101Option Trading Secrets Section 2 doc

Section 2 The Prediction Game [...]... For example, many years ago there was a freeze in the Southeast that killed off almost 1/3 of all the orange trees in several states This resulted in orange juice prices racing up from $1 .25 per pound to over $2. 20 per pound, and a 1-cent move is THE PREDICTION GAME equal to $150 on one contract; therefore a sizable move However, a large amount of orange juice is produced in Brazil Hence, with such... action including its trading volume should be treated as signs in the sand of what the future might hold Charts are pictures of supply and demand They show you the trend and where the price will find support and resistance I look closely at support and resistance when designing my strategies, especially when setting stop-losses and profit goals I also watch for breakouts from tight trading ranges This... extensive risk if it keeps falling in price For example, at one time sugar dropped down to 5-cents a pound, and everyone said it could not go any lower Well, it dropped down to 2- cents a pound, and each cent is equal to $1 120 So, when you purchase a futures contract to catch the low, it is like trying to catch a falling knife; you can get hurt Options, because of their limited risk, are ideal for taking... crash of 1 929 , the crash of 1987, the crash of 1989, and the crash of 1997 No question that the best time to buy stocks is near the end of October One reason is that tax-loss selling by institutions occurs in THE PREDICTION GAME October Also, stock prices tend to fall in December due to taxloss selling by individual investors Another important seasonal tendency that has existed since the 1 920 ’s is the... seasonal tendency that has existed since the 1 920 ’s is the end of the month phenomenon Stock prices tend to rise on the last trading day of the month and the first four days of the month In fact, if you had invested in the stock market averages only during those five days since the 1 920 ’s, you would have shown better gains than if you had been in the market the whole time On those five magical days, stock... euphoria work in the market and using it for you rather than against you is a self-discipline you have to acquire Emotionally as well as intellectually, you have to prepare yourself for the game 37 Secret 12 TRACKS IN THE CHARTS Even though the markets approach randomness, technical charts of stocks or futures can provide some clues or tracks to what will happen in the future However, readings from the charts... your behavior If you are on a hot streak, look out! You’re due for a losing streak as you regress to the mean “Regression back to the mean” is one of the few tools that you can use to forecast the future 28 Secret 9 BEWARE OF GURUS Many option investors are always in search of a free ride They are looking for the guru that will lead them to the promised land or the system that is the Holy Grail There... option markets is to earn it Use the wisdom of the experts, but make your own decisions and be willing to take the responsibility for those decisions No one will lead you to the promised land except you! 32 Secret 10 SECRET PREDICTION METHODS In Secret #6 we discussed the almost impossible task of predicting futures and stock prices However, out there are some methods that will improve your ability to predict... process similar to how we evolved from microorganisms over millions of years With super fast and powerful computers, the evolutionary process can be replicated on the computer One company, Ward Systems, has trading systems software that use neural nets and have developed a specific software that may give you an edge We also have experimented with neural nets in predicting stock index moves and have formed... less predictable You may be able to develop a system that finds a peep hole on the future, but that could take a lot of work and continued retuning of your system Here, again, the advantage of options trading comes through; you don’t have to predict the future 34 Secret 11 MAVERICK INVESTING To truly predict what the markets will do in the future, you need to look at the field of psychology and group . Section 2 The Prediction Game