Thomas Wood | MicroQuant Divergence Trading Workshop - My ... · Divergence Trading Workshop Day...

Divergence Trading Workshop

Day One

presented by

Thomas Wood | MicroQuantSM

- My 4 Favorite Trades - Essential Trades of a Professional Trader

Risk Disclaimer

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U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures, stocks or options on the same. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.

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About Me… Dave Aquino

• 1995 Graduate of Vanderbilt

University

• Full Broker at Age 23 with Merrill Lynch

• 12 Year Senior Advisor Vanguard Asset Management Service

• 31 months in Stocks & Options Live Trading Room

- My 4 Favorite Trades -

Essential Trades of a Professional Trader

4 Essential Trades of a Professional Trader

• The Consistency Trade

• The Explosive Trade

• The Continuation “Trend Surfing” Trade

• Do It Everyday Trade

The Consistency Trade


Weekly Credit Spread

• Routine, consistently performing weekly income trade.

• Sell Credit Spreads based on 60 min & Daily timeframe

• Selling Option Premium : Theta (time) Decay



• Trades on Mon, Tues or possibly Wed

• Selection based on Daily chart

– Momentum trend

– Protected by at least one, better two: price

action setup, significant daily EMA level, daily

high/low


Weekly Credit Spread • Trades on Thurs or possibly Wed

• Selection based on 60 minute chart

– Momentum trend

– Protected by at least one price action setup, significant daily EMA level, daily high/low

– Bonus : Daily chart’s momentum trend is in agreement with 60min


• Selling Spreads requires looking at charts from a different point of view.

• Focus on selling (short strikes) “Away” from projected price direction – Where will prices most likely NOT be at expiration.


STEP 1 :

• Look at 60 min Chart / Daily Chart

• Check for Momentum Direction & Strength – MQ Momentum or MACD

– Squeeze histogram direction

• Bonus : for 60 min Charts, Same direction as daily – Determine if the daily chart is also in same direction


STEP 2:

• Review last 20-30 bars of stock’s Price Action

• Look for obvious setups – Divergences,

– Double Top/Bottom,

– Channel breakouts

• Change in momentum : MQM or MACD


STEP 3 :

Look for Active Protection

• Did Price Action setup create obvious support & resistance levels

• Plot Daily EMA levels on 60 minute chart

• Daily highs & lows – create high & lows


Step 4 : Does it pay a decent credit ? • Historical average, $0.40 - $0.70

• Conservative Sweet spot : 0.23 - .40

• Don’t be too aggressive • Bigger credit = bigger risk

• Less credit = extra distance & extra protection


STEP 5 : Risk management / Long Term success

• Once you sell the credit spread, determine risk

• Recommend 2x – 3x max gain, stoploss

• Active Traders : Mental stops (b/c Fri opening gaps)

• Set&Forget Traders : Put stops in now


STEP 6 : Friday AM

• Watch for reversal gaps

• If gap against – watch momentum strength & possible gap fill

• If positive or neutral open, maintain position – time decay will very likely generate jump in profits at

open


STEP 7 : Exit Phase – Friday Afternoon

• Optimum exit = Spreads expire worthless – Keep 100% of Premium

– No exit commissions

• If you can’t watch, partial profits are OK

• Try to get commission free – close out of positions


“Set & Forget” Traders : Extra notes

• Be selective on candidate – OK to have more requirements : clear momentum, clear

setups, daily high/low – support & resistance levels

• Decide on Risk Control / Stop Loss levels – Too narrow : stopped out early

– Too wide : too expensive losses

– In both cases, reduce # contracts

• What we can control : Being Selective


Questions on the Consistency Trade

- Hourly Credit Spreads -

The Explosive Trade


The Explosive Trade

• Directional Breakout Squeeze Trade

• Situational Trade : Compression -> Breakout

• These trades, especially in hourly & daily timeframes, can be start of major moves


The Explosive Trade

• Any Trading Day, Any Timeframe

• Trade Based on breakout of a Momentum

trend

STEP 1 :

• Look at Chart, any Timeframe (5 min, 60 min, Daily)

• Check for YELLOW VBT Squeeze Signal dots

The Explosive Trade

STEP 2:

• Look for obvious “quiet” consolidation

– Horizontal Channel Pattern

– Pennant formation

• Review last 20-30 bars of stock’s Price Action

• Change in momentum : MQ Momentum or MACD

The Explosive Trade

STEP 3:

• You can enter once MQ Momentum or MACD signal lines are favoring a bullish/bearish side.

