Investors Conference 2013

BREAKOUT SESSION
REFERENCE GUIDE
HOW TO USE THIS GUIDE
How to Use this Guide
This reference guide is a tool to assist you in your learning both during and after the Investools Investor Conference.
During the Conference

Follow along with the presenter and complete the practice activities.
This icon is found on the presentation slides. The number on this icon indicates where the
information on that slide can be found in this reference guide.
This icon marks in-class activities. Complete these activities to test your knowledge and apply
your skills.
Bold text indicates text that appears both in this guide and on the presentation slides.
Take notes ANYWHERE in the guide. Its yours! An additional one to two blank pages of notes are
included at the end of each presentation.
Superscripted numbers mark source information that can be found in the Bibliography section of this
guide.
After the Conference

Use the guide as a reference tool for all that youve learned.
Read the presentations you could not attend.
Complete the next steps to continue developing your investing skills.
How this Guide Is Organized

This reference guide is divided into four sectionsPortfolio, Options, Stocks, and Special Sessions. Each
section is organized alphabetically by the presentation title.
Portfolio: This section covers topics related to your overall portfolio. These subjects include using ETFs to
create a portfolio, managing your 401(k), overcoming bad trading habits, and gauging global market trends.
Options: This section explores the role of options in your portfolio and how to trade them. Subjects
include options for income, high-probability trading, calendar spreads, icon condors, and others.
Stocks: This section discusses how to trade stocks and teaches you what to look for in terms of global
trends, sector analysis, and fundamental and technical analysis.
Special Sessions: This section dives into alternative investments, such as bonds, forex, and futures, and
teaches you how to diversify your portfolio across a wide range of these investment types.
Download an editable PDF for you electronic devices here:

http://education.investools.com/content/pdf/investorsconference2013.pdf
Investools Investor Conference 2013 i

TD AMERITRADE DISCLOSURES
TD Ameritrade Disclosures
Options are not suitable for everyone as the special risks inherent to options trading may expose investors to
potentially rapid and substantial losses. Investors must consider carefully all relevant factors including their
own personal financial situation before investing in options. Prior to engaging in trades involving options, you
should carefully read Characteristics and Risks of Standardized Options, which was previously provided or the
hard copy provided today. This important document is also available at www.tdameritrade.com or by contacting
TD Ameritrade at 800-669-3900.
Option trading privileges in your account are subject to TD Ameritrade review and approval. Not all accounthold-
ers will qualify. Industry regulations require certain conditions be met before TD Ameritrade can extend options
trading privileges. For additional requirements for options positions and for our options exercise policy, consult
the TD Ameritrade Margin Handbook.
Carefully consider the investment objectives, risks, charges and expenses of any exchange-traded fund
(ETF) before investing. To obtain a prospectus containing this and other important information, contact
your broker. Please read the prospectus carefully before investing.
ETFs can entail risks similar to direct stock ownership, including market, sector, or industry risks. Some ETFs may
involve international risk, currency risk, commodity risk, and interest rate risk. Trading prices may not reflect the
net asset value of the underlying securities. Commission fees typically apply.
Brokerage services provided by TD Ameritrade, Inc., member FINRA | SIPC | NFA. TD Ameritrade is a trademark
jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. Used with permission.
Investools Inc. and TD Ameritrade, Inc. are separate but affiliated companies that are not responsible for each
others services or policies.
Investools Investor Conference 2013 iii

Investools Disclosures
The following Orlando Investor Conference presentations are for educational purposes only and are not a recommendation
or endorsement of any particular investment or investment strategy. Past performance does not indicate or guarantee future
success. Returns will vary and all investments involve risks, including loss of principal.
Neither Investools Inc. nor any of its officers, employees, representatives, agents, or independent contractors are, in such
capacities, licensed financial advisors, registered investment advisers, or registered broker-dealers. Investools Inc. does not
provide investment or financial advice or make investment recommendations, nor is it in the business of transacting trades, nor
does it direct client commodity accounts or give commodity trading advice tailored to any particular clients situation. Nothing
contained in this communication constitutes a solicitation, recommendation, promotion, endorsement, or offer by Investools
Inc. of any particular security, transaction, or investment.
Trading securities can involve high risk and the loss of any funds invested. Investment information provided may not be
appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation,
investing time horizon or risk tolerance.
Options trading is generally more complex than stock trading and may not be suitable for some investors as the special risks
inherent to options trading may expose investors to potentially rapid and substantial losses. Granting options and some other
options strategies can result in the loss of more than the original amount invested. Options trading privileges may be subject to
your brokers review and approval. Before trading options, a person should review the document Characteristics and Risks of
Standardized Options, available from your broker or any exchange on which options are traded.
The risk of trading futures can be substantial. The valuation of futures may fluctuate, and as a result, investors may lose more
than their original investment. Investors must consider whether futures are a suitable investment for their own personal finan-
cial situation before trading. Past performance is not indicative of future results.
Trading foreign exchange on margin carries a high level of risk as well as its own unique risk factors. Spot currency contracts
are highly leveraged. This means that significant losses can be created quickly and unexpectedly. Please read the following risk
disclosure before considering the trading of this product: Forex Risk Disclosure. Futures and forex accounts are not protected
by the Securities Investor Protection Corporation (SIPC).
Investments in bonds and fixed income products are subject to various risks (including liquidity, interest rate, financial, and
inflation risks) and special tax liabilities. You should discuss any/all implications of investing in such products with your broker
and/or tax advisor.
Asset allocation and diversification do not ensure a profit nor eliminate the risk of investment losses.
Carefully consider the investment objectives, risks, charges and expenses of any investment company before investing. A
prospectus contains this and other important information. Contact your broker for a copy. Read carefully before investing.
Investools does not provide tax advice. It is recommended that you consult with a tax advisor regarding your personal
tax situation.
iv Investools Investor Conference 2013

INVESTOOLS DISCLOSURES
The paperMoney application is for educational purposes only. Successful virtual trading during a one-time peri-
od does not guarantee successful investing of actual funds during a later time periodmarket conditions change
constantly. thinkScriptTM and Condition Wizard are functions of paperMoney that may allow Investools students
to automate some of their hypothetical investing activities, but does not relieve investors from the responsibility
of making their own investing decisions.
No part of these presentations may be copied, recorded, or rebroadcast in any form without the prior written
consent of Investools.
Investools Inc. and TD Ameritrade, Inc. are separate but affiliated companies that are not responsible for each
others services or policies.
Investools Investor Conference 2013 v

PORTFOLIO
2Looking Back to Look Forward: Finding an Edge with ETFs
Brett Pattison, Investools Educational Resource Manager
16Manage Your 401(k)...Today
Michael Turvey, CMT, CFP, Investools Coach
28Overcoming the Person Within: Take Your Trading to the Next Level
Linda McCoy, CMT, Investools Instructor
42Trade the Trends of Global Markets Using Intermarket Analysis
OPTIONS
58Generating Monthly Income with Options
Joe Mazzola, Senior Strategist, Institutional Trading Education,
TD Ameritrade Institutional*
70High-Probability Trading
82Inside Options: Anatomy of an Iron Condor
Don Kaufman, Director, TD Ameritrade Trader Group
90Strategies to Reduce Risk Over Time
James Boyd, Investools Coach
102Swap Time for Money with Calendar Spreads
Michael Follett, Investools Coach
114The Wide World of Options Uncovered
Joe (JJ) Kinahan, Chief Strategist, TD Ameritrade
Steve Quirk, Senior Vice President, TD Ameritrade Trader Group
vi Investools Investor Conference 2013

TABLE OF CONTENTS
STOCKS
122Dening Entry and Exit Signals
Dave Johnson, Investools Instructor
134Finding Stocks at the Right Price
Michael Kealy, AAMS, Investools Coach
150Gauging Market Posture
Scott Martin, Investools Instructor
166Getting Technical with Your Trading System
John McNichol, Investools Coach
180High-Probability Price Patterns
190Top-Down Analysis: A 360-Degree View
200Up and Coming Global Phenomena
Pat Mullaly, CMT, Investools Coach
SPECIAL SESSIONS
210Balancing Your Portfolio with Fixed-Income ETFs
David Settle, Investools Coach
224Forex Tides Move Markets Day and Night
Blake Young, Investools Coach
232Live Trading Room: Advanced Technical Analysis
240The Technical Side of Futures Trading
Brett Crowther, Investools Coach
Investools Investor Conference 2013 vii

viii Investools Investor Conference 2013
PORTFOLIO
PORTFOLIO
2Looking Back to Look Forward: Finding an Edge with ETFs
16Manage Your 401(k)...Today
28Overcoming the Person Within: Take Your Trading to the Next Level
42Trade the Trends of Global Markets Using Intermarket Analysis
Investools Investor Conference 2013 1

Looking Back to Look Forward:
Finding an Edge with ETFs
Todays Goals
You can try to gain an edge in the market by studying its history. Market cycles and behaviors have existed for decades, and you
just have to study history to find out what they are. Once youve uncovered market cycles, you can use exchange-traded funds
(ETFs) as a potential method to help build out your portfolio. Investors interested in broadening their horizons may find that
ETFs are a key that could unlock new opportunities.
In this session youll learn how to:
Identify what a model equity portfolio looks like
Build a passive portfolio
Review market history to try and find an investing edge
Build an active portfolio
Build a super active portfolio
What is an exchange-traded fund (ETF)?

