I'm a little drunk now, but I'll share as best as I can in my state, lol:
Stocks trade purely on the law of supply and demand. A stock could have dog-crap financials, poor management, and a dismal outlook, but if the street thinks it’s hot, they will buy it and stock price will surge higher. The key is understanding the street’s feelings about a stock’s trading range. Thus, the most effective means to monitor a stock’s short-term trading range is purely a technical analysis. Fundamentals being the operating financials and future projections of a company, and technicals being the mapping of the support (low-end trading range) and resistance (high end-trading range) of the underlined.
Let’s take Apple for example. The last three months the stock has traded between the range of 117 and 133. What does this mean? Absent any fundamental changes (earning increase/decrease, Feds raising or lowering rates, news that can impact the company’s bottom line, etc.), if the stock trades close to the resistance level of 133, then it’s time to short (profiting from a lower price) the stock. Conversely, when the stock trades closer to the 117-122 range, its support, absent any fundamental change, then it’s time to buy the stock. Some traders use two-week, 1-month, 2-month, 6-month charts to map support and resistance levels. Other traders like to convolute the trading process with esoteric terms/approaches such as mapping the regression line, regression channel, Fibonacci retracements, extensions, time series, time ratios, time extensions, arcs, spans, spirals, pitchforks, fans, circle brackets. The best approach is simple: Study only a few stocks, learn their volatility and trading ranges; then trade based on your studied observations.
Notwithstanding the above, my opinion is technical stock trading is the kindergarten class for the savvy. The savvy trade derivatives, a/k/a options.
In the options market, you are not saddled by directional moves only like stocks; instead you can sell options and collect premiums ($$) if a stock remains within a specific trading range within a specific time—or play directional moves or both.
Here is a derivative play I use often called an iron candor (buying and selling call and put options simultaneously for credit premiums). I opened this position last week in Apple, APPL with way out-of-the-money options:
Sold 20 Apr 24 Calls with Strike Price 145 = $2.1 Credit
Bought 20 Apr 24 Calls with Strike Price 150= $1.3 Debit
Net Credit .8 = $1,600 premium received
Sold 20 Apr 24 Puts with Strike Price 115@ $1.5 Credit
Bought 20 Apr 24 Puts with Strike Price 110 $1 Debit
Net Credit .5 = $1,000 premium received
What this means is that I collected $2,600 in upfront premiums. Nice isn't it?! However, without a stop loss order, my total downside could be $7,400, which is a big chunk to lose in one play. The way this works is if Apple remains within the trading range of $115 and $145 at 4/24/15, I make a $2,600 profit. If it doesn’t, I could potentially lose $7,400. But if I use a stop loss order of 100%, I limit my total downside to $2,600.
Now here’s the key: Apple's 45-day support and resistance levels are between 122 and 133, so my play is 90% likely to work. How do I know its 90% likely? There is a derivative term called delta which is a mathematical algorithm which dictates the likelihood that a stock reaches a specific price within a specific time. The delta--which is public information on any trading platform--shows 10% likely to hit.
I don’t need to wait till 4/24 expiration: I can cash out any time with less profit. In other words, instead of waiting till 4/24 with a $2,600 profit and potential risk should the position work against me, I closed my position and cashed out this Friday with a $1,200 profit, as the stock remained within the range I needed. When I closed my position, I captured the time decay, which was $1,200.
So what does this all mean? Let’s do the math: I utilize stop loss orders on all my plays, so total downside cannot eclipse 100% of the net premium I receive. I will win 90% of the time but usually cash out at 50% or less of the total premium, and lose 10% of the time with a full premium loss. Thus, I net roughly 350% after 10 plays.
Now I don’t utilize my whole portfolio in credit plays as when I trade only one play like above, I tie up $7,400 in that one play until its liquidated. So with a portfolio of plays, most of the monies are tied up in potential downside risks. I also need to keep cash aside to adjust plays that work against me if I wish not to use a stop loss. The above is a super-abridged version, but overall, I’ve been averaging 50-60% per annum on my whole portfolio, with hundreds of plays annually.