• Or you can wait until breakout occurs across support/ resistance level

The Explosive Trade

STEP 4:

• Monitor Momentum Signal Line slope, look for building momentum strength

• Verify Heavy Volume (dark blue) in VBT on Squeeze “fire”, watch for increasing VBT histogram

The Explosive Trade

STEP 5:

• Hold Trade until …

– Momentum Signal Line slope, goes “flat”

– VBT Histogram Bars “switch” or start moving back to mid-line

– Get reversal setup in opposite direction

The Explosive Trade

Questions on the Explosive Trade

- Directional Squeeze Breakout -

The Bull & Bear Flag Trade


Bull Flag & Bear Flag Trade

• Ever feel disappointed that you “missed” a trade? Still want to jump on, but didn’t know how?

• The continuation trades : Bull Flag & Bear Flag can get you in on the price action, and help you more safely enter a trade.

Bull Flag


Bull Flag & Bear Flag

Option Trading Ninja

Bear Flag


STEP 1 :

• Look at Chart, any Timeframe (5 min, 60 min, Daily)

• Check for…

– Verified Breakout or Reversal

– Strong directional momentum


STEP 2:

• Bullish Trend

• Bull Flag formation

– Look for lower high / lower low bar Pattern (3 Bar)

- Look for entry at first break of previous bar high


Bull Flag


STEP 2:

• Bearish Trend

• Bear Flag formation

– Look for higher high / higher low bar Pattern (3 Bar)

- Look for entry at first break of previous bar low


Bear Flag


STEP 3:

• Continue to hold through subsequent bull/bear flags

• Possible to Add positions, 1st or 2nd flag

• Trend usually has 3 – 4 Flags before reversal


Questions on Bull & Bear Flags

The Do It Everyday Trade


Mid-Morning Reversal

• Within the framework of the Opening Range, the Mid-AM reversal is one of the most consistent intraday trading patterns.

• You trade against a consistent trending move that runs some time in the first trading hour.



• Between 10:15 – 10:30 – 10:45, look for a reversal pattern against the O.R. Move

• Highest probability move is a 50% retracement. Next highest 61.8%

• * The OPENING RANGE *

- Opening Range of the trading day

- Defined by the first 30 minutes (9:30am – 10am Eastern)

- Opening Range High – the highest price the index traded in the first 30 minutes

- Opening Range Low – the lowest price the index traded in the first 30 minutes


Opening Range

• * The Mid-Morning Reversal*

- 10:00 – 10:45 AM : Likely range of Mid-AM Reversal

- If Index moving +45° inside O.R. Box it will emerge at the top of the O.R. Box

- If Index moving -45° inside O.R. Box it will emerge at the bottom of the O.R. Box


Quick Reversal at 10AM

• Trade Setups for Reversals

- Double Tops / Bearish Divergence : still common, higher

probability of success because of 2 points of momentum & prices to compare, higher probability against O.R. High or against previous Daily Highs

- Double Bottoms / Bullish Divergence : higher probability of success because of 2 points of momentum & prices to compare, higher probability against O.R. Low or against previous Daily Lows

- Enter at the Second high/low price – in direction of divergence


• Trade Setups for Reversals

- Head & Shoulders Pattern : Triple Top/Bottom

- Decreasing Momentum Setup

- Watch for Double Top / Bearish Divergence pattern to possibly develop into H&S pattern

- Watch for Double Bottom / Bullish Divergence pattern to possibly develop into Inverse H&S pattern

- Enter at the Right Shoulder as bearish trade




• Watch for a trending 20-30 min O.R. Move

• Between 10:15 – 10:30 – 10:45, look for a reversal pattern against the O.R. Move

• Highest probability move is a 50% retracement. Next highest 61.8%

Questions on the “Do It Everyday” Trade Mid-Morning Reversal

Thank You for your Attendance

Thomas Wood | MicroQuant Divergence Trading Workshop - My ... · Divergence Trading Workshop Day...

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