ETFs are baskets of securities that may track a sector-specific, country-specific, or narrow/broad-market index. ETFs trade
on an exchange like a stock.
A basket of stocks that track assets like a mutual or index fund
Trades like a stock throughout the day
Typically has lower maintenance fees than mutual funds
Its important to carefully consider the investment objectives, risks, charges, and expenses of any exchange-traded fund(ETF)
before investing. To help you in the review process, you can obtain a prospectus containing this and all other important infor-
mation by contacting your broker. Please carefully read the prospectus before investing.
2 Investools Investor Conference 2013

LOOKING BACK TO LOOK FORWARD: FINDING AN EDGE WITH ETFS PATTISON
Model Portfolio
A model portfolio typically consists of U.S. and international stocks, bonds,
and alternative investments. The allocation percentages may be different
depending on your goals, age, income, etc. In this session we will focus on
U.S. and international stocks.
Top-Down Analysis
You should be familiar with top-down analysis. To adapt it for global investing, follow these steps:
Evaluate the global market and list the three major markets
from strongest to weakest
Evaluate countries and sectors both in the U.S. and specific country
indices for developed non-U.S. markets
Filter individual stocks within the given sector or country
U.S. Market: S&P 500 Sectors and Stocks

The U.S. portion of a portfolio consists of U.S. sectors and stocks. Here is an example of how someone could build
this portion of the portfolio using top-down analysis.
U.S. Sector % Allocation Example Stocks

Information Technology 18% AAPL, MSFT, IBM, GOOG
Financials 16% BAC, WFC, JPM, BRK.B
Health Care 12% JNJ, PFE, MRK, AMGN
Consumer Discretionary 12% CMCSA, HD, AMZN, MCD
Energy 11% XOM, CVX, SLB, OXY
Consumer Staples 11% PG, PM, KO, WMT
Industrials 4% GE, UTX, CAT, UNP
Utilities 3% DUK, SO, D, NEE
Telecom 3% T, VZ, S
For illustrative purposes only. Not a recommendation of any security or strategy.

Developed Non-U.S.: Countries and Stocks
The developed international stocks portion of a portfolio consists of countries and stocks from developed countries. Here is
an example of how someone could build this portion of the portfolio using top-down analysis.
Example
Developed Non-U.S. % Allocation
Stocks
United Kingdom 22% HBC, BP
Japan 20% TM, HMC
Switzerland 9% NVS, CS
Australia 9% BHP, WBK
France 9% SNY, TOT
Germany 8% SI, SAP
Hong Kong 3% AAGIY, CHEUY
Spain 3% SAN, TEF
Netherlands 3% UL, ING
Emerging Markets: Countries and Stocks

The emerging market portion of a portfolio consists of countries and stocks from emerging countries. Here is an example of
how someone could build this portion of the portfolio using top-down analysis.
Example
Emerging % Allocation
Stocks
China 18% CHL, BACHY
South Korea 15% PKX, SHG
Brazil 13% PBR, VALE
Taiwan 11% TSM, CHT
South Africa 7% SSL, FANDY
India 7% INFY, IBN
Russia 6% OGZPY, LUKOY
Mexico 5% AMX, CX
Malaysia 3% MLYBY, TNABY
Now that you understand what an equity portfolio typically looks like from a top-down perspective, write down one
word that comes to mind when you see these three different tables .

Steps to Build a Passive Equity Portfolio
There are four steps for creating and managing a portfolio. We will walk through the four steps with each
portfolio we build.
Step 1: Select Your Allocation
Step 2: Select Your ETFs
Step 3: Invest in Your Portfolio
Step 4: Manage Your Portfolio
Step 1: Select Your Allocation

Investors will have different allocations based on their own situation. We will use
the chart to the right as a model in our discussion.

ETF Selection Criteria:
Low expense ratio: The expense ratio represents management fees and expenses paid out of the fund.
These expenses are taken out of a funds assets and lower the investors return. An investor would like
this to be as low as possible.
Optionable: If you are using options trading strategies, including covered calls, find out if the ETF has
listed options. If you do not want to trade options, the primary focus will be the expense ratio.
Liquidity: When employing options strategies on an ETF, make sure that the options trade with plenty
of open interest. A good rule is 20 contracts of open interest for every one contract you intend to trade.

The following is a list of examples to illustrate a global ETF allocation based on the selection criteria that may suit the needs of
different investors.
Market Ticker Expense Ratio % Optionable Liquid Options
SPY .09 Yes Yes

United States of America MGC .12 Yes No
IVV .07 Yes No
EFA .34 Yes Yes
Developed Non-U.S. GWL .34 Yes No
VEA .10 Yes No
EEM .69 Yes Yes
Financials VWO .18 Yes No
GMM .59 No No
For illustrative purposes only. Not a recommendation of any security or strategy. Carefully consider the investment objectives, risks, charges, and expenses of any
exchange-traded fund (ETF) before investing.
Step 2: Select Your ETFs Global Markets

SPYUnited States
EFADeveloped Non-U.S.
EEMEmerging Markets
ACWIThe World

Fill in the Current Price column and calculate the number of shares to allocate to each example ETF.
Example Portfolio: $60,000 in equities

Example ETF Allocation $ Amount Current Price # Shares*
SPY 35% $35,000
EFA 17% $17,000
EEM 8% $8,000
Totals 60% $60,000

*# of shares = $ amount/current price

So what do you own?
2,300 Companies
For example, by using ETFs that fit your needs, you could have exposure to thousands of different companies in
dozens of countries. If you wanted to simplify your life even further, you could also own the entire globe by purchas-
ing an ETF that tracks a global equity index. Such an index would have company shares in developed, emerging, and
frontier markets. As with any investment, make sure you understand the risks before investing and always read the
funds prospectus.

Check your portfolio annually: Ongoing management of a passive portfolio
requires some attention.
Rebalance as needed: When your allocation percentages are off,
it may be time to make adjustments.
Steps to Build an Active Equity Portfolio

An active equity portfolio takes a deeper dive into top-down analysis. It adds another layer of complexity to an
investors portfolio whose goal is to outperform the market. This adds more risk to the portfolio but also the
potential for more reward. The same four steps apply to an active equity portfolio:
1. Select Your Allocation

2. Select Your ETFs
3. Invest in Your Portfolio
Overweight whats in favor
Underweight whats out of favor
Equal weight what remains steady
4. Manage Your Portfolio

For step 1, we will continue to use the same allocation model that we used in the prior two portfolios. Then, in step 2, select
ETFs that we would consider purchasing based on:
Expense Ratio
Optionable
Liquidity
Markets, History, and Your Portfolio

The second part is understanding which ETFs to purchase. This is once again based on market history.
Index Nov. - April Avg. % Return May - Oct. Avg. % Return
S&P 500 6.9 1.5

MSCI - EAFE 4.9 -.03
MSCI - EM 12.1 .9
S&P Capital IQ. Used with permission. Market averages from 1990-2012. Past performance does not indicate or guarantee future success.
Index Nov. - April Avg. % Return May - Oct. Avg. % Return
S&P 500 Overweight Equal Weight

