Happy Friday, Evolvers!
If you struggle to enter and exit trades at the ideal time, or fail to identify key price levels on a chart … it’s time to pay attention.
All of the research and due diligence in the world will be worthless if you don’t sharpen these skills.
I remember being a newbie and wondering how traders I looked up to, like Tim Sykes, were so good at picking the important levels on a chart (and getting in and out at the perfect moment).
So, in today’s Q&A, I’ll do my best to demystify the secrets of these all-important trading tools.
Keep reading and I’ll answer your questions…
“How do you identify the important price levels for your trades? It seems like the target and risk on your alerts are always very close to the trading ranges, but I have trouble seeing these levels on my own.”
Identifying key price levels takes a bit of experience. Remember that I’ve been trading professionally for over a decade.
But if you stick with your trading journey, you’ll find that identifying levels eventually comes as second nature.
When you’re first starting, it can be a weird concept to grasp. It might seem like professional traders pick these ‘key levels’ out of thin air…
But this isn’t the case. Experienced traders know exactly what they’re looking for when it comes to price levels.
So, how do I approach finding the critical prices on a chart?
First, I start by looking for recurring levels on a long-term chart, like the daily or the weekly.
It’s much easier to see key levels on longer-timeframe charts because they illustrate more historical context than, say, the 5-minute chart.
From there, I look for three specific indicators when picking the key levels on a chart…
- Prices that the stock has consistently bounced off of (support)…
- Prices that the stock has consistently been rejected at (resistance)…
- Channels between two prices that the stock trades within (ranges)…
Once I’ve found these prices, I use them to establish the target and risk for my trade, as you mentioned.
Then, these levels become my potential entry and exit points for the position…
If the stock loses my risk level, I cut my losses and move on.
And if the stock hits my price target, I take my profits and call it a win.
I also wrote in detail about — and gave specific examples of — identifying key price levels here.
“If you think the market’s headed lower this year … what do you think about buying long-dated puts on the major indexes?”
As you probably know, I very rarely buy long-dated options. It’s just not my style and I don’t like to mess with the strategy that’s made me a multi-millionaire.
The last time I tried to do this — when I bought long-dated puts on the ProShares Bitcoin Strategy ETF (NYSEARCA: BITO) earlier this year — I got smoked.
But aside from that, there are some other concerns I’d have about getting into long puts on the major indexes right now.
- Expensive contracts
Longer-dated contracts are more expensive because the buyer has more time to realize the strike price than they do on short-dated plays.
This isn’t ideal for my strategy because it’s difficult to make massive % gains on higher-premium contracts.
Additionally, if the market decides to trade sideways for a while (which is always a possibility), the value of these contracts will get devalued considerably.
Finally, I’m not sure about the timing…
- Uncertain timing
Just because you buy puts with a longer lifespan doesn’t mean they won’t get destroyed if the market has a relief rally.
I’m pretty confident we’ll see lower prices in the major indexes this year, but a variety of factors could cause bounces along the way.
If the road down is particularly bumpy, sprinkled with relief rallies along the way … it’ll be brutal holding long puts.
All in all, I’d rather play my normal strategy of scalping short-term moves than try to be a hero and make a long-term prediction.
Have a great weekend, Evolvers!
I think we’re all glad to have this catalyst-filled week behind us.
Now, we can look forward to the trading opportunities that may potentially arise as the market digests the news.