided between
green (November to May) timeframes and red (May to November). As
you can see, the green shaded timeframes all resulted in higher moves in
the market, but the red areas were not as good to the stock market.
Though two of the three did move higher during a red zone, there was a
definite rise in volatility at this time.
Seasonal Patterns can be found in anything that trades. One needs only
to have back data, and the ability look at exact days, weeks, and months,
year after year to spot seasonal trends. It could be as easy as spotting a
pattern that happens a certain time year after year. Let’s look at one
more pattern that happens in the energy markets.
Crude Realities That Repeat Themselves

Again, I love seasonal patterns … especially on commodities that we use
and re-use over and over again. Nobody can actually tell me why
seasonal patterns occur, though there are many opinions. Some say its
supply and demand issues that happen year after year, some say the
patterns are weather related, while others say it’s merely the perception
of a pattern that causes the pattern itself. So I thought I would turn to my
good friend, and one of the authorities on this subject, Jeff Hirsch. Jeff
and his father Yale have been studying (and trading) seasonally for
decades now, and author the annual Commodity Traders Almanac. Jeff
explains his expert opinion on why seasonal patterns occur, as well as a
timely pattern at this time to pay attention to in the Energy markets.
Crude oil tends to make significant price gains in the summer, only to decline in
the fall, writes Jeffrey Hirsch of The Stock Trader's Almanac.
Jeff goes on to tell us that the bottom of the seasonal cycle tends to be
mid-February of each year, with the top coming around summer time.
Jeff believes it’s due to the upcoming summer demand, and that, since the
markets always precede any demand, summer demand for oil and gas
creeps into energy prices before spring even starts. This pattern tends to
move more or less each year due to overall supply and demand, as well
as implied volatility from events such as production from the Middle East
to consumption from countries such as China. So what’s the probability
of this move happening this year?
It’s anyone’s guess to the future, Jeff says, but looking at the past 15 years, the
energy markets have moved up between mid-February and mid-July over 75% of
the time, and at just below a 10% rate per year.
So now that we have a grasp on the energy markets and the winter-spring
pattern now upon us, what do we do with this information? I can think
of 3 asset classes to look for opportunities right now using this pattern. In
one sentence, I call it Commodities, ETFs and Energy Stocks themselves.
All trade options, but not all options are created equal across these asset
classes. Let’s take a look at each using last year’s price data, with a
potential call option case study included:
Crude Oil ETF (USO)
As you can see, the pattern worked quite well for Crude Oil from mid-
February to July as the USO ETF which tracks Crude Oil was up 5 points
or better than a 60% return. It wasn’t a straight up move for USO, as it
drew down a bit between mid-March to the first week of April.
The United States Oil Fund (USO), correlates very well to crude, but it’s
lower priced, so the moves you see in crude will be minimized in USO,
though the percentage moves will vary. You could also look at oil stocks,
but many times these will often move randomly compared to oil, and
sometimes even the opposite way. I do have a solution for you that 1-
percenters frequently use, and we will discuss this more in the next
section of this book.
What about Popular Stocks?
Do stocks have a seasonal pattern? You bet they do, and I have been able
to spot these patterns with a high degree of accuracy. Of course I can’t do
this with the naked eye, but I have a fantastic set of programmers that
have helped me develop something I like to call the Money Calendar.
In short, my Money Calendar helps me do the following:
• Money Calendar hunts down simple, short-term patterns each and

every day using 10 years’ worth of historical data
• So valuable, I am in the process of being granted a utility patent
for it by the USPTO
• From there, we can utilize other strategies such as DoubleFinder
in TomsOptionTools.com with reward-to-risk ratios of 1:1, 3:1, 5:1
… or more
So it follows all my Golden Rules as a Rules Based Trader:
• Spotting Opportunities - It identifies trade opportunities and

only shows high probability trades where the Money Calendar
pattern has appeared in at least nine of the last ten years
• Finds low-risk trade opportunities - always $500 or less
• It pinpoints unique ”Price and Time Patterns" - within 30 days or
less
Here is a snapshot or overview of what a monthly grid looks like with
Money Calendar
As you can see, it looks like any ordinary calendar, but there’s more.
Each day, my Money Calendar scans the top 325 optionable stocks and
etf’s, looking back 10 years to find patterns that are 90% or more
profitable. What I see on the screen going forward is those patterns. The
trading days in Green tell me there’s more bullish patterns and less
bearish patterns. Red is the opposite.
When I click on a day, it opens up and shows me potential opportunities.

Here’s what a day looks like within the Money Calendar software:
From here I can see the summary of its trading pattern, 10 year history,
accuracy, and even average profit in the pattern. I simply select the stock
I am interested in finding out further details from and click on it.
In the example above, this was a 26 day trading pattern that averaged
6.03 move higher in 9 of the last 10 years! So how did it perform in this
year after having this information ahead of time?
IBM performed exactly as we expected it to, increasing 4.89% during this

year’s pattern. Imagine trading options on this! You can get a free trial of
this and all my other developments by going to
http://www.TomsOptionTools.com
HFT and LFT (High and Low Frequency
Trading) Systems
High Frequency Trading has gotten a bum rap over the last several years,
and has been blamed for nearly every fast move in the markets. But very
few people have come to defend all these computerized trades as
increased liquidity has tightened spreads between buyers and sellers like
I have never seen. While you have probably heard of HFT trading, you
may not have heard of the other term that I tend to throw around a lot…
LFT, or low frequency trading. LFT is just another term for a short term
or day trader. Short-term traders in my mind are ones that look for
incremental moves that happen in a market in 1 week or less. This could
be momentum trading, trading through earnings season, or anything that
could cause the markets to move quickly over a short time frame. The
majority of my trading in stocks and futures is on the LFT side.
As I am writing this, I had an LFT signal in crude oil, which I took, with a
20-cent stop, which I trailed up over time. Crude took off and was up 33
cents above my order fill, a $330 per contract open position profit. I
ended up taking a $90 loss per contract on the position however. WHY?
I have to keep to the system, and trade it as it gives me both the entries
and exits. All of my LFT programs I trade have some type of stop built
in. It’s imperative as a 1-percenter that you have some type of parachute
in the markets in case your trade crashes. 1-percenters do not trade
without a stop. UPDATE: I just looked at my screen and crude oil is
down .40 cents ($400 a contract) since my stop loss was triggered. That’s
why stops are important!
Robot Auto-Trader Systems

Not a day goes by where I hear this term, and I have seen quite a few of
these programs—fully automated, take your hands off the wheel trading,
letting the computer do all the work for you. It seems a lot of traders are
introducing automated robot traders to the public. Most of these people I
have never heard of before so be warned. Even my partner George was
well on his way to developing his own robot program called Robotrader,
before passing away in 2012. Though we disagreed on specific programs
and systems within his robot, I really believe he was onto something, and
since his death I have been developing and testing my own robot. I have
a work in progress robot that is robust and very promising, but that’s for
another time, another book. I will keep this short by saying that, if
you’re ever interested in a robot program that’s out there for sale or lease,
make sure that the company or person you intend getting the program
from provides a track record. Make sure it includes losses. Nobody other
than your broker makes money 100% of the time, not even a robot.
OK, so we have discussed an overall trading plan, creating a trading

system, and modifying a trading system. Now let’s look at matching the
right option strategy with the system we use.
Part 3
1-percenters Use Options as
Asset Alternatives
Let’s do a quick review… 1-percenters take responsibility for all of their
actions as a trader, and create a trading plan. 1-percenters are also RBTs
meaning that they use objective systems for their trading. They also learn
to adapt their systems to the market. Ok, now that you have a plan and a
system to trade, we need to evaluate the system to determine if an option
strategy is appropriate.
A Quick Option Primer?

In its most basic form, an option is a contract between a buyer and seller.
Let’s focus on the buyer for the next few examples. An option gives a
buyer the right, but not the obligation, to control a set number of shares of
an asset, at a certain price, or a certain time. For the call buyer, that right
is to buy the asset, for a put buyer, the right is to sell the asset. What are
the Big 3’s of Options?
Big 3’s of Options
• Strike Prices
• Expiration Months
• Rights and Obligations
Strike Prices
The transaction price is agreed upon by a buyer and a seller. So a ‘25
Strike Price Call’ means the buyer can buy 100 shares of stock at $25 a
share. The seller may have to sell 100 shares of stock at $25 a share. This
is true regardless of how high the price of the stock rises prior to option
expiration.
So if the stock rises to $50 a share, the buyer can still buy the shares at $25
and would have an unrealized profit of $25 a share. The seller must sell
the shares at $25, even if this means the seller has to go out to the market
and buy them for $50 a share.
A Few Things to Note:

• Stocks typically have strike prices of 5, 10, 15, 20, 25, etc.
• May also have strike prices of 7.5, 12.5, 17.5, 22.5, etc.
• A high priced stock (ex. GOOG) might have 10-point strike price
increments (480, 490, 500, 510, 520, etc.)
• Options on several ETFs (ex. SPY, QQQ) trade in 1-point
increments (43, 44, 45 or 107, 108, 109)
Expiration Months
The most popular options in the US expire on the third Friday of the
designated expiration month; however, there are many different option
months to choose from.
• Leaps – Long term equity anticipation securities, which have 9 or

more months to expiration.
• Various 30-60-90-120 day options, depending on the cycle in
which they trade. This is determined by the CBOE.
• There may also be ‘Quarterly’ options, which expire on the last
trading day of the designated quarter.
• Weekly’s – Short term options that expire in 1 week or less. These
options represent 20% of the total option volume now, so they
have become popular among option traders.
Rights and Obligations
Let’s take our stock trader above, and apply this to 30-day options. The
buyer of June 25 call option:
• Obtains the right to buy the underlying stock
• at $25 a share
• up until the third Friday of the month
The Seller (‘writer’) of the 25-call option:

• Assumes the obligation to sell the underlying stock
• at $25 a share
• up until the third Friday of the month
• but only if a buyer ‘exercises’ his option to buy the shares
There’s an important term to note here—exercise. If the buyer chooses to

buy the stock he exercises his option. To do so he informs his broker of
his desire to exercise a specific option that he holds long. On the next
trading day the option buyer will no longer hold the option but instead
will have 100 shares of stock in his account. If an option writer must
deliver his shares he will receive a notice of assignment from his broker.
Prior to expiration or assignment, the writer can exit by buying back the
call option. Once an option writer receives notice of assignment he has
no choice but to give up his stock shares.
So far we have talked basics when it comes to call options, but later in this
section we will compare calls, to spreads, to combos. Like I said earlier in
this book, if you’re just getting started with options, by all means get
educated.
Options as an Alternative Strategy
Options and the Presidential Pattern
I want to go back and revisit our Presidential Pattern, however this time
let’s look at an alternative strategy instead of just buying the asset.
Remember this chart?
Chart of DIA (Dow Jones ETF) from January 2003 thru December 2004
We could have bought 100 shares of DIA at $80 a share, paying a total
price of $8000 for this position. Yes, this would have produced a nice
profit in 2 years but imagine buying a call option instead:
(DIA January 2005 – 80 call option priced at $15.50)
The option above gives the buyer the right to buy DIA at $80 a share
between now and January 2005. Now remember, we are looking at
January 2003 right now so that’s a 2-year option. The cost of this option is
$15.50 so that’s $1550 out of pocket for your option. Still a lot of money,
but far less than $8000 for the stock. Because we are paying for this right
to own DIA at $80, we are really buying time. Time for DIA to move
higher, which would cause our option to become more valuable between
now and January 2005. What is the risk of holding this option over its
lifetime of 2 years?
(Risk Graph of the DIA 80 call option)
The maximum risk of this trade is what you pay for the option, which in
this case is $1550. The upside reward is unlimited to expiration. Who
knows how far the DIA could go in the next two years? Remember,
buying 100 shares of DIA in 2003 for $80 and selling 2 years later for $105
yielded a profit of $2500 or 31% return on investment of $8000, less
commissions. Let’s see what actually happened during this time frame
and what this option was worth.
Buying a 2-year call option on DIA at $80 strike for $1550 would have
resulted in a $1233 return or an 80% return on investment less
commissions. Less money than the asset, but better return on
investment!
What about the 2007-2008 pattern? Let’s take a look!
Buying 100 shares of DIA on Jan 2, 2007 for $126 and selling 2 years later
for $80 resulted in a loss of $4600 or a 36% loss on investment of $12,600,
less commissions. How did the options perform?
During this time frame, the option trader was looking outward 2 years
and, at that time, the DIA January 2009 $124 calls were trading at $13.75.
That means the option trader spent $1375 to have control over the same
amount of stock as the stock trader.
The risk of this trade is no different than the risk of the last example; it’s
the cost of the option itself, or in this case, $1375. Reward is still
unlimited to the upside as was the case before.
Buying a 2-year option on DIA at $124 for $1375 resulted in a total loss of
$1375 on the investment, less commissions. So the options lost
everything invested, but there’s a silver lining to this example if you look
closer. This loss was less than what the stock trader suffered.
In summary of the two examples above:

• During the 2003-2004 Cycle
• DIA gains 25 points or a 31% ROI in 2 years
• DIA $80 Calls worth over 25 points or an 80% ROI in 2
years
• During the 2007-2008 Cycle

• DIA loses 46 points or 35% in 2 years
• DIA $124 Calls lose 13.75 points or 100% in 2 years
Though options aren’t meant for every type of trade, it is interesting that
in this case they worked both as an alternative during a bullish move, and
a conservative strategy during a market pullback.
Options and the Buy in November, Sell in May Pattern
So if we have a system that gets us long the market for 6 months and then
out of the market for 6 months, can we use options as an alternative to
trading the index? Of course we can. But what options do we want to
trade?
ITM, ATM or OTM options?

Well the answer will be found dependent on how long the average trade
is kept. If your system tells you that the average hold time is 2 weeks,
then you need to go ITM, for one big reason. ITM options move more
like a stock, and that’s what you want when you’re not in a trade for a
long time. The worst feeling in the world is to be right on the direction of
a stock and lose money on the options. If your system holds trades for
the long term, such as one year or longer, then OTM will work because,
typically, the longer trades are held, the more they are likely to return
over time. As for this cycle system, ATM options should do fine. The
hold time on our cycle system is 6 months.
Ok, next question - What type of time frame do we want to expiration?

30 days, leaps, or somewhere in between? Again, this answer depends on
the system. If the system in question buys and sells within a week’s time
frame, then perhaps options are not the right strategy. Perhaps the best
thing to do in this case is to simply stay with the asset. If you’re in the 30
day time frame with your system, then 60 day options will work. If
you’re in the one year time frame, then leaps are best. How about our
cycle system presented above? 6 month options look like they can do the
job.
What about spreads? Well anything outside of a 30-day system hold can
be looked at for a spread trade. How do you know if a spread is better
than just a call or a put for a system? Well that takes a little work, but it
can be done… Let me show you.
Time for a little research... This system, which buys every other 6
months, just happens to have an average gain of about 7 percent between
the first day of the first month and the last day of month 6. Knowing this,
we can properly place our options. Our most recent signal came on
11/01/13. Let’s look at the most recent signal for a moment:
Hindsight tells us that this trade worked for almost a 7% price

advancement. So what we need to determine is what option strategy
works best.
Buying a 6-month ATM call is going to cost nearly 8 points at this level.
The problem here is that, if you make 7% advancement, you give up most
of your value of the option in time premium, give or take a point for the
last 30 days. That leaves you with maybe 2 points profit. We could buy
an ITM call and push the time value out, but that also pushes up the cost
and risk of the trade.
What about a spread? Well I checked out a 10-point ATM spread with 6
months to expiration. Risk is 4.75 and Reward is 5.25. This seems to be
the best of the bunch, as you are making at least as much as you risk.
Keep in mind that this is a look at one point in a system that tracks back
30 years. I would want to look at several of these, and evaluate the
overall strategy that gave the best reward to risk ratio.
Options and Our Crude Oil Pattern
Let’s revisit another chart from the last section, the Crude Oil Cycle.
Remember we talked about the February to July Bullish cycle here and
how often crude oil tends to rise in price during this time. Like we said
before, the pattern worked quite well according to the chart. It’s a simple
option purchase that makes sense as your risk is limited no matter how
far the asset moves against you. Let’s take a look at some case studies
involving oil, and its sister ETF, the United States Oil Fund.
This case study shows the purchase of an August crude oil option with a
strike price of $97.50 for $5.40 or $5400 in premium. This is based off the
crude oil chart a few pages above. By mid-July, the position had gained
$3440 in profits or a 63% return on investment. Another way we can play
the Crude Oil Cycle is by looking at an Exchange Traded Fund that
moves with the price of oil, or in this case, USO.
Trading Oil using options on an Exchange Traded Fund (ETF)
United States Oil Fund (USO) is a limited partnership. It’s basically a

commodity pool that issues limited partnership interests (units) traded on
the NYSE Arca, Inc., and also trades options. As you can see from the
chart above, the period of mid-February to mid-July of 2013 was good to
the bullish pattern. But because this tracks closely with crude oil, it too
suffered setbacks in April before resuming its upward seasonality trend.
This case study on USO is also a July 35 call option, which costs only
$1.76 or $176 per contract. At the time of this case study, there are 5
months to expiration, which is plenty of time to take advantage of a
potential seasonal move in oil. Since USO highly tracks oil, any move in
crude is likely to be mimicked in USO. Although profits were only $96
per contract by mid-July, the return on investment was very close to the
crude oil case study at 54%.
This option case study had the least amount of cost involved and also
biggest payday of all from mid-February to mid-July. A July 24 call
option at a price of $1.56 in February skyrocketed to profits of $344
during the seasonal oil move. This represents a return on investment of
over 224%!
To summarize, on a per contract basis, the biggest gross returns will

almost always be in the commodity itself, but they also come with the
biggest drawdowns. Always remember that one way to cut your risk is
to look for an ETF or stock that moves with the commodity, as the
contract size of these options will likely be a lot less, as will the cost and
risk of these options. And remember, it’s all about return on investment
too. While the biggest returns were on crude oil, both USO and NRG had
better ROI. In any case, there are several alternatives to trading
commodities during seasonal tendencies.
How Volatility Can Affect the Way You Match a
Strategy to a System
Volatility definitely plays a role in exactly what I want to do when I get a
system buy or sell. Let’s assume we have a short term trading system
that takes a trade and holds it for a few weeks or so. The market just had
a big down run and I get a signal to go long. Now that I know I only
have a few weeks to be in this trade, I can rule out using a spread, right?
Not necessarily. Let’s look at the options…
I could buy call options … but … if the market I am trading just went
down hard, there’s a good chance the calls I am buying are going to be
pumped up with premium. This is because typically equity options rise
in volatility when the market falls. So even if the asset were to move in
my direction, there is bound to be a volatility crush on the way up, taking
some of my potential profits with it.
What about a Bull Put Spread? Now here’s an idea, buying a bullish
credit spread and taking advantage of the high volatility. Even if the
market lags after your buy signal, the spread should do well, especially if
it happens to be the last 2 weeks before expiration. Again, part of what
we are looking for are the options that best fit the right time frame. Bull
put spreads with 2 weeks of time value left are perfect for a system that
trades every 2 weeks or so.
Would the same thing work on a trade that gives you a bearish signal that
lasts for a few weeks? Maybe, but again volatility is the key in
determining the answer. Typically, volatility is low as stocks rise, so the
right strategy for a bearish signal will usually be a simple put purchase.
Adjusting or Protecting Profits