MSCI - EAFE Underweight Equal Weight
MSCI - EM Overweight Equal Weight

Using the table below and current prices of the example ETFs, enter the number of shares for each fund
based on the allocation percentage guidelines listed below. The goal is to adjust the percentages and add
more outperforming ETFs while reducing exposure to underperforming ETFs.
Example Portfolio in Equities = $60,000
Example Regular Reg. Port. New $ Current

+ or - % # Shares*
ETF Allocation Amount Amount Price
SPY 35% $35,000
EFA 17% $17,000
EEM 8% $8,000
Total Equity 60% $60,000

Example allocation percentages guidelines:
SPY +/- up to 10%

EFA +/- up to 10%
EEM +/- up to 5%

For those who want to take more control and be an active investor, consider the following:
Check your portfolio quarterly or semiannually

Rebalance as needed: Add more of the outperforming funds and
less of the underperforming funds

Steps to Build a Super Active Equity Portfolio
The process for super active investors is essentially the same as that for active investors. However, it requires additional
analysis on your part. Now that you know how to use the markets history to your advantage, lets build the third portfolioa
super active portfolio.
1. Select Your Allocation

2. Select Your ETFs
3. Invest in Your Portfolio
4. Manage Your Portfolio
Top-Down Analysis
When performing a global investing top-down analysis, evaluate the following:
1. Global Market Postures (i.e., bullish, bearish, or neutral) can be determined using global indices
2. Countries, Sectors, and Industries both inside and outside of the U.S. look at specific country indices for developed
non-U.S. markets
3. Individual ETFs within strong countries and sectors
Each top-down layer adds
Complexity: When using both fundamental and technical analysis, you have to
analyze and understand more areas of the market, different countries, sectors,
industries, and ETFs.
Risk: News and event risk can affect a single company to a larger degree than a
diversified ETF.
Reward: With increased risk comes the potential for greater reward,
as well as the possibility of a larger loss.

For step 1, we will use the same allocation model that we used in the prior two portfolios. Then, in step 2, select ETFs that we
would consider purchasing based on:
Expense Ratio
Optionable
Liquidity

S&P Sectors Nov-April Avg. % Return May - Oct. Avg. % Return
Consumer Discretionary 11 -1.1
Consumer Staples 4.9 4.6
Energy 8.5 1.4
Financials 8.1 .7
Health Care 4.4 4.4
Industrials 9.7 -1.1
Information Technology 8.9 2.7
Materials 10.1 -2.8
Utilities 3.0 1.9
S&P 500 7 1
S&P Capital IQ. Used with permission. Market averages from 1990-2012. Past performance does not indicate or guarantee future success.

Expense
Sector Ticker Optionable Liquid Options
Ratio %
XLY .18 Yes Yes
Consumer Discretionary
VCR .14 Yes No
XLP .18 Yes Yes

Consumer Staples
VDC .14 Yes No
XLF .18 Yes Yes

Financials
VFH .14 Yes No
XLV .18 Yes Yes

Health Care
VHT .14 Yes No
XLI .18 Yes Yes

Industrials
VIS .14 Yes No
XLK .18 Yes Yes

Information Technology
VGT .14 Yes No
XLB .18 Yes Yes

Materials
VAW .14 Yes No
XLU .18 Yes Yes

Utilities
VPU .14 Yes No
XLE .18 Yes Yes

Energy
VDE .14 Yes No
For illustrative purposes only. Not a recommendation of any security or strategy. Carefully consider the investment objectives, risks, charges, and expenses of
any exchange-traded fund (ETF) before investing. To obtain a prospectus containing this and other important information, contact your broker. Please read the
prospectus carefully before investing.

Select Your Allocation
Select Your ETFs
Invest in Your Portfolio

Regular
Example Regular New $ Current
Portfolio + or - % # Shares*
ETF Allocation Amount Price
Amount
SPY 35% $35,000 -$10 25
XLY
XLF
Total Equity $35,000 $35,000


Check quarterly or semiannually: Market conditions change, so dont forget
to evaluate your portfolio on a regular basis
Rebalance as needed
Sell covered calls monthly help generate monthly premium on funds you hold
Next Steps
Using ETFs to help balance your portfolio is one of many ways you
can diversify your portfolio. Follow these steps to apply what you
learned today:
Paper trade a portfolio like the one you created today
Join one of the many Community groups already using

these ideas

Notes

15
Investools Investor Conference 2013
Manage Your 401(k)...Today
Todays Goals
A 401(k) plan is the primary source of many peoples retirement savings. However, not all investors take the time to learn how to
build and manage this important asset.
In this session youll learn to:
Understand common choices in a 401(k)
Choose and build an appropriate allocation model
Identify three strategies to effectively manage a 401(k) through any market condition
Common 401(k) Mistakes1, 2

Saving for retirement may seem like a daunting task and nobody is perfect; however, when it comes to employment, we all need
to retire sooner or later. But at what age and with how much money depends on your participation in your retirement account.
Fill in the blanks as the presenter highlights some surprising statistics about peoples preparation for retirement.
1. % of employees do not join the plans.
2. More than % dont contribute the maximum amount.
3. About % do not diversify their 401(k) investments.
4. % dip into their 401(k) early.

MANAGE YOUR (K)...TODAY TURVEY
Characteristics of 401(k) Plans
Investing in a 401(k) is usually done with mutual funds. These funds pool investor dollars together to buy
securities like stocks and bonds. Most plans offer investment choices from the following asset classes:
Mixed Allocation: A mixed allocation combines several asset classes into one fund. These are also
commonly called asset-allocation funds or target-date funds.
Stocks: Stocks include U.S. and international stocks and can also be broken down by company size.
Large-cap stocks are generally large, stable companies that pay dividends
Small-cap stocks are smaller companies still in the growth phase
Bonds: Compared to stocks, bonds are considered to be lower-risk, lower-return investments.
Cash: This term refers to money market funds, similar to a savings account in a bank.

Mutual Fund Descriptions
To get information about available funds, you must first have a 401(k) account. After opening an account, research the funds
prospectus that covers risk, allocation, and other fund details. This document is usually available on the plans website and
includes the funds:
Investment Objective & Strategy

Volatility Analysis Risk
Largest Holdings Diversification
When choosing a fund, an important aspect to consider is the expense ratio, or the fees paid to the funds managers. The
prospectus describes how the fund is managedwhether actively or passively (e.g., an index fund). Actively managed accounts
typically have higher expense ratios, while passively managed funds typically mimic a market index and have lower expense
ratios. Higher fees for actively managed funds can eat into the funds returns.

Characteristics of 401(k) Plans: Self-Directed
Although most 401(k) accounts simply offer a choice of mutual funds, some allow for a more hands-on approach.
This hands-on approach may include the ability to:
Open a self-directed account
Choose from many investment types such as individual stocks, exchange-traded funds (ETFs), or
other types of actively managed asset classes
But it does have drawbacks, such as:
Trading fees can be higher than a regular brokerage account
Research and tracking the account can take more time than a managed account
Choosing and Building Your Allocation

Before building your 401(k) portfolio, you must first choose an allocation model. This involves determining a mix
of investment types (e.g., stocks, bonds, and cash) to balance risk and reward. Here are some factors to consider
when determining your mix:
Investing goals
Risk tolerance
Time horizon
Asset allocation and diversification do not ensure a profit or eliminate the risk of
investment losses.

Allocation Examples
Here are three examples of how an investor might allocate his account, according to his goals, risk tolerance, and time horizon.
Notice how, in example #1, the larger part of the portfolio is allocated to stocks for the more aggressive investor with a long-
term time frame. In contrast, in example #3, there is a much smaller stock allocation and a larger bond allocation with a very
short time horizon.
Allocation Example #1
Goal: Aggressive growth
Risk tolerance: High
Time horizon: Long term (10+ years)
Goal: Moderate growth
Risk tolerance: Moderate
Time horizon: 5-10 years
Goal: Capital preservation
Risk tolerance: Low
Time horizon: At goal and beyond
For illustrative purposes only. Not a recommendation of a specific portfolio allocation. Asset allocation and diversification do not ensure a profit nor eliminate the risk of invest-
ment losses.

Check the allocation example that you feel best fit your current situation.
Building Your Allocation: The Simplest Approach

After choosing an allocation model, you can invest the account balance several ways. A simple approach is to use
target-date funds, also called asset-allocation funds.
Target-date funds allow investors to choose a diversified allocation within a fund
Allocation becomes more conservative over time
As with any investment vehicle, there are advantages and limitations. Using the columns below, write
down as many advantages and limitations that come to mind.
Advantages Limitations

Building Your Allocation: The Custom Model
You can also allocate your 401(k) using a mix of individual funds. When choosing funds ask yourself the following:
Is the fund actively managed or is it an index fund?
If the fund is actively managed, whats its track record based on third-party rating agencies?
Does the fund have restrictions on how often it can be bought/sold?
Using the sample list of funds and sample allocation models, here are two examples of building an allocation.
For illustrative purposes only. Not a recommendation of a specific portfolio allocation.
Managing Your 401(k)

After building your 401(k), it requires ongoing maintenance to stay consistent with your goals, risk tolerance, and time horizon.
To accomplish this, your portfolio may need to be rebalanced regularly.
This prevents a portfolio from becoming too risky or too

conservative compared to its original objective. It involves
selling assets that have appreciated significantly and using
the proceeds to buy underperforming assets.
Some 401(k) plans offer an auto-rebalancing feature.
Then all you do is determine how frequently you want to
rebalance: yearly, semiannually, or quarterly.
As retirement nears, your goal should shift from growth
to capital preservation. For example, your allocation could
become more conservative over time (less stocks,
more bonds).

Making Changes to Your 401(k)
Short- and intermediate-term market gyrations can cut deeply in to portfolio balances that
are heavily weighted in stocks. To help protect against equity-based volatility, its important
that investors allocate to more conservative investments as they near retirement. As a re-
cent example, many investors who were previously nearing retirement were shocked to see
how much their account balances dropped during the 2008 recession.
What drives the economy?

The economy regularly goes through cycles of growth and contraction, which causes asset
prices to fluctuate. The economy is influenced by factors such as:
Gross domestic product (GDP): Unemployment rate: An econ- Interest rates: When interest
This is the most-watched omy is stronger when consumer rates go up, it costs more to
economic indicator because it spending is up. Consumers are borrow money and fewer
reflects a countrys total value of hesitant to spend money if they businesses and consumers are
all goods and services it produces. are unemployed. The unemploy- willing to borrow, which affects
ment rate is directly related to economic growth.
the strength of the economy.
Market Analysis
Economic indicators, such as GDP, unemployment, and interest rates, are backward looking. In other words, they
explain data of past economic performance. Economic indicators are also referred to as fundamental indicators.
Market indicators, such as stock, bond, and commodity prices, are forward looking. When buying and selling
stocks, investors use stock charts to anticipate future price movement. For this reason, market indicators tend
to move three to nine months before economic indicators.

Spotting Market Direction Changes
Just like the economy, the stock market goes through periods of growth (called bull markets) and contraction (called bear
markets). Many investors use a 200-day moving average to determine the markets long-term trend.
In a bull market ,the S&P 500 will generally be above the 200-day moving average.
In a bear market, the S&P 500 will generally be below the 200-day moving average.
A Better Way to Spot Market Changes

Using a single moving average for entry and exit signals can be challenging because frequent crossovers can occur. However,
you can use two moving averages to narrow your entry and exit signals.
Use two moving averages: 10 week and 40 week
10 week crossing below 40 week signals the likelihood of a bear market
In a bear market, the main goal is to preserve capital until a new bull market begins. To do this with your 401(k):
Consider switching to a capital preservation allocation
Return to normal allocation after a bullish crossover (10 week goes above the 40 week)

Steps to Managing Your 401(k)
Learning how to manage your 401(k) is an important step in achieving your financial goals. Heres a brief summary
of the process:
1. Choose an appropriate allocation based on your goals and time horizon.
2. Select appropriate funds to build the allocation:
Target fund or individual approach?
Actively vs. passively managed?
Performance record?
Buy/sell restrictions?
3. Rebalance the account regularly. In many 401(k) plans, this can be set up automatically.
4. Check your charts weekly, including the S&P 500, for signals of a bear market.

Next Steps
Now youve learned how to better manage a 401(k) plan, here are some helpful
next steps:
Look at your own 401(k) account and consider any changes that may
need to be made. This can also be applied to an IRA account.
Share what youve learned with othersthey may find the

information very valuable!
Learn more about portfolio management by taking the Portfolio

Strategies course.*
Continue Your Learning

Contact your coach:
Michael Turvey, CMT, CFP

michael.turvey@investools.com
Or, attend one of the coachs upcoming events*:
Portfolio Strategies Trading Room: Tuesday 12:30 p.m. 1:30 p.m. ET
Introduction to Trading Stocks Online Coaching: Wednesday 1:30 p.m. 3:00 p.m. ET
Advanced Options Online Coaching: Thursday 11:30 a.m. 1:00 p.m. ET
Market WrapSM: Wednesday 4:00 p.m. 4:15 p.m. ET
Morning HuddleSM: Tuesday 9:00 a.m. 9:15 a.m. ET

*May require additional purchase of products and services. Speak with an Investools representative for more details. Events may be subject to change.

Notes

Overcoming the Person Within:
Take Your Trading to the Next Level
Todays Goals
The biggest obstacles traders face are often self-created.
Identify your limiting beliefs and biases
Develop a plan of action to:
Make better decisions

Optimize results
Achieve greater consistency
Put your plan to the test
You are in the right room
All winning professionals know the enormous

importance of psychology in trading.
All losing amateurs ignore it.1

-Dr. Alexander Elder

OVERCOMING THE PERSON WITHIN: TAKE YOUR TRADING TO THE NEXT LEVEL MCCOY
Lets Prepare to Win
If your subconscious financial blueprint is not set for

success, nothing you learn, nothing you know, and
nothing you do will make much of a difference.2

-T. Harv Eker
Identify Your Limiting Beliefs and Biases

The first step is to identify any limiting beliefs and biases that may be impacting your trading decisions.
Limiting beliefs about money
Known obstacles for traders
Personality vs. trading style

Limiting Beliefs about Money
Answer the following questions about how you feel about money.
Expressions
What common expressions about money have you heard that could be limiting your success?
Programming
How were you taught to view money?
Experiences
What personal experiences have you had that may have shaped your beliefs about money?

Do you think BIG or small?2
Circle which statements best represent your mindset.
I believe I create my life or I believe life happens to me
I play the money game to win or I play the money game not to lose
I think big or I think small
I think both or I think either/or
Capture a key concept.

Key Elements of Change
Catalyst: Change requires a catalystor triggerto take action. Common catalysts for change are:
A compelling need
An intense desire
Write your personal catalyst.
Roadmap for Change: To enhance your probabilities of success, create a roadmap for change. Consider where youre headed
and detail how youre going to get there.
Action: To reach your goals, take action. Identify your goal and break it down into incremental actions that will help you reach
your goal. Then take the first step.
Reinforcement: To achieve lasting change, reinforce taking appropriate action so that you will do so repeatedly. Make sure
you celebrate your successes.
Write down three ways that you would celebrate your success.
1.
2.
3.

Action Plan
Commit to three actions that will help set your financial blueprint for success.
1.
2.
3.
Known Obstacles for Traders
FearA Common Bias

The challenge for traders is that there is no certainty in the market, which can lead to fear.
The brain...seeks certainty (fear of loss) rather than

management of uncertainty (probability thinking).3

-Rande Howell

Roadblocks that Dominate a Traders Mind
In the space provided, answer the questions below.
Which fears may be impacting your ability to reach your full potential?
How do these fears impact your trading and block your progress?

Lets Dig Deeper
Three specific roadblocks that traders often face are:
Preferential Bias
Prospect Theory
Disposition Effect
Preferential Bias
How long does it take to read these words?
What implications does preferential bias have to trading?
Preferential bias impacts trading because you tend to favor information that confirms your opinions and views,
while ignoring information that contradicts them.
Which tools could you use to compensate for this bias?

Technical Indicators Can Assist
In addition to top-down analysis, many investors also use technical analysis to help overcome their preferential bias as they
look for potential investments. Common technical indicators include:
Trend
Support and resistance
Momentum
Volume
Prospect Theory
Which investment would you choose?
Now, which investment would you choose?
Prospect theory is often called loss-aversion theory, because you feel a greater impact from the loss of $1,000 than you feel joy
from a gain of $1,000.