Some systems are long term in nature. Just because you take a system
buy or sell for the long haul doesn’t mean you can’t adjust or protect it.
Let’s assume for a moment your system is a long-term system which
requires you to stay in the markets for a year. You also are looking to
take advantage of long-term capital gains as well. But 6 months into the
system buy, you are concerned that the overall markets are going to drop
and take away the potential profits you have accumulated. Let’s look
once again at how the right option strategy can help you enhance your
profits vs. just buying stocks.
Ok, let’s tie the specifics to Apple (AAPL), which you bought after the
stock split in June 2014, at 90, and want to hold for a year. IPhone 6 is
coming and you think this will reflect a positive move in the stock. So
what are our options at this point?
We could just take the profits and run, right? I mean, there’s no loss in
banking a profit today. But it could run higher, and 100 is really your
price target. But there’s also the concern that it could reverse and move
lower.
What about setting a stop? There are a variety of ways to do this, either
with a dollar stop loss, a percentage stop loss, a trailing stop, etc. The
ways to set stops now are endless…
What about options to help protect your trades? We could make a slight
adjustment, lock in profits, and even give ourselves room for more.
There are endless ways to do this, but here are three such ways using
Apple.
The first would be a simple put purchase. Notice in this example the
trader bought Apple at $90 and wants to lock in 6 months of protection at
a strike of 90. The ask price for these puts is $5.90. Cheap for protection,
and it should be, the volatility of AAPL is very low. This position will
cost money, but gives you protection without sacrificing future upside
potential. It also keeps you from getting stopped out of a trade using a
sell stop on the stock. This is especially good if you are used to getting
stopped out of the markets only to see your trade rise to new highs.
The covered call strategy… Not my favorite on rising stocks, because you
don’t get much for your option. In this case, 3.6 points, but it does add
some cushion to the trade, but not complete protection like the put did.
The positive is that it put money in your pocket, and didn’t take any out.
If only we could have a trade that didn’t cost money, but gave us
protection and some additional upside potential…
The collar spread which is a combination of the above two positions. One
cancels out the other in cost, which is great. You also have the protection
to the downside, and some added profit potential to the upside. Just a
few ways we can take options and add them to longer-term positions to
lock in profits without exiting the trade.
Short Term Options (Weeklys)
Option Volume Chart (www.cboe.com)
This is the most recent product to enter the markets as an alternative.

When it first came on board back in 2009, very few people traded them.
Since then, they represent 20% of the option volume on the CBOE,
meaning that these things are LIQUID! I quickly became a fan of weekly
options in 2012, and use them every chance I get when a short-term signal
presents itself.
When you get a chance, take a look around the CBOE website as it will
give you some great nuggets about liquidity, put to call ratios, and put
and call volumes. This will also give you the knowledge to know what’s
trading the most by volume, and volume means liquidity … and liquidity
means tight bid ask spreads which is great for us.
Tom’s Top 10 Stocks to Trade Weekly Options in for 2017
Ok, this list changed a bit from last year to this year, but here goes.
Near Money
Symbol Company Spreads
AAPL Apple .01-.05
FB Facebook .01-.05
TWTR Twitter .05-.10
TSLA Tesla Motors .02-.10
IBM IBM .02-.20
BIDU Baidu .05-.20
AMZN Amazon .05-.20
NFLX Netflix .15-.35
GOOG Alphabet, Inc. .30-.50
LNKD LinkedIn .20.-.70
So for those of you who like your trading short term, this is a great
alternative to buying and selling the underlying stocks!
Part 4
The 1-percenter Trading Mindset
You Against Yourself… It’s More Than You Think!
Here is where the 1-percenters will separate themselves from the pack.
It’s crucial that you put together an overall plan for success, and
implement that plan by creating systems that fit your lifestyle. After
backtesting, forward testing, and finally starting to trade, you need to
follow your rules in good and bad times, using alternatives in place of the
underlying asset whenever possible. It also makes sense to utilize a
brokerage firm that will best fit your comfort in implementing all of the
above. BUT THAT’S NOT ALL! The biggest friend or enemy in the
room is not the other side of your trade, but who’s staring at you on the
other side of the mirror. By following the rules I have set forth below,
you stand a better chance than most of making it to the 1% club.
Let me tell you a quick story of a guy I knew who broke all the rules. He
started out trading in 1986 with great intentions. He started small,
learned the basics about trading, got past the nervous jitters that come
with placing your first or second order (on the phone mind you) and
finally felt like he knew what he was doing. Then he actually started
winning a little.
He then felt like he could do no wrong. He paid for his new car in cash,
and started to believe he was moving the market, not the other way
around. Eventually, he got clobbered by doing several things wrong. 1)
No system, and trading by the seat of his pants; 2) No risk management
whatsoever, because he was right and the market was wrong, or so he
thought; 3) No regard to having an exit plan to the seat-of-his-pants
system that got him into trades. Eventually the market spanked him
good, and took all of his money and then some. That someone … was
me! Keep this in the front of your mind as you move forward.
This section, which some might think is the boring part, will account for
the majority of your profits and the best chance at minimizing losses. It is
divided into sections consisting of dealing with losses, discipline,
negativity, focus, success, avoiding bad habits and getting cocky and
overconfident, as you embark on joining the 1-percenters.
I put each section on individual sheets so you can print them out and put
them up on your wall, like I do. They will serve as reminders for what
you’re doing right, and what you need to work on.
Dealing with Losses
Let’s face it; losses are part of any business, especially trading. Losses
have to be accepted before a business even begins operation. Here are a
few things to remember about losses and how you can make them part of
your trading business.
1. Remain mentally and emotionally focused while trading

2. Losses are part of all systems, knowing when to take losses is
important
3. I am extremely disciplined, and I exit losing trades when my
system requires me to do so
4. Not taking losses when indicated is dangerous
5. Riding losing trades for too long usually results in larger losses
and the risk of ruin increases
6. It is not a good idea to keep changing stops to avoid a loss
7. System traders use stops consistently
8. I separate myself as a trader from myself as a person
9. No system can trade the markets without taking losses at times
10. Clumping can happen on the losing side as well as the winning
side
11. My ability to take losses quickly is a great asset to my trading
Discipline for the 1-percenter
1-percenters know this is vital to trading success. Imagine a person

trying to become a pro athlete, who sleeps in every day, eats excessively,
stays up late and parties every night. Now is he going to become an elite
athlete, or not? The answer is no, and the reason is discipline. Discipline
in my mind is like homework, only it’s homework that pays off in dollars
in the trading industry. Here are a few rules that I use when it comes to
discipline in my life as a trader.
1. Good trading discipline is vital to my success

2. My three successes to the market are: doing my market
homework, following through, and using my stop losses
3. I train my mind every day to be disciplined and focused
4. I see myself everyday doing my market homework and following
the signals, setting stops
5. I track my system exactly as it dictates
6. If my system gives me daily signals, I follow them every day
7. If my system gives me intraday signals, I follow them during the
day
8. I do not allow outside influences to affect my discipline
9. Placing my orders correctly as my system dictates increases my
odds for success
10. Discipline to follow through with my system is my friend
11. A system without stop losses puts me in a position of unlimited or
unknown loss
12. I understand that a major aspect of being disciplined is using
stops
Blocking Out Negativity
Negativity is in all aspects of life. I’ve got enough of them in my family. I

remember when I told my family that I wanted to be a trader. Now they
didn’t call me stupid or an idiot, but the rolling eyes were enough for me.
The ability to think positively and block out negativity is key in having
consistent profits. The biggest thing negativity can do in your trading
business is keep you from taking that next trade, which ironically, could
be a grand slam in profits. Here are my rules to fighting negativity.
1. My best tool against negative influences is my system

2. Being consistent in my trading means following my rules
3. As a consistent trader, I place my orders each day at the same time
4. Through consistency, negative influences go away
5. I follow through on scheduled assignments, such as order entry,
exit, and adjustment
6. I plan my trades and trade my plans to facilitate consistency
7. I use a trading partner to achieve consistency in my trading
8. Fear and Greed are the enemies of consistent trading
9. My commitment to consistency blocks greed from my goals and
objectives
10. Keep goals and objectives realistic to combat fear and greed
Keeping Focus
The ability to focus in any business is important. The ability to focus as

the president of your own business is vital to its success. This is true in
Trading as your report card shows your focus in daily account
statements. Here are a few things that I believe will help your focus as a
key to success.
1. Focus is the opposite of distractions