Disposition Eect
Most of us are wired to
Cut our winners
And, let our losers
Disposition is short for predisposition toward get-evenitis. Because people dislike incurring losses much more
than they enjoy making gains and are willing to gamble to avoid locking in a loss, they will hold on to stocks that
have lost value (relative to the reference point of their purchase) and are eager to sell stocks that have risen in
value. Selling a stock with a small gain gives the satisfaction of placing a W in the win column. However, cutting
winners short may lead to missing larger gains.
List some tools you could use to compensate for this bias.
Investing Plan Rules Can Help

Following an investing plan can help overcome obstacles that many traders face. Investing plan rules can help
traders answer these questions: What to trade?, When and how much to trade?, and When to exit?.

Are investing plan rules enough?
While many traders believe that they can be systematic and unemotional, the latest neuroscience suggests its impossible.
Rande Howell3 shows that your emotional state and state of mind impact what possibilities you can see.
For traders, this has huge implications. Your emotions may limit what opportunities you see in the market, which will directly
impact the actions you do or dont take. It is important to be aware of your emotional state, understand how it can impact your
state of mind, and ensure that you remain open-minded in order to see setups occurring in the market.
Action Plan
Commit to three actions that can help you overcome these mental blocks:.
1.
2.
3.

Personality vs. Trading Style
In addition to replacing limiting beliefs about money with empowering beliefs and tackling known obstacles to
traders, it is essential to ensure that your trading style fits with your personality. Brett N. Steenbarger, Ph.D.,
points out that finding the proper fit between who you are and how you trade is a big part of finding success
in trading.4
Does your trading style match your personality?
Action Plan
Now that youve explored potential limiting beliefs and biases from several perspectives and identified tools to
help you overcome these biases, its time to develop a roadmap to help you take your trading to the next level.
Commit to three actions that will help you make better decisions, optimize your results, and achieve
greater consistency.
1.
2.
3.

Self-understanding and analytics is the key. Denise Shull5
Learning to recognize common trader pitfalls and implementing a personalized investing plan will help you become a more
rational trader. Some keys to trading self-mastery are:
We are not stupid or irrational.
We have been taught to over-rely on the numbers.
We must make judgments in a fundamentally uncertain environment.
We must learn how to better judge!
Next Steps
Continue to apply what you learned today by following these steps:
Remain aware
Be gentle with yourself
Implement your plan
Realize your full potential

Contact your instructor:
Linda McCoy, CMT

linda.mccoy@investools.com
Or, attend one of the instructors upcoming events*:
Basic Options, Greensville, October 1213, 2013
Basic Options, San Francisco, October 1718, 2013
Advanced Options, Chicago, November 23, 2013
Basic Options, Dallas, November 2223, 2013

*May require additional purchase of products and services. Speak with an Investools representative for more details.
Events may be subject to change.

41
Notes
Notes
Trade the Trends of Global Markets Using
Intermarket Analysis
Todays Goals
We live in an interconnected economy. Changes in interest rates, commodity prices, and the U.S. dollars value have rippling
effects across U.S. markets and throughout the global economy.
Understand intermarket relationships
Identify trading opportunities using intermarket analysis
Recognize major shifts in intermarket posture
Back to 1981

TRADE THE TRENDS OF GLOBAL MARKETS USING INTERMARKET ANALYSIS TURVEY
Lets start by looking at an example where a change in one market led to rippling effects in subsequent markets.
In the early 1980s, there were several major intermarket developments that had long-term implications.
Gold prices peaked in early 1980, which affected interest rates (changes in the commodity market often
correlate with changes in interest rates).
Interest rates then peaked in the fall of 1981. During the previous decade, high interest rates held back
stocks because companies and consumers were burdened by high borrowing costs.
In mid-1982 stocks began their greatest bull market in history, fueled by falling interest rates and low
inflation. The bull market lasted until 2000 and, in turn, caused an extended bear market in commodities
during the same time period.
2001-2002: U.S. Dollar Peak
For illustrative purposes only. Not a recommendation of any security or strategy .
In the early 2000s, another important intermarket analysis event occurredthis time triggered by the U.S. dollar.
In the spring of 2002, the dollar confirmed a double top and signaled a long-term trend change. A bearish dollar
then made commodities a more attractive investment.

U.S. Dollar Peak Leads to Gold Rally
For illustrative purposes only. Past performance does not indicate or guarantee future success.
During the same time that the dollar confirmed a double top and began to drop in value, gold began a long-term uptrend that
has continued.
Intermarket Relationships
From the previous examples, you can see how a change in one market often leads to rippling effects in other markets.
Intermarket analysis is the study of the relationship among the four major asset classes: currencies, commodities, bonds, and
stocks. Intermarket analysis helps identify how movements in one asset class may affect others, either directly or indirectly.
The general progression of intermarket analysis is as follows:
1. Changes in currency prices

influence commodities
2. Commodity prices influence bond prices

and interest rates
3. Bond prices and interest rates

affect stocks
4. Changes in stocks affect the underlying

economy and eventually will affect
currencies and restart the cycle

When using intermarket analysis, the first relationship to understand is between currencies and commodities.
The U.S. dollar is the worlds reserve currency, which means that many global commodities, like gold and
oil, are priced in U.S. dollars.
A rising dollar makes commodities more expensive for global consumers.
A falling dollar makes commodities cheaper for global consumers.
The dollar and commodity prices usually trend in opposite directions.
For illustrative purposes only. Not a recommendation of any security or strategy. Past performance
may not indicate or guarantee future success.
The next intermarket relationship is between commodities and interest rates.
Rising commodity prices are considered inflationary.

Rising inflation means interest rates are also rising and bond prices are falling.
Commodities and interest rates usually trend in the same direction.
For illustrative purposes only. Not a recommendation of any security or strategy. Past performance
may not indicate or guarantee future success.

Finally , there are several important concepts to understand regarding the relationship between bond and stock prices.
When stocks are weak, investors often rotate into less volatile assets like Treasury bonds.
Stocks and bond prices usually move in opposite directions.
For illustrative purposes only. Past performance may not indicate future or guarantee
futures success..
Complete the following sentence to denote the market relationship using the terms the same or opposite:
The U.S. dollar and commodities usually move in direction(s).
Commodities and interest rates usually move in direction(s).
Bond prices and interest rates move in direction(s).
Stock and bond prices usually move in direction(s).
All financial markets are interrelated. Changes in one asset class will trickle down into other asset classes. Understanding this
relationship is critical to selecting the right types of investment at the right time. When investors appetite for risk is higher
(risk on), the dollars value decreases. The dropping dollar makes the price of commodities higher and, in turn, drives bond
prices lower. As bond prices drop, interest rates and equities climb. The inverse is true when investors appetite for risk is
lower (risk off).

Intermarket Analysis Investing Plan Overview
An intermarket analysis investing plan is similar to plans youve built before because it contains the same
three steps:
1. Identify your intermarket posture

2. Build an intermarket watch list by adding the search results for potential securities to trade based on
your analysis
3. Trade with the trend
1. Identify Your Intermarket Posture

Determining your intermarket analysis posture is about more than just being bullish or bearish because youre
considering multiple asset classes. It can be broken down into two categories:
1. Risk On: Risky assets such as stocks, commodities, and commodity currencies are in favor. This period
is usually characterized by rising interest rates.
2. Risk Off: Defensive assets like bonds and safe-haven currencies are in favor while risky assets are out
of favor. This period is usually characterized by falling interest rates.
Write down which assets (e.g., stocks, bonds, currencies, etc.) tend to be in favor given a risk-on or
risk-off posture.
Risk-On Examples Risk-O Examples
Example: Stocks Example: Cash

Circle what you think the current intermarket posture is based on todays conditions.
Risk On Risk Off
Why?
2. Build an Intermarket Watch List

Through exchange-traded funds (ETFs) and exchange-traded notes (ETNs), investors can access different asset classes, such
as stocks, bonds, commodities, and currencies.
Identify ETF/ETN symbols that correspond with the asset classes listed in the previous activity.
Risk-On Example ETFs/ETNs Risk-O Example ETFs/ETNs
Example: Stocks - SPY Example: Bond -TLT
For illustrative purposes only. Not a recommendation of any security or strategy. Past performance may not indicate or guarantee future success.
Carefully consider the investment objectives, risks, charges, and expenses before investing. A prospectus, obtained by contacting the investment company or your broker,
contains this and other important information about an investment company. Read carefully before investing.

3. Trade with the Trend
In this session were using an intermediate-term (i.e., weeks to months) time frame. Consider the following
samlpe intermarket analysis investing plan.
Objective
Use intermarket relationships to trade intermediate-term trends of ETFs and ETNs
Watch List Criteria
ETFs and ETNs that track the stock, bond, commodity, and forex markets
Average volume of 250,000 or higher (the more volume, the better)
Entry Rules
Identify market posture risk on or risk off

Uptrend entry: Uptrend on daily chart
Buy on close above high of low day
Place initial stop 1% below support
Downtrend entry: Downtrend on daily chart
Short on close below low of high day
Place initial stop 1% above resistance
Money Management
Position Size: Risk 1% to 2% of portfolio per trade

Allocation: Allocate no more than 10% of a portfolio to one position
Exit Rules
Uptrend: Place initial stop 1% below support

Move stop up when entry signal repeats (1% below new support)
Downtrend: Place initial stop 1% above resistance
Move stop up when entry signal repeats (1% above new resistance)
Routines
Daily Routine
Check current positions to see if the stop needs to be adjusted
Check watch list for new trade opportunities
Weekly Routine
Determine market posture risk on or risk off

Recognize Major Shifts
After learning how to identify intermarket analysis trends, build and paper trade
your watch list. Its important to know when to adjust your posture and strategy with
major trend changes. This requires that you conduct an ongoing intermarket
analysis. To do this, follow these steps at least once a month:
Check long-term (i.e., weekly) charts of the four major asset classes
(i.e., currencies, commodities, bonds, and stocks) and look for significant
trend changes.
Know which asset classes are likely to head in which direction based on
shifting trends.
Know which ETF/ETNs to focus on.
Take appropriate action according to your investing plan rules.
Check the Charts

Look for significant trend changes. By regularly checking long-term charts, you can better spot major shifts in the intermarket
posture. Consider these guidelines:
Use a weekly chart for long-term analysis

10- and 40-period exponential moving average (EMA) for trend analysis
For illustrative purposes only. Past performance may not indicate or guarantee future success.

Using your intermarket analysis investing plan, examine the following market scenarios and determine
actions you could take given the stated market conditions.
Scenario #1Major Breakout for the U.S. Dollar

Based on the chart below:
1. How does this affect your intermarket posture?

How is a bullish breakout in the U.S. dollar likely to affect commodities, bonds, and stocks?
2. Which types of ETF/ETNs should be on your watch list?
3. When would you enter/exit trades on these ETFs/ETNs?
For illustrative purposes only. Not a recommendation of any security or strategy. Past performance may not indicate or guarantee future success.

Scenario #2Bullish Trend Reversal for Gold
1. How does this affect your intermarket posture?
How does a bullish breakout for gold affect the U.S. dollar, bonds, and stocks?
2. Which types of ETF/ETNs should be on your watch list?
3. Whenwould you enter/exit trades on these ETFs/ETNs?
Past performance does not indicate or guarantee future success.
Scenario #3Major Top for Bonds

How does this affect your intermarket posture?
How does a change in the trend of bonds affect stocks, commodities, and the U.S. dollar?
Which types of ETF/ETNs should be on your watch list?
When would you enter/exit trades on these ETFs/ETNs?

Next Steps
Learning to implement intermarket analysis into your investing plan can help you
spot opportunities and better assess potential market moves. To apply what
you learned today, continue your education by following these steps:
Implement your intermarket analysis investing plan
Take the Portfolio Strategies online course and workshop*
Attend the Portfolio Management capstone*

Contact your coach:
Michael Turvey, CMT, CFP

michael.turvey@investools.com
Portfolio Strategies Trading Room: Tuesday 12:30 p.m. 1:30 p.m. ET
Introduction to Trading Stocks Online Coaching: Wednesday 1:30 p.m. 3:00 p.m. ET
Advanced Options Online Coaching: Thursday 11:30 a.m. 1:00 p.m. ET
Market WrapSM: Wednesday 4:00 p.m. 4:15 p.m. ET
Morning HuddleSM: Tuesday 9:00 a.m. 9:15 a.m. ET

Notes

55
OPTIONS
OPTIONS
58Generating Monthly Income with Options
70High-Probability Trading
82Inside Options: Anatomy of an Iron Condor
90Strategies to Reduce Risk Over Time
102Swap Time for Money with Calendar Spreads
114The Wide World of Options Uncovered
Generating Monthly Income with Options
Todays Goals
Options can be used to potentially generate income from your stocks.
Identify the keys of income generation

Develop your own trading rules for entering and exiting
Understand strategies designed for income generation:
Selling cash-secured puts
Covered calls
Option Strike Prices
1. In the Money (ITM): An option with intrinsic value. Examples include a call option where the strike price is below the
current stock price or a put option where the strike is above the current stock price. An options intrinsic value is the
difference between the strike price and the underlying stocks current value.
2. At the Money (ATM): An option closest to the stock price. This option may or may not have intrinsic value because
the strike could be slightly above or below the underlying stocks current value.
3. Out of the Money (OTM): An option with no intrinsic value. Examples include a call option where the strike price is
above the current stock price or a put option where the strike is below the current stock price. Unlike an ITM option, an
OTM only has extrinsic value and no intrinsic value. For both ITM and OTM options, the extrinsic value is the difference
between the entire price of the option and its intrinsic value.
58 Investools Investor Conference 2013 *TD Ameritrade Institutional is a division of TD Ameritrade, Inc.
GENERATING MONTHLY INCOME WITH OPTIONS MAZZOLA
Options Price =
An options price is comprised of two partsintrinsic value and extrinsic value. When you buy a call, for ex-
ample, the intrinsic value is calculated by subtracting the strike price from the stock price. Intrinsic value is the
difference between the entire price of the option and its extrinsic value.
Beyond intrinsic value, the remaining amount is extrinsic value. Extrinsic value represents several factors, such as
time until expiration (i.e., time decay) and future anticipated volatility in the stock. Less significant factors that
impact the extrinsic value of options include dividends and interest rates.
Time Decay
The rate of time decay is slower in the early months and faster as it nears expiration.
As an options expiration date draws closer, the rate of time decay increases and the options time value
decreases. The greatest effects of time decay occur during the last month before expiration. Time decay works
against an option buyer and works in favor of an option seller.

Selling Cash-Secured Puts: Strategy Objectives
Generate income: Cash-secured puts can generate income.
In return for selling the put and assuming the risk of
potentially buying a stock you may not currently own, youre
compensated with the options premium.
Buy stock: Selling OTM puts for a credit can generate
income and potentially provide opportunities to purchase
stocks below current market prices if the stock falls below
your sold put.
Position is theta positive: As an option seller you benefit
from time decay because the option you sold loses time
value for the buyer each day.
High implied volatility (IV) favors sellers: If implied
volatility is high when you sell the option, the initial premium
you collect is higher. Of course, higher volatility increases
the risk of assignment on the put.
Note: This strategy is subject to a high risk of purchasing the corresponding stock at the strike price when the stocks market price will likely be lower. There is also the risk of loss
should you have to buy the option back at a higher price than what you sold it for initially.
Theta is a measure of an options sensitivity to time decay. Implied volatility is the estimated volatility of the underlying assets price movement for the period of the options
contract.
Watch List Considerations

Stocks you want to own: A watch list is for stocks you would actually consider owning. Be careful not to set your
initial criteria too loose or you may end up with too many stocks and be unable to perform an effective review.
Trend must be up and/or sideways:
Overall market: How might the overall market direction affect the stock?
Sector: What is the trend of the stocks sector or industry group?
Stock: What is the current trend?
Sufficient daily trading volume: Stocks with higher average volume tend to have lower overall price volatility.
Higher average volume might also help reduce the chance of erratic price movements.