2. I choose to stay on the winning path by focusing on the markets
during my market time
3. Environment can cause distractions; remove all distractions from
the workplace such as noise, visual distractions, and clutter
4. Self-discipline, following through, and consistency are the keys to
trading success
5. An organized workplace can keep me from distractions
6. Focus on one trading aspect at a time in small bites
1-percenter Success Rules
Success is also something that needs to be contagious for 1-percenters in

trading. It’s not only important to have a plan for success, but to follow
through and readjust your goals over time. Here are my rules to success.
1. Success in trading is achieved by working on goals that are

specific
2. Success is comfortable and positive, not exciting and emotional
3. The past is over and done with, I move forward
4. I complete trades according to the rules of my trading system.
Doing this achieves success in my trading
5. Success means seeing my profit goals as well as my security in
stops, and to know where my trade will be closed out at any
time…
6. I visualize myself as a master of market skills and as a profitable
trader
Avoiding Bad Habits
You might think this falls into the negativity category, and it will if you
don’t follow the rules below. Follow the rules, and block out bad habits.
1. I have the capability of reversing any bad trading habits I may

develop
2. I accept the fact that I am human and fall victim to bad trading
habits
3. I can change losing and destructive trading habits
4. I know exactly what my bad trading habits are, make a list of
them, and refer to them often
5. I keep a checklist of all my trading rules and follow all procedures
each and every time
6. If I am unclear about a trade, I simply do not make the trade
7. I keep a diary of all my trades and what rules I follow, and follow
up on both the winners and losers
8. If I have an emotional day, no matter if it’s high or low, I don’t
trade that day…
9. Many errors are subtle, so I keep a close eye on my errors and fix
them ASAP
Getting Cocky and Overconfident
Overconfidence can soften your focus and throw you into a state where
you believe that nothing can go wrong. It is at this stage in trading that
EVERYTHING can go wrong. Don’t fall into this trap by following the
rules to overcoming overconfidence below.
1. I understand that overconfidence can occur if I have too many

winning trades
2. I catch myself when I have thoughts that my trading system can
do no wrong
3. I catch myself when I say I need to leverage up because I am never
wrong
4. I catch myself when I find I think I can guess the direction of the
markets
5. I do not allow overconfidence to cause me to overtrade causing
losses
6. Overconfidence can lead me to a fantasyland of 100% profits, and
leads me to lose my discipline
7. If this happens, I stop trading and redirect my mind to my trading
system
8. I live in the reality of my trading system. If I have many winning
trades in a row, I remember to check the long term results of the
trading system, which includes losses
Winning Attitude
Following the rules above is great, but it’s not enough. Developing a
Winning Attitude will stop negative thoughts from creeping in, and
outside influences from changing your plan. Here are my thoughts about
developing a winning attitude.
1. My positive attitude enhances my market performance

2. Don’t dwell on losses if they are part of the system’s performance
3. Attaining a goal means to have a goal. Avoid setting goals that
cannot be achieved. Winning goals include sticking to your
system each day
4. Winning goals mean doing my homework before the market
opens
5. Winning goals mean placing all of my orders ahead of time
6. I understand how my system is constructed and its maturity
before I take the first trade
7. Winning goals means following through from start to finish
8. Focus on the next winning trade, and leaving the last trade behind
9. Being organized, being consistent, setting goals and following
through makes for a winning system!
Trading psychology, in my mind, accounts for half of my trading profits.

It doesn’t matter how good your system is or how great your trading
strategy might be, if you cannot come to follow both the winners and the
losers, then you will not be able to duplicate the system’s success.
Learning and following the rules above will help you to follow the rules
of your system and will help you to stick to them.
Conclusion
I hope you enjoyed a glimpse into the life of the 1-percenter, and what it
takes to be at the top. Now that you have read through this entire book, I
suggest that you do the following if you haven’t already:
1. Create a roadmap or a trading plan and start taking responsibility

for your future as a trader. Clearly state in your plan your goals
in terms of trading, markets, time frames, and strategies.
2. Find two trading systems that fit your time and lifestyle. Don’t
take anyone’s word for the validity of the systems, test them for
yourself!
3. Realize that, as the markets change, so should you, and have a
plan to adapt to the constant changes in the markets.
4. Figure out what options strategy, if any, fits the trading systems
you intend on using in your trading plan.
5. Understand the rules of Money Management, and how they apply
to your personal trading. Understand run ups and drawdowns,
and how they can help you in determining your profit and loss
targets.
6. Look at the big picture; it’s not about one trade, it’s about the
entire portfolio. Most businesses do not make money on
everything; it’s the bottom line they are worried about. Portfolio
management is just that—the bottom-line.
7. Create affirmations to keep your mind focused on keeping you
away from fear and greed.
8. Finally, click on the image below to take advantage of our free
access to TomsOptionsTools and see what works best for you.
Good luck with your trading, and I hope someday our paths will cross in
the Profit Zone!
Tom Gentile
http://www.tomgentile.com
Glossary of Terms
401K Plan
A tax-deferred defined contribution retirement plan offered by an

employer.
ABC
Elliott wave terminology for a three-wave countertrend price movement.

Wave A is the first price wave against the trend of the market. Wave B is
a corrective wave to Wave A. Wave C is the final price move to complete
the countertrend price move. Elliott wave followers study A and C waves
for price ratios based on numbers from the Fibonacci series.
Advance/Decline Line
A technical analysis tool representing the total of differences between

advances and declines of security prices. The advance/decline line is
considered the best indicator of market movement as a whole. (See also:
Breadth-of-Market Theory)
Adverse Excursion
The loss attributable to price movement against the position in any one
trade.
American Stock Exchange (AMEX)
A private, not-for-profit corporation located in New York City that

handles approximately one-fifth of all securities trades within the United
States.
American Style Option
An option contract that can be exercised at any time between the date of
purchase and the expiration date. Most exchange-traded options are
American style.
Analyst
Employee of a brokerage or fund management house who studies

companies and makes buy and sell recommendations on their stocks.
Most specialize in a specific industry.
Ask
An indication by a trader or a dealer of a willingness to sell a security or a

commodity; the price at which an investor can buy from a broker-dealer.
Asset
1. Anything that an individual or a corporation owns. 2. A balance sheet

item expressing what a corporation owns.
Assign
To make an option seller perform his obligation to assume a short futures

position (as a seller of a call option) or a long futures position (as a seller
of a put option).
Assignment
The receipt of an exercise notice by an options writer that requires him to

sell (in the case of a call) or purchase (in the case of a put) the underlying
security at the specified strike price.
At-the-Money Option
An option with an exercise or strike price that is equal, or almost equal, to

the current market price of the underlying security. ATM options have a
delta of +50 or -50.
At-the-Opening Order
An order that specifies it is to be executed at the opening of the market or

of trading in that security or else it is to be canceled. The order does not
have to be executed at the opening price.
Auction Market
A market in which buyers enter competitive bids and sellers enter

competitive offers simultaneously. Most stock and bond markets function
as an auction market. This means that there is a bid and an ask price for
each security. You as an investor can choose to buy or sell at the given bid
or ask, or you can establish your own bid or ask price. Think of the stock
market as a giant garage sale. If you don't like the price that you see, you
can make your own bid for the item. The NYSE is an auction market.
Automatic Exercise
An exercise by the clearing firm in which the firm automatically exercises

an in-the-money option at expiration.
Average
An arithmetic mean of selected stocks intended to represent the behavior

of the market or some component of it. One good example is the widely
quoted Dow Jones Industrial Average, which adds the current prices of
its 30 stocks, and divides the results by a predetermined number, the
divisor.
Average Directional Movement Index (ADX)
Indicator developed by J. Welles Wilder to measure market trend

intensity.
Average Price
A step in determining a bond's yield to maturity. A bond's average price

is calculated by adding its face value to the price paid for it and dividing
the result by two.
Averages and Indices
Statistical measures of the state of the stock market or the economy, based
on the performance of stocks or other components. Examples are the VSE
Composite Index, TSE 300 Composite Index, the Dow Jones Industrial
Average and the Consumer Price Index.
Backtesting
A strategy is tested or optimized on historical data and then is applied to

new data to see if the results are consistent.
Bar Chart
A chart that graphs the high, low, and settlement prices for a specific
trading session over a given period of time.
Bear
An investor who acts on the belief that a security or the market is falling
or is expected to fall. (See also: Bull)
Bear Call Spread
A strategy in which a trader sells a lower strike call and buys a higher
strike call to create a trade with limited profit and limited risk.
Bear Market
A declining stock market over a prolonged period, usually lasting at least

6 months and normally not more than 18 months. Usually caused by a
strong conviction that a weak economy will produce depressed corporate
profits. Also, a market in which prices of a certain group of securities are
falling or are expected to fall. (See also: Bull Market)
Bear Put Spread
A strategy in which a trader sells a lower strike put and buys a higher
strike put to create a trade with limited profit and limited risk.
Bias
The difference between the expected value of an estimator and the actual
value to be estimated.
Bid
An indication by an investor, a trader or a dealer of a willingness to buy a

security or commodity; the price at which an investor can sell to a broker-
dealer.
Bid-asked Spread
The difference between bid and offer prices. The term asked is usually
used in over the counter trading. The term offered is used in exchange
trading. The bid and asked, or offered, prices together comprise a
quotation, or quote.
Bollinger Bands
Bollinger bands plot trading bands above and below a simple moving
average. The standard deviation of closing prices for a period equal to the
moving average employed is used to determine the bandwidth. This
causes the bands to tighten in quiet markets and loosen in volatile
markets. The bands can be used to determine overbought and oversold
levels, locate reversal areas, project targets for market moves, and
determine appropriate stop levels. The bands are used in conjunction
with indicators such as RSI, MACD histogram, CCI and Rate of Change.
Divergences between Bollinger bands and other indicators show potential
action points. As a general guideline, look for buying opportunities when
prices are in the lower band, and selling opportunities when the price
activity is in the upper band.
Bond
A debt obligation issued by a government (i.e. Treasury bond) or

corporation (i.e. Corporate bond) that promises to pay its bondholders
periodic interest at a fixed rate (the coupon), and to repay the principal of
the loan at maturity (a specified future date). Bonds are usually issued
with a par or face value of $1,000, representing the principal or amount of
money borrowed. The interest payment is stated on the face of the bond
at issue.
Breakaway Gap
When a tradable exits a trading range by trading at price levels that

leaves a price area where no trading occurs on a bar chart. Typically,
these gaps appear at the completion of important chart formations.
Break-even Point
1. The point at which gains equal losses. 2. The market price that a stock
must reach for an option buyer to avoid a loss if he exercises. 3. For a call,
it is the strike price plus the premium paid. 4. For a put, it is the strike
price minus the premium paid.
Broker
1. An individual or firm that charges a fee or commission for executing

buy and sell orders submitted by another individual or firm. 2. The role
of a firm when it acts as an agent for a customer and charges the customer
a commission for its services.
Broker-Dealer (BD)
A person or firm in the business of buying and selling securities. A firm

may act as both broker (agent) and dealer (principal) but not in the same
transaction.
Bull
An investor who acts on the belief that a security or the market is rising
or is expected to rise. (See also: Bear)
Bull Market
A rising stock market over a prolonged period, usually lasting at least 6

months and normally not more than 18 months. Usually caused by a
sound conviction that a strong economy will produce increased corporate
profits. Also, a market in which prices of a certain group of securities are
rising or are expected to rise. (See also: Bear Market)
Bull Spread
Any spread in which a rise in the price of the underlying will increase the
value of the spread. Bull spreads can be traded at a debit or credit to the
trader. With calls: net debit transaction; maximum loss = debit; maximum
gain = difference between strike prices less the debit; no margin. With
puts: net credit transaction; maximum loss = difference between strike
prices less credit; maximum gain = credit; requires margin.
Buy on Close
To buy at the end of a trading session at a price within the closing range.
Buy on Opening
To buy at the beginning of a trading session at a price within the opening

range.
Buy Stop Order
An order to buy a security that is entered at a price above the current

offering price and that is triggered when the market price touches or goes
through the buy stop price.
Calendar Day
Any day of the year, as opposed to a Business Day.
Call
An option contract giving the holder the right, but not the obligation, to
buy a specified amount of an underlying security at a specified price
within a specified time (e.g., one contract of IBM Jan $25; you have the
right to buy 100 shares of IBM at $25 by the third Friday in January.) The
act of exercising a call option.
Call Option
Refers to the right, but not the obligation, to buy 100 shares of a particular
stock, stock index, or futures at a predetermined price before a preset date
in exchange for a paying a premium. The buyer does not have to invest as
much money as they would have to in order to buy the stock or futures
unless they exercise their call option. The seller of a call option makes
extra income and does not have to give up the stock unless the option is
exercised by the buyer.
Call Premium
The amount to be paid over and above the face value if the issuing
corporation calls a security for redemption before maturity.
Cancel or Change Former Order (CFO)
An order that cancels or changes a customer's current order.
Capital Gain
The profit realized when a capital asset is sold for a higher price than the
purchase price. Your costs (when you buy) include the commission you
paid your broker and are deducted from the proceeds when you sell. In a
mutual fund, capital gains are created when the fund buys and sells
securities. These gains are then distributed to shareholders at least
annually. Shareholders can also earn capital gains by redeeming their
units at higher prices than they originally paid.
Capital Loss
The loss incurred when a capital asset is sold for a lower price than the
purchase price.
Cash and Equivalents
The value of assets that can be converted into cash immediately, as

reported by a company. Usually includes bank accounts and marketable
securities, such as government bonds and Bankers' Acceptances. Cash
equivalents on balance sheets include securities (e.g., notes) that mature
within ninety days.
Certificate of Deposit (CD)
A fixed-income debt security issued by most chartered banks, usually in

minimum denominations of $1,000 with maturity terms of 1 to 6 years.
Channel
In charting, a price channel contains prices throughout a trend. There are

three basic ways to draw channels: parallel, rounded and channels that
connect lows (bear trend) or highs (bull trend).
Chicago Board of Trade (CBOT)
The oldest commodity exchange in the United States; established in 1886.

The exchange lists agricultural commodity futures such as corn, oats and
soybeans, in addition to more recent innovations such as GNMA
mortgages and the NASDAQ 100 Index.
Chicago Board Options Exchange (CBOE)
The largest options exchange in the United States.
Close
1. The price of the last transaction for a particular security on a particular

day. 2. The mid-price of a closing trading range.
Closed Trades
Positions that have been either liquidated or offset.
Commission
A service charge assessed by an agent in return for arranging the

purchase or sale of a security. Commissions represent a fixed or
percentage charge on the value of a transaction. This money goes to the
broker and his/her investment company for providing services. A
commission must be fair and reasonable. In 1975, deregulation led to the
creation of discount brokers, who charge lower commissions than full
service brokers. Full service brokers offer advice and usually have a full
staff of analysts who follow specific industries. Discount brokers simply
execute a client's order and usually do not offer an opinion on a stock.
Commodity
Any bulk good traded on an exchange or in the cash market; examples

include metals, grains and meats.
Commodity Futures Trading Commission
The CFTC was created by the Commodity Futures Trading Commission

Act of 1974 to ensure the open and efficient operation of the futures
markets. The 5 futures markets commissioners are appointed by the
president (subject to Senate approval). This government agency currently
regulates the nation's commodity futures industry.
Congestion Area or Pattern
A series of trading days in which there is no visible progress in price.
Consolidation
A pause that allows participants in a market to reevaluate the market and

sets the stage for the next price move.
Contract
Unit of trading for a financial or commodity future. Also, actual bilateral

agreement between the parties (buyer and seller) of a futures or options
on futures transaction as defined by an exchange.
Contract Month
The month in which futures contracts may be satisfied by making or

accepting delivery.
Contrarian Approach
Trading against the majority view of the marketplace. A contrarian is said

to fade the trend.
Corporation
The most common form of business organization, in which the total

worth of the organization is divided into shares of stock, each share
representing a unit of ownership. A corporation is characterized by a
continuous life span and the limited liability of its owners.
Correction
A market correction is usually a sudden temporary decline in stock or

bond prices after a period of market strength. A 10% movement on the
downside that lasts no longer than six months is a normal correction.
Correction Wave
A wave or cycle of waves moving against the current impulse trend's

direction.
Cover
Buying a security that you had previously sold short.
Covered Call
A term used to describe the situation that exists when an option writer
already owns shares and can therefore turn them over to the option
buyer, without having to go to the market to purchase them first.
Covered Option
An option contract backed by the shares underlying the option. An

option is covered when the person who owns stock sells call options in
that stock since, if the price goes up, the seller is in a position to deliver
the stock to the buyer without going to the market first.
Covered Put
A put option position in which the option writer also is short the
corresponding stock or has deposited, in a cash account, cash or cash
equivalents equal to the exercise of the option. This limits the option
writer's risk because money or stock is already set aside. In the event that
the holder of the put option decides to exercise the option, the writer's
risk is more limited than it would be on an uncovered or naked put
option.
Covered Write
Writing a call against a long position in the underlying stock. By

receiving a premium, the writer intends to realize additional return on
the underlying common stock or gain some element of protection (limited
to the amount of the premium less transaction costs) from a decline in the
value of that underlying stock.
Cycle
A variation where a point of observation returns to its origin.
Cyclical Companies
Those companies that tend to follow overall economic cycles. They report
strong earnings when the overall economy is doing well and weaker
earnings when the economy is in recession.
Day Order
Unless an investor specifies otherwise, an order to buy or sell a security

will expire if not filled at the end of the day.
Day Trading
Refers to establishing and liquidating the same position or positions

within one day's trading, thus ending the day with no established
position in the market.
Debit Spread
The difference in value of two options, where the value of the long
position exceeds the value of the short position.
Delta
The amount by which the price of an option changes for every dollar
move in the underlying instrument.
Delta Neutral
This is an "options/options" or "options/underlying instrument" position

constructed so that it is relatively insensitive to the price movement of the
underlying instruments. This is arranged by selecting a calculated ratio of
offsetting short and long positions.
Delta Position
A measure of option price vs. the underlying futures contract or stock

price.
Directional Movement Index
Directional Movement uses a rather complicated set of calculations

designed to rate the directional movement of commodities or stocks on a
scale from 0 to 100. For those traders who employ trend-following
methods, commodities or stocks rating in the upper end of the scale
would-be attractive. Those using non-trending methods, commodities or
stocks rating at the lower end of the scale should be considered for
trading.
Discretionary Account
A type of account where you give the broker some control over purchase
and sale of securities on your behalf, without you having to approve each
order. This should only be done if you really trust your broker as
discretionary powers can lead to abuses.
Dow Jones Averages
The most widely quoted and oldest measures of change in stock prices.
Each of the four averages is based on the prices of a limited number of
stocks in a particular category.
Dow Jones Industrial Average (DJIA)
An average made up of 30 blue chip stocks that trade daily on the New
York Stock Exchange. The DJIA is used as an overall indicator of market
performance although criticism is periodically raised over how it is
calculated, as well as the fact that so few companies are included so that it
may not be a truly representative indicator of market activity.
Dow Jones Transportation Average
Similar to the Dow Jones Industrial Average, this average is made up of

20 transportation stocks that trade daily on the New York Stock
Exchange.
Downside
The potential for prices to move down. Also, the potential risk one takes
for directional trading.
Drawdown
The reduction in account equity as a result of a trade or series of trades.
Earnings
Net income for the company during the period.
Elliott Wave Theory
Elliott Wave Theory goes beyond traditional charting techniques by

providing an overall view of market movement that helps explain why
and where certain chart patterns develop. The three major aspects of
wave analysis are pattern, time and ratio. The basic Elliott pattern
consists of a 5-wave uptrend followed by a three-wave correction. Each
‘leg’ of a wave in turn consists of smaller waves. Elliott waves can be
used to successfully define where the market currently is in relation to
‘the big picture’ which is unreliable for short term trading.
Exchange
Place where an asset, option, future, stock or derivative is bought and

sold. The most well-known exchange is the New York Stock Exchange.
Execution
The process of completing an order to buy or sell securities. Once a trade

is executed, it is reported by a Confirmation Report; settlement payment
and transfer of ownership occurs in the U.S. 5 days after an order is
executed. Settlement times for exchange-listed stocks are in the process of
being reduced to three days in the U.S.
Exercise
To implement the right of the holder of an option to buy (in the case of a
call) or sell (in the case of a put) the underlying security. When you
exercise an option, you carry out the terms of an option contract.
Expiration
The date and time after which an option may no longer be exercised.
Expiration Cycle
An expiration cycle relates to the dates on which options on a particular

security expire. A given option will be placed in 1 of 3 cycles, the January,
February or March cycle. At any point in time, an option will have
contracts with 4 expiration dates outstanding, 2 in near-term months and
2 in far-term months
Expiration Date
The last day (in the case of American-style) or the only day (in the case of
European-style) on which an option may be exercised. For stock options,
this date is the Saturday immediately following the 3rd Friday of the
expiration month; however, brokerage firms may set an earlier deadline
for notification of an option holder's intention to exercise. If Friday is a
holiday, the last trading day will be the preceding Thursday.
Expiration Time
The time of day by which all exercise notices must be received on the
expiration date.
Exponential Moving Average (EMA)
The EMA for day D is calculated as: where PR is the price on day D and a
(alpha) is a smoothing constant. Alpha may be estimated as 2/(n+1),
where n is the simple moving average length.
Extrinsic Value
The price of an option less its intrinsic value. An out-of-the money

option's worth consists of nothing but extrinsic or time value.
Fast Market
When a stock has so much volume that the order entry systems have
difficulty processing all of the orders. This causes problems for brokers
who want to give their clients current prices so that they can buy or sell
securities. A declaration that market conditions in the futures pit are so
disorderly temporarily to the extent that floor brokers are not held
responsible for the execution of orders. This usually happens when a
company announces important information.
Fibonacci Ratios and Retracements
They can be applied both to price and time, although it is more common
to use them on prices. The most common levels used in retracement
analysis are 61.8%, 38% and 50%. When a move starts to reverse, the 3
price levels are calculated (and drawn using horizontal lines) using a
movement low to high. These retracement levels are then interpreted as
likely levels where counter moves will stop. It is interesting to note that
the Fibonacci ratios were also known to Greek and Egyptian
mathematicians. The ratio was known as the Golden Mean and was
applied in music and architecture. A Fibonacci spiral is a logarithmic
spiral that tracks natural growth patterns.
Fibonacci Sequence
The sequence of numbers (0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233...),
discovered by the Italian mathematician Leonardo de Pisa in the 13th
century and the mathematical basis of the Elliott Wave Theory, where the
first two terms of the sequence are 0 and 1 and each successive number in
the sequence is the sum of the previous two numbers. Technically, it is a
sequence and not a series.
Frequency
The number of complete cycles observed per time period (i.e., cycles per
year).
Fundamentals
The theory that holds that stock market activity may be predicted by
looking at the relative data and statistics of a stock as well as the
management of the company in question and its earnings.
Futures
A term used to designate all contracts covering the purchase and sale of
financial instruments or physical commodities for future delivery on a
commodity futures exchange.
Futures Contract
Agreement to buy or sell a set number of shares of a specific stock in a

designated future month at a price agreed upon by the buyer and seller.
The contracts themselves are often traded on the futures market. A
futures contract differs from an option because an option is the right to
buy or sell, whereas a futures contract is the promise to actually make a
transaction.
Futures Market
A continuous auction market in which participants buy and sell

commodities contracts for delivery on a specified future date. Trading is
carried on through open outcry and hand signals in a trading pit or ring.
Golden Mean or Golden Ratio
The ratio of any two consecutive numbers in the Fibonacci sequence,

known as phi and equal to 0.618; a proportion that is an important
phenomenon in music, art, architecture and biology.
Hedge
To create a trade which lowers the risk of an outright directional move

(i.e., to go long one security, short another security). An investment made
in order to reduce the risk of adverse price movements in a security. The
intention is to reduce the risk of a loss from a specified event; e.g.,
hedging a currency to protect against detrimental currency movements
that would reduce the portfolio return. Thus, you can reduce the risk of
loss by taking a position through options or futures opposite to the
current position they hold in the market.
Hedger
A trader who enters the market with the intent to protect a position in the
underlying. An investor who uses the futures market to minimize the risk
in his or her business. Hedgers may be manufacturers, portfolio
managers, bankers, farmers, etc.
Hedging
A strategy designed to reduce investment risk using ‘call’ options, ‘put’

options, ‘short’ selling, or futures contracts. A hedge can help lock in
existing profits. Its purpose is to reduce the potential volatility of a
portfolio, by reducing the risk of loss.
Implied Volatility
The volatility computed using the actual market prices of an option

contract and one of a number of pricing models. For example, if the
market price of an option rises without a change in the price of the
underlying stock or future, implied volatility will have risen.
Impulse Wave
A wave or cycle of waves that carries the current trend further in the
same direction.
Index
An index is a group of stocks that make up a portfolio in which

performance can be monitored based upon one calculation.
Index Options
Call options and put options on indexes of stocks designed to reflect and
fluctuate with market conditions. Broad-based indexes cover a wide
range of industries and companies and narrow-based indexes cover
stocks in one industry or economic sector. Index options allow investors
to trade in a specific industry group or market without having to buy all
the stocks individually.
In-the-Money
If you were to exercise an option and it would generate a profit at the

time, it is known to be in the money. For example, when a commodity
price is $500, a call option with a strike price of $400 is considered in-the-
money.
In-the-Money Option
A call option is in-the-money if the strike price is less than the market
price of the underlying security. A put option is in-the-money if the strike
price is greater than the market price of the underlying security. For
example, an XYZ call option with a 52-strike price is in-the-money when
XYZ trades at 52 1/8 or higher. An XYZ put option with a 52-strike price
is in-the-money when XYZ is trading at 51 7/8 or lower.
Intrinsic Value
The amount by which a market is in-the-money. Out-of-the-money

options have no intrinsic value. Calls = underlying - strike price. Puts =
strike price - underlying.
Investment
1. As used in economics, spending on capital goods such as factories,

mines and machinery, so as to increase the productive capacity of the
economy. 2. In its broader meaning, investment is any purchase of an
asset to increase future income.
Leverage
The amount of volume that enables a trader to buy or sell a security or

derivative and receive fair value for it. Using borrowed capital to increase
investment return.
Liquidation
The process of converting property and securities into cash. When a

company is dissolved or closed down, cash remaining after sale of its
assets and payment of all indebtedness is distributed to the shareholders,
beginning with the preferred shareholders and ending with the common
shareholders.
Liquidity
The ease with which an asset can be converted to cash in the marketplace.
A large number of buyers and sellers and a high volume of trading
activity provide high liquidity. Liquidity is a concern for any moneys that
may be required on short notice, whether for emergencies or for planned
purchases.
Long
The term used to describe the owning of a security, contract or

commodity. For example, an owner of common stock is said to have a
long position in the stock.
Long Hedge
The purchase of a futures contract in anticipation of an actual purchase in

the cash market. Used by processors or exporters as protection against
and advance in the cash price.
Long Position (Options)
An options position where a person has executed one or more options

trades where the net result is that they are an ‘owner’ or holder of options
(i.e. the number of contracts bought exceeds the number of contracts
sold).
Low Risk Investing
A trade that is hedged for purposes of limiting price loss as opposed to a

directional trade where loss is unlimited.
Margin Call
The Federal Reserve Board's demand that a customer deposit a specified

amount of money or securities when a purchase is made in a margin
account; the amount is expressed as a percentage of the market value of
the securities at the time of purchase. The deposit must be made within
one payment period.
Market
1. The place where buyers and sellers meet to exchange goods and
services. 2. The demand, actual or potential, for a product or service.
Market Sentiment
Crowd psychology, typically a measurement of bullish or bearish

attitudes among investors and traders.
Market Timing
Using analytical tools to devise entry and exit methods.
Maximum Adverse Excursion
A historical measurement of the closed losing trades versus the closed

profitable trades of a trading system. Used to determine the stop-loss
level that can be used that will allow winning trades to remain; the
extreme unfavorable price level reached for both profitable and
unprofitable trades.
Mean
When the sum of the values is divided by the number of observations.
Mean Deviation
The average absolute value of the difference between the population of

numbers and the mean.
Mean Return
The average monthly total return of a stock. The total return is price
change added to dividends and indicates the probability distribution of
possible returns. Also known as the Expected Return.
Mean Reverting
The term adopted in academic literature for one possible state of a price
series: that state when price is oscillating randomly about some
(unknown) mean value-that is, it is not trending.
Moving Average Chart
A tool used by technical analysts to track the price movements of a

commodity. It plots average daily settlement prices over a defined period
of time (for example, over three days for a three-day moving average).
Moving Average Convergence/Divergence (MACD)
The MACD is used to determine overbought or oversold conditions in the

market. The crossing of two exponentially smoothed moving averages
that are plotted above and below a zero line. The crossover, movement
through the zero line, and divergences generate buy and sell signals.
Written for stocks and stock indices, MACD can be used for commodities
as well. The MACD line is the difference between the long and short
exponential moving averages of the chosen item. The signal line is an
exponential moving average of the MACD line. Signals are generated by
the relationship of the two lines.
Moving Average Crossovers
The point where the various moving average lines intersect each other or
the price line on a moving average price bar chart. Technicians use
crossovers to signal price-based buy and sell opportunities.
Moving Averages
The moving average is probably the best-known and most versatile

indicator in the analyst's tool chest. It can be used with the price of your
choice (highs, closes or whatever) and can also be applied to other
indicators, helping to smooth out volatility. A mathematical procedure to
smooth or eliminate the fluctuations in data and to assist in determining
when to buy and sell. Moving averages emphasize the direction of a
trend, confirm trend reversals and smooth out price and volume
fluctuations or ‘noise’ that can confuse interpretation of the market; the
sum of a value plus a selected number of previous values divided by the
total number of values. As the name implies, the Moving Average is the
average of a given amount of data. For example, a 14-day average of
closing prices is calculated by adding the last 14 closes and dividing that
number by 14. The result is noted on a chart. The next day the same
calculations are performed with the new result being connected (using a
solid or dotted line) to yesterdays, and so forth.
Naked Option
An option written (sold) without an underlying hedge position.
Naked Put
The writer of a put option contract who is not short the underlying
security.
Net Change
The daily change from time frame to time frame. An example would be
the change from the close of yesterday to the close of today. The
difference between the closing price of a security on the trading day
reported and the previous day's closing price. In over-the-counter
transactions, the term refers to the difference between the closing bids.
Obligation
A legal responsibility for a debt.
Offer
The lowest price at which a person is willing to sell.
Open Order
An order to buy or sell a security at a specified price, valid until executed

or canceled.
Open Outcry
Verbal bids and offers made on the trading floors of stock exchanges. This
method is disappearing as exchanges become automated.
Opening
The period at the beginning of the trading session during which all
transactions are considered made or first transactions were completed.
Option
A security that represents the right, but not the obligation, to buy or sell a
specified amount of an underlying security (stock, bond, futures contract,
etc.) at a specified price within a specified time. The purchaser acquires a
right to exercise the specifics of the contract, and the seller assumes a
legal obligation to fulfill the contract if the purchaser chooses to exercise
his/her right. Interesting to note that options are a zero sum game,
meaning that, if someone makes $10,000 on an option, the other person
has lost out on that same amount.
Option Eligible Securities
Securities that meet the eligibility criteria as underlying securities for put
and call options on a stock exchange.
Option Premium
This is the price of an option. It is the amount of money that the option
holder pays for the rights and the option writer receives for the
obligations granted by the option.
Option Writer
The seller of either a call or put option. The option writer receives
payment, called a premium, and is obligated to buy or sell the underlying
security at a specified price, within a certain period of time, if called upon
to do so.
Oscillator
Technical indicator used to identify overbought and oversold price

regions. An indicator that detrends data, such as price.
Out-of-the-Money Option (OTM)
A call option is out-of-the-money if its exercise or strike price is above the

current market price of the underlying security. A put option is out-of-
the-money if its exercise or strike price is below the current market price
of the underlying security.
Overbought
A technical analysis term for a market in which more and stronger buying
has occurred than the fundamentals justify.
Overbought / Oversold Indicator
An indicator that attempts to define when prices have moved too far and
too fast in either direction and thus are vulnerable to reaction.
Oversold
A technical analysis term for a market in which more and stronger selling
has occurred than the fundamentals justify.
Paper Profit
A profit on a security that has not been taken. Paper profits become
realized profits only when the security is sold. A paper loss is the
opposite of this. An example of a paper profit would be the purchase of
ABC at $25. It is now trading at $27, so the paper profit is $2 per share.
Paper Trading
The ability to simulate a trade without actually putting up the money for
the purpose of gaining additional trading experience. A paper trail
recording all simulated trades.
Pivot
Price level established as being significant by the market's failure to

penetrate it or as being significant when a sudden increase in volume
accompanies the move through the price level and an upcoming trend
reversal ensues.
Point & Figure Charts
The Point and Figure (PF) charting method is a technique has been used
for many years in analyzing the variations in prices of stocks and
commodities. There are several types of PF charting methods. Some
employ trend lines, resistance levels, and various other additions to the
chart. In this study, we shall be concerned with only daily reversal type
charts. The principal advantage of a PF chart is that it is much easier to
read and interpret than other types of charts. All the small, and often
confusing, price movements are eliminated, and only the most important
features of the price action remain. It would be reasonable to think of this
method as a filter that (hopefully) allows only meaningful information to
enter the chart. Two basic symbols are used: X denotes the continuance of
an increase in price and is always ‘stacked’ in the vertical direction; O
denotes the continuance of a decrease in price and is always ‘stacked’ in
the vertical direction. While prices are rising, X’s are used. When falling,
O’s are used.
Portfolio
A collection of investments owned by an investor, an institution or a

mutual fund.
Position
The total of a trader's open contracts. The amount of a security either

owned (a long position) or owed (a short position) by an individual or by
a dealer. Dealers take long positions in specific securities to maintain
inventories and thereby facilitate trading.
Position Delta
The sum of all positive and negative deltas in a hedged position.
Position Limit
The maximum number of open contracts in a single underlying

instrument.
Premium
1. The amount of cash that an option buyer pays to an option seller. 2. The
difference between the higher price paid for a security and the security's
face amount at issue.
Price
Price of a share of common stock on the date shown. Highs and lows are
based on the highest and lowest intra-day trading price.
Price Patterns
Price Patterns are formations that appear on commodity and stock charts
that have shown to have a certain degree of predictive value. Some of the
most common patterns include: Head & Shoulders (bearish), Inverse
Head & Shoulders (bullish), Double Top (bearish), Double Bottom
(bullish), Triangles, Flags and Pennants (can be bullish or bearish
depending on the prevailing trend).
Profit
That which is left over for the owners of a business after all expenses have
been deducted from the revenues of a firm. Gross profit is the profit
before corporate income taxes. Net profit is the final profit of the firm
after all deductions have been made.
Put
1. An option contract giving the owner the right, but not the obligation, to
sell a specified amount of an underlying security at a specified price
within a specified time. 2. The act of exercising a put option.
Random Walk Index
This indicator is defined as the ratio of an actual price move to the

expected random walk. If the move is greater than a random walk, and
thus a trend is present, its index will be larger than 1.0.
Random Walk Theory
A market analysis theory that the past movement or direction of the price
of a stock or market cannot be used to predict its future movement or
direction.
Real-time
Data received from a quote service as the prices change.
Return on Assets (ROA)
Indicator of profitability. Determined by dividing net income for the past

12 months by total assets. The result is shown as a percentage.
Return on Equity (ROE)
Indicator of profitability. Determined by dividing net income for the past

12 months by common stockholders' equity (adjusted for stock splits).
The result is shown as a percentage.
Return on Investment (ROI)
Calculated by dividing the corporation's net profit after taxes by total

assets, or by multiplying net profit margin by total asset turnover. In the
United States the division is usually made before taxes. Return on
Investment (ROI) is sometimes referred to as the return on total assets.
Reward-Risk Ratio
The mathematical relationship between the maximum potential risk and

maximum potential reward of a trade.
Right
A security representing a stockholder's entitlement to the first

opportunity to purchase new shares issued by the corporation at a
predetermined price (normally less than the current market price) in
proportion to the number of shares already owned. Rights are issued only
for a short period of time, after which they expire.
Risk
The potential financial loss inherent in an investment.
Risk Graph
A graphical representation of risk and reward on a given trade as prices

change.
Risk Profile
A determination of risk on a trade. This would include the profit and loss
of a trade at any given point for any given time frame.
Sector Fund
A mutual fund whose investment objective is to capitalize on the return

potential provided by investing primarily in a particular industry or
sector of the economy. A mutual fund that concentrates on trading a
range of securities within a broad industry group, such as technology,
energy or financial services.
Securities
Negotiable instruments such as stocks and bonds. Transferable

certificates of ownership of investment products such as notes, bonds,
stocks, futures contracts and options.
Securities and Exchange Commission (SEC)
Commission created by Congress to regulate the securities markets and

protect investors. It is composed of five commissioners appointed by the
president of the United States and approved by the Senate. The SEC
enforces, among other acts, the Securities Act of 1933, the Securities
Exchange Act of 1934, the Trust Indenture Act of 1939, the Investment
Company Act of 1940 and the Investment Advisers Act of 1940.
Security
Another word for stocks, bonds, and short-term investments. Any piece
of securitized paper that can be traded for value other than an insurance
policy or a fixed annuity. Under the act of 1934, this includes any note,
stock, bond, investment contract, debenture, certificate of interest in
profit-sharing or partnership agreement, certificate of deposit, collateral
trust certificate, pre-organization certificate, option on a security, or other
instrument of investment commonly known as a security. Also
categorized as securities are interests in oil and gas drilling programs,
real estate condominiums and cooperatives, farmland or animals,
commodity option contracts, whiskey warehouse receipts, multilevel
distributorship arrangements, and merchandising marketing programs.
Selling Short
If an investor thinks the price of a stock is going down, the investor could
borrow the stock from a broker and sell it. Eventually, s/he must buy the
stock back on the open market. For instance, you borrow 1,000 shares of
XYZ on July 1 and sell them for $8 per share. Then, on Aug 1, you
purchase 1,000 shares of XYZ at $7 per share. You've made $1,000 (less
commissions and other fees) by selling short.
Settlement Price
A figure determined by the closing range that is used to calculate gains

and losses in futures market accounts. Settlement prices are used to
determine gains, losses, margin calls, and invoice prices for deliveries.
Shares
Certificates or book entries representing ownership in a corporation or

similar entity
Short
The term used to describe the selling of a security, contract or commodity

not owned by the seller. For example, an investor who borrows shares of
stock from a broker-dealer and sells them on the open market is said to
have a short position in the stock.
Short-term Investments
In an investment portfolio, short-term investments are those whose prices

are relatively stable compared to other types because they are easily
converted into cash. They focus more on capital preservation as an
investing goal than on growth. Short-term investments generally mature
within one to three years.
Slippage
The difference between estimated transaction costs and actual transaction

costs. The difference is usually composed of revisions to price difference
or spread and commission costs.
Speculator
A trader who hopes to profit from a directional move in the underlying

instrument and attempts to anticipate price changes and, through buying
and selling futures contracts, aims to make profits; does not use the
futures market in connection with the production, processing, marketing
or handling of a product. The speculator has no interest in making or
taking delivery.
Spread
1. In a quotation, the difference between the bid and the ask prices of a
security. 2. An options position established by purchasing one option and
selling another option of the same class but of a different series. A trade
in which two related contracts/stocks/bonds/options are traded to exploit
the relative differences in price change
Standard Deviation
A measure of the fluctuation in a stock's monthly return over the

preceding year.
Statistics
The probability distribution used to test the hypothesis that a random

sample of an observation comes from a normal population with a given
mean.
Stochastic Indicator
The Stochastic Indicator is based on the observation that, as prices

increase, closing prices tend to accumulate ever closer to the highs for the
period. Conversely, as prices decrease, closing prices tend to accumulate
ever closer to the lows for the period. Trading decisions are made with
respect to divergence between % of "D" (one of the two lines generated by
the study) and the item's price. For example, when a commodity or stock
makes a high, reacts, and subsequently moves to a higher high while
corresponding peaks on the % of "D" line make a high and then a lower
high, a bearish divergence is indicated. When a commodity or stock has
established a new low, reacts, and moves to a lower low while the
corresponding low points on the % of "D" line make a low and then a
higher low, a bullish divergence is indicated. Traders act upon this
divergence when the other line generated by the study (K) crosses on the
right-hand side of the peak of the % of "D" line in the case of a top, or on
the right-hand side of the low point of the % of "D" line in the case of a
bottom. Two variations of the Stochastic Indicator are in use: Regular and
Slow. When the Regular plot of the Stochastic too choppy, the ‘slow’
version can often clarify the Stochastics.
Stock
When you own a company's stock, you own part of the company. How
much you own depends on how many shares of stock you have. Holders
of common stock are the last to be paid any profits from the company but
are likely to profit most from any growth it has. Owners of preferred
stock are paid a fixed dividend before owners of common stock, but the
amount of the dividend doesn't usually grow if the company grows.
Stock Broker
One who acts as an agent in the buying and selling of securities and
charges a commission for his services.
Stock Consolidation
The opposite of a stock split. A number of existing shares are combined

into a smaller number of shares, i.e., turning every three shares into one.
Stock Exchange or Stock Market
An organized marketplace where buyers and sellers are brought together

to buy and sell stocks and must follow certain rules, regulations and
guidelines.
Stock Index Futures
A futures contract traded that uses a market index as the underlying

instrument. Typically, the value of the contract is $500 times the
underlying index. The delivery mechanism is usually cash settlement.
Stock Quote
A list of representative prices bid and asked for a stock during a

particular trading day. Stocks are quoted in points, where one point
equals $1, and 1/8ths of a point, where 1/8th equals 12.5 cents. Stock
quotes are listed in the financial press and most daily newspapers.
Stock Split
An increase in the number of a corporation's outstanding shares that

decreases the par value of its stock. The market value of the total number
of shares remains the same. The proportional reductions in orders held on
the books for a split stock are calculated by dividing the market price of
the stock by the fraction that represents the split.
Stock Symbol
A unique three or four letter symbol assigned to a security trading on a

stock exchange.
Stops
Buy stops are orders that are placed at a predetermined price over the
current price of the market. The order becomes a ‘buy at the market’
order if the market is at or above the price of the stop order. Sell stops are
orders that are placed with a predetermined price below the current
price. Sell-stop orders become ‘sell at the market’ orders if the market
trades at or below the price of the stop.
Support
A historical price level at which falling prices have stopped falling and
either moved sideways or reversed direction; usually seen as a price chart
pattern.
Swing Chart
A chart that has a straight line drawn from each price extreme to the next
price extreme based on a set criteria such as percentages or number of
days. For example, percentage price changes of less than 5% will not be
measured in the swing chart.
Technical Analysis
A method of evaluating securities by analyzing statistics generated by

market activity, such as past prices and volume. Technical analysts do not
attempt to measure a security's intrinsic value.
Technical Indicator
A bullish or bearish numerical indicator used to help predict future price

movement.
Time Premium
Another name for extrinsic value. The additional value of an option due
to the volatility of the market and the time remaining until expiration.
Premium minus intrinsic value.
Time Value (Extrinsic Value)
The amount by which the current market price of a right, warrant or

option exceeds its intrinsic value. Intrinsic value is the amount by which
the market price of a security exceeds the price at which the warrant,
right or option may be exercised. The intrinsic value of a put is calculated
as the amount by which the market price of the underlying security
(premium) is below the exercise price.
Trade
A verbal (or electronic) transaction involving one party buying a security

from another party. Once a trade is consummated, it is considered ‘done’
or final. Settlement occurs 1-5 business days later. Optionetics instructors
use the word ‘trade’ to mean the purchase or sale of a single stock and
one or more derivatives at the same time, as part of a single strategy, and
entered on the same day. A completed trade includes both an entry and
an exit.
Trader
1. Employee of an investment dealer who executes buy and sell orders for
the dealer and its clients either on a stock exchange or the over-the-
counter market. 2. The term is also used to describe a client who buys and
sells frequently with the objective of short-term profit.
Trading Account
An account opened with a brokerage firm from which to place trades.

Opening an account takes several steps including signing a risk
disclosure statement (a document which indicates that the signer
understands the risks involved in trading), performance bond agreement
(binds the trader to pay for any losses incurred in the course of trading),
and a futures account agreement (outlines how the account is to be
handled by the broker).
Trend
The general drift, tendency or bent of a set of statistical data as related to

time.
Underlying Instrument
A trading instrument subject to purchase upon exercise.
Underlying Securities
1. Options: The security subject to being purchased or sold upon exercise

of an option contract. For example, IBM stock is the underlying security
to IBM options. 2. Depository receipts: The class, series and number of the
foreign shares represented by the depository receipt.
Upside
The potential for prices to move up. Also the potential risk taken on a
directional trade.
Vertical Spread
A spread in which one option is bought and one option is sold, where the
options are of the same type, have the same underlying, and have the
same expiration date, but have different strike prices.
Volatility
Measure of the magnitude of price or yield changes over a predefined

period of time. A primary determinant in the valuation of options. There
are two types of volatility: historical and implied.
Volume (Vol)
The amount of shares bought and sold on a stock exchange.
Writer
An individual who sells an option.
Yield
The rate of return on an investment, usually expressed as an annual

percentage rate.
Zigzag
In a bull market, an Elliott 3-wave pattern that subdivides into a 5-3-5

pattern with the top of wave B noticeably lower than the start of wave A.
In a bear market, this pattern will be inverted.

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This publication is protected under the US Copyright Act of 1976 and all other applicable

Copyright © 2017 Tom Gentile. All rights reserved worldwide.

Risk Levels DISCLAIMER

PRIOR TO BUYING OR SELLING AN OPTION CONTRACT

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS

Next, I want to thank the many partners, employees, and contractors of

I want to also thank my mentor and partner, George Fontanills. Many of

Finally, I want to thank the hundreds of thousands of students and

The Stock Market Course, and The Stock Market Workbook, by

The Options Course, and Options Course Workbook, by George

The Volatility Course, and Volatility Course Workbook, by

Now, if you have some knowledge in trading but your knowledge

7. – Natural Sciences Manager

3. – Chief Executive Officers

(Source, www.askmen.com 2012)

Recipe for Trading Disaster (Ingredients)

 1 part lack of knowledge

Setting Your Goals

Setting Your Requirements

What are you going to sacrifice in order to get to your goal of a 1-

• Taking responsibility for your education. That means taking

Note that there is nothing wrong with being an investor. Some of my

System Development – Systems are classified into several groups. There

Longer term ETF

My longer-term ETF and Index strategies are in the 6-month to 2-year

Preferred Strategies – Many of you know I like options trading. What

Money Management – The difference between money management and

Where Do You Sit On The Food Chain?

Types of Retail Traders

• Institutional traders work for large firms or banks, brokerages,

The Challenge – The challenge is a clear one. To Trade like a 1-percenter,

If you are a NOVICE, then you are an UNCONSCIOUS

CONSCIOUS INCOMPETENTS face the most dangerous obstacles as

CONSCIOUS COMPETENCE means your skill sets as a trader are

UNCONSCIOUS COMPETENT means that you are now following the

Discretionary Trader – A discretionary trader is one who trades based on

Some discretionary traders are what we call ‘guru watchers’, meaning

Indicators are merely calculations of price and or volume, to give the

(Moving Average Crossover as a trending indicator)

Trending Indicators – These indicators are designed to work as a stock or

(Candlestick Patterns, as a channeling indicator)

Channeling Indicators – These indicators are designed to find

Breakout Indicators – This type of indicator is often less used in the

Contrarian Indicators – These are the least understood indicators as they

This chart is an example of my EUR/USD page, plotting highs and lows,

1-percenters Are System Traders

This system on the Japanese Yen is a Support / Resistance breakout with a

1) Guessed the market direction based on emotion

1. What type of trader am I? Am I directional, non-directional, or

I am often asked if it makes sense to buy a system. If you understand

This book has in it some of my favorite position trading systems, which I

Presidential Pattern to Presidential System

Our preliminary research behind the Presidential Pattern is that every 4

During the first two years of a 4-year presidential term…

• A new president and vice president, as well as a new cabinet are

• Campaigning starts to try to get re-elected.

Election 1st Half 2nd Half

1968 -8% 18%

1972 -19% 27%

1976 -31% 42%

1980 -14% 16%

1984 10% 18%

1988 52% 13%