Options Selection Considerations
Effectively creating and reviewing your watch lists allows you to focus on potential investment choices. Before
selling puts on stocks from your watch list, consider the following:
Time Frame
Determine your time frame. For example, some investors focus on options with four to 10 weeks
remaining until expiration.
Strike Price
Determine your strike price. For example, some investors focus on put options with a -.30 delta to
-.40 delta*.
Which strike price would you prefer to take delivery of shares on?
Does the potential return justify the risk?
*Delta is a measure of an options sensitivity to changes in the price of the underlying asset.
Entry ConsiderationsTechnical Analysis

Evaluate trend
Support is key
Bouncing off support: If a long-term bullish stock is bouncing off support, it creates a potential
opportunity to sell puts. In a short-term downtrend, volatility tends to be higher and favors the premium
received by the seller, but also increases the risk of continued erratic price movements.

Exit ConsiderationsTrade Management
If the stock is no longer in the forecasted range as expiration nears, consider the following:
Scale out: You might choose to exit to of your contracts. Closing only a portion of the position still allows you to
purchase the stock on expiration at the strike price, or allows the position to still expire worthless to the buyer and
you keep the initial credit minus any transaction costs. Keep in mind that additional transaction costs will be incurred
when you scale out of a position a little at a time.
Close the entire position: Closing the position by buying back the sold option (buying to close) would incur additional
transaction costs. In addition it would likely cost more than the original credit received; however, it keeps you from
having to purchase and then sell the shares, if you are assigned the position.
Play the probabilities: When there is still a possibility that the option sold may expire worthless, some investors
examine the probabilities and stay in the trade until shortly before expiration. Keep in mind that you could be
assigned at any time up until the option expires or until you buy to close.
Roll to next month: If you still believe the stock will remain bullish and that selling the put is a good investment
position, buying back the sold put (buying to close) and selling another put (selling to open) for subsequent months is
another way to continue the trade, although additional transaction costs will incur on both the buy and subsequent
sell transactions.
Take delivery of shares: If your intent in selling the put is to take delivery of the shares at the sold strike price, then
allowing the option to expire ITM would trigger the obligation to purchase the shares.
Selling Covered Calls: Strategy Objectives

Neutral to bullish strategyyou must own stock to implement: When selling
covered calls your primary investment is still the underlying stock. Remember
that its difficult for the income from covered calls to offset the losses of a
severely declining stock.
Potential to generate income on stocks you own: Selling covered calls

attempts to generate income by taking on the risk of having to sell your stocks
at a defined price on the expiration date.
Provide limited downside risk protection: If the stock drops, you keep the
premium of the call you sold. However, your larger position in the stock is losing
value. If you would like to sell the stock before the option expires, you will need to
first buy back the option you sold.
Potential to provide monthly portfolio return enhancements: When you have a long-term bullish-to-neutral outlook
on stocks you own, selling covered calls can help generate additional income rather than just letting the stocks sit. The
income earned can help offset the original purchase price and lower your break-even point on the stock position.

Possible Risks
Chance of losing your stock
Reduced profits if the stock continues to rally
Stock might drop in value
Selling covered calls, like any investment, has risks. You may not wish to sell your stock within a given time period
or may not want to limit your potential gains to the strike price of the call you sold. Remember your primary
investment is still in the underlying stock, and if it continues to drop, the income from the call you sold will likely
not offset your stock losses.
Outcomes for a Covered Call at Expiration
Stock rallies = Profitable trade

Your primary investment is the underlying stock. If the stock rallies, you make money on the
underlying stock shares up to the price of the call you sold (at which point you will likely be called
out), as well as keep the premium you received for the sale minus any transaction costs.
Stock unchanged = Profitable trade

If the stock remains unchanged and the OTM call you sold expires worthless, you keep the premium minus
any transaction costs.
Stock drops less than premium = Profitable trade

If the stock only decreases slightly, the premium received by selling the call could help offset the loss,
and the trade could still be profitable.
Stock drops more than premium = Loss on trade

If the stock drops too much, the premium received by selling the call will only offset losses in the stock
by the amount of premium minus any transaction costs.

Options Selection Considerations
Time Frame
Determine your time frame: Some investors focus on options with four to 10 weeks remaining until expiration. As an
option seller, you are hoping to keep the premium you received as time decays.
Rate of decay increases as expiration nears: The time value of options decays quickest as expiration approaches.
Options Selection
Determine your strike price: The closer an options delta is to zero, the less likely you will have to surrender your
stock at expiration. But keep in mind, a short option can be exercised at any time up until it expires. Also remember
delta measures an options sensitivity to changes in the price of the underlying asset.
OTM option provides a high-probability of keeping stock: By selling OTM covered calls, your premium is lower than
with ATM or ITM calls, however, so is the risk of having to surrender the stock at expiration. If the goal is to keep the
stock and collect the premium, many investors choose to sell OTM covered calls. But its still possible to get assigned,
should the stock rise above the strike price.
ATM option provides the fastest rate of decay: Aggressive option sellers may choose to sell ATM calls because the
delta is higher and the rate of time decay is faster. Selling ATM calls, however, also increases the risk that the stock
will move ITM and you will have to surrender the stock.

Entry ConsiderationsTechnical Analysis
Sell call at resistance:
Stock already owned

Higher probability of keeping stock
Bullish longer term
If your long-term perspective is bullish to neutral, the short-term pullback of resistance may present a covered
call trade opportunity. Selling a call at resistance may allow you to collect a higher premium and
decreases the chances that you will have to surrender the stock at expiration if resistance holds.

If you want to keep the stock and the stock price is above the short strike with expiration day approaching, consider
the following:
Scale out of the position by exiting to of your contracts: Scaling out reduces your overall risk exposure and
would only require you to surrender some shares while still maintaining some of the original investment position. Its
important to note that, although uncommon, a short position that is ITM could be called away before expiration. Also,
keep in mind that additional transaction costs will be incurred when scaling out of a position a little at a time.
Stay in the trade and play the probabilities: If youre willing to accept the risk of having the stock called away and
want to wait until expiration, you can stay in the trade.
Roll the option: Buying back the option you sold and selling another call option for a future month could allow you
to keep the investment objective without surrendering the stock. Keep in mind, however, that additional transaction
costs will incur on both the buy and subsequent sell transactions if you roll an option.
If you dont care if you lose the stock, do nothing: Maybe youre indifferent to whether you keep the stock. If you
dont want to buy back the option and anticipate having to surrender your shares, youll likely generated a profit if
you sold an OTM call and move on to other investment choices.
Note: Consider any possible tax consequences of selling your stock.

Buy call back and sell another to open in a later month:
Roll out = Keep same strikes

Usually a credit/neutral outlook for stock
Roll up = Sell higher strike
Usually debit/allows for more upside for stock
Roll down = Sell lower strike
Usually a credit/more of a short-term bearish outlook for the stock in an intermediate uptrend
Although youre still buying back the original options position and closing the trade when you roll an option, youre continuing
the investment objective with a subsequent months contract. How you decide to roll the option will depend on your current
investment outlook for the underlying stock prior to the corresponding expiration.

Exit ConsiderationsExiting the Trade
Determine your time frame. Many investors choose to close anywhere from four to 10 days
before expiration.
Some investors target a certain percentage of the maximum gain on the trade, such as 70% to
80% of maximum gain.
Consider your own goals and risk tolerance level to make the right choice for your situation.
Deciding when to exit a position depends on your initial investment objectives. Many investors do not want
to surrender their stocks and instead decide to buy back the options contract at a given profit percentage
or a few days before expiration. Doing so releases the obligation of the contract and allows them to focus
on other investments. However, there is also the risk of loss should you buy the option back at a higher price
than what you sold it for initially.
Next Steps
Using options to generate income is just one of the many ways to
help manage a diversified portfolio. To learn other strategies with
more sophisticated options techniques, apply what you learned
today by following these steps:
Review the Introduction to Options online course

available at TD Ameritrade.com
Options involve risks and are not suitable for everyone as the special risks inherent to options trading may expose investors to
potentially rapid and substantial losses. Investors must consider carefully all relevant factors including their own personal financial situation before invest-
ing in options. Prior to engaging in trades involving options, you should carefully read Characteristics and Risks of Standardized Options, please read the pre-
viously provided copy or the hard copy provided today. This important document is also available at www.tdameritrade.com or by contacting TD Ameritrade at
800-669-3900.
Options trading privileges in your account subject to TD Ameritrade review and approval. Not all account-holders will qualify.
While this session focuses on technical analysis, traders should also consider fundamental analysis when making investment decisions.
Investools Inc. and TD Ameritrade, Inc. are separate but affiliated companies that are not responsible for each others services or policies. Brokerage services
provided exclusively by TD Ameritrade, Inc.
TD Ameritrade, Inc., member FINRA/SIPC/NFA. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.
2013 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.

Notes

69
Notes
High-Probability Trading
Todays Goals
High-probability trading is all about trying to put the odds in your favor and benefiting from time decay.
Recognize the importance of focusing on high-probability strategy selection

Identify how to benefit from time decay
Construct a diversified, highly liquid options inventory
Identify a clear set of consistent entry and exit rules
High-Probability Goal
As a high-probability trader, your goal is to focus on managing your directional risk while benefiting from time decay. Option
traders manage risk using the greeks: delta, gamma, theta, and vega.
Manage your directional risk: delta

Benefit from time decay: theta
High-Probability Goal Example

In this session we will focus on delta and theta, as shown in this example of a high-probability options inventory below.
For illustrative purposes only. Not a recommendation of any security or strategy. Past performance does not indicate or guarantee future success..

HIGH-PROBABILITY TRADING MCCOY
Manage Your Directional Risk: Delta
Understanding delta is important because it helps you measure your directional risk. Delta measures:
An options sensitivity to a $1 change in the underlying securitys price

Number of shares you control = Risk
In this example the beta-weighted delta is -10.88, which, when rounded to -11, is similar to shorting
11 shares of the SPDR S&P 500 (SPY)an exchange-traded fund (ETF) that tracks the S&P 500
Index. This example shows that if you can afford the risk of shorting nearly 11 shares of SPY stock,
you should also be able to handle the risk shown in this options inventory example.
Answer the following questions about the significance of your beta-weighted delta.
If the SPY went up one point today, how much would you theoretically make/lose from a directional perspective?
What if the SPY went down two points instead?
Benet from Time Decay: Theta

Theta measures how much you make per day as an option seller, as a result of time decay. Theta is
the one constant in options trading, and option sellers take advantage of time decay. In this
example the options inventory is making just less than $51 per day due to time decay alone.
If you were able to make $51 per day from theta, the return would total $1,530 after 30 days. Assuming
a $25,000 account, a return of $1,530 would generate a 6.1% monthly return, provided youre also
managing the other greeks in your account, including delta. As you learn to use theta in your options trading, it is also
important to remember to watch gamma. Gamma indicates the speed with which delta moves. A larger theta will
result in a larger gamma and cause delta (i.e., risk) to move more quickly, thus making it harder to manage.
Name at least four strategies that are theta positive.
1. 5.
2. 6.
3. 7.
4. 8.

Investing Plan
Similar to other strategies youve learned, high-probability strategies use the same framework of rules as other investing
plans. Here is a basic framework for creating rules for your high-probability trading strategies:
1. Objective
2. Watch List Criteria
3. Entry Rules
4. Money Management
5. Exit Rules
6. Routine
Now lets review two sample plans for both short iron condors and calendar spreads.

Sample Investing PlanShort Iron Condors
Objective
To make money on time decay and falling implied volatility
Watch List Criteria
Liquidity: Liquid stocks or ETFs

Spreads: Narrow bid/ask spreads; penny-wide spreads preferable
Entry Rules
Expiration Selection
Sell contracts that will expire in 20 to 50 days
Strike Selection
Sell options with a 20% to 30% probability of expiring in the money (probability ITM)
Look for a minimum return on investment (ROI) of 30%
ROI = Risk/reward
Money Management
Position up to 5% per strategy per expiration cycle

Formula: Portfolio risk/trade risk = # of contracts
Position size small and scale in through the life of the expiration cycle; Start selling at
approximately 50 days out
Exit Rules
Trade Management
Manage as two vertical spreads
If still in forecasted range, let the trade work
If no longer within the forecasted range within 10 days of expiration:
Scale out
Exit the full position
Be patient and stay in the trade
Exit four to 10 days before expiration
Exit anytime the vertical is worth 10% of the strike width in the option chain
Routine
For iron condors, you may want to use small allocations and spread out entries 20 to 50 days to expiration.
For consistent time decay, consider selling options early to mid-week. In addition, to get better pricing ,look
for opportunities when the VIX is at resistance. Remember to manage to your winners.

Sample Investing PlanCalendar Spreads
Objective
To make money on time decay and rising implied volatility
Watch List Criteria
Liquidity: Liquid stocks or ETFs

Spreads: Narrow bid/ask spreads; penny-wide spreads preferred
Volatility: Best if implied volatility is relatively low
Entry Rules
Sell contracts that will expire in 20 to 50 days
Buy contracts that will expire in 50 to 150 days
Strike Selection
When selecting strikes, choose where you think the stock will be trading when the near-term option is about to expire:
When bearish, buy an OTM put calendar
When bullish, buy an OTM call calendar
If you have no bias, sell the OTM put with a 30% to 40% probability of expiring
Roll Values
Using the Theoretical Price calculator, find the potential roll value using perfect price and expiration Saturday
Buy the cheapest per month calendar
Look for a 100% return on the calendar to enter
Money Management
Formula: Portfolio risk/trade risk = # of contracts
Position size small and scale in through the life of the expiration cycle; Start selling at approximately
50 days out
Exit Rules
Trade Management
When managing, consider scaling out:
Stock is at your strike 10 to 20 days before expiration
Short option value is 10% of the strike width in the option chain
Scale out on days when the stock moves toward your short strike
Routine
Calendar spreads need time to work as time decays. Be sure to check your position approximately 20 days before
expiration. Pay attention to where price is relative to your strikes and make adjustments as the rules state above.

Examining the two charts below, would you most likely add to your iron condor positions or calendar
positions, and why?
1.
2.
Past performance shown in examples is not indicative of future results.

Inventory Review
Incorporating both calendar spreads and short iron condors in your portfolio creates an options inventory. When reviewing
an options inventory, remember to focus on the greeks of your entire portfolio and the long and short strikes of your
positions. After you learn to recognize your strikes and determine what is in your inventory, the final step is to manage
your trades accordingly.
Greeks:
Its important to review the options greeks to understand your trade risk and reward. Here are some sample questions you
might ask yourself:
Delta What is my directional risk?

Gamma Is my gamma going to increase or decrease my risk as price moves?
Theta What is my daily reward?
Vega Is my vega consistent with my expectations of volatility?

Probability of Entire Portfolio
Follow the steps below to view the probability and risk profile of your options inventory beta weighted to a
benchmark on the paperMoney platform:
1. Go to the Analyze tab
2. Change single symbol to Portfolio Beta Weighted
3. Change the symbol to the SPY or another appropriate benchmark
4. Change the date in the upper-right corner to the nearest expiration Saturday
5. Set slices to Break Even at nearest expiration Saturday
For illustrative purposes only. Not a recommendation of any security or strategy. Past performance does not indicate or guarantee future success.

Review the Strikes
An easy way to recognize what you have in your options inventory is to use the Trade tab on the paperMoney platform.
1. Start by setting the layout above the option chain to Position, Intrinsic, Extrinsic. Remember that your short strikes
contain the risk, so always understand where they are relative to price and their potential obligations.
2. Match your short strike positions with your long strike positions to get a better understanding of what your position
is made up of: verticals, calendars, or diagonals.
For illustrative purposes only. Not a recommendation of any security or strategy. Past performance may not indicate or guarantee future success..
Trade Management
Follow the rules for managing verticals and calendars that were given in the investing plans. When managing an options
inventory, remember that it doesnt matter what positions you originally entered; what matters is whats in your inventory now.

High-Probability Trading
The key to finding success as a high-probability trader is consistency and discipline. Doing the
same thing day in and day out, week in and week out, month in and month out is critical to
finding success.
Next Steps
Learning to use high-probability options as part of your portfolio makes
you a more balanced investor in a variety of market conditions. Apply what
you learned today by following these steps:
Build a high-probability portfolio in the paperMoney platform

Close your eyes
Plug your nose
Follow your rules

Linda McCoy, CMT

linda.mccoy@investools.com
Or, attend one of the instructors upcoming live events*:
Basic Options, Greensville, October 12 13, 2013

Basic Options, San Francisco, October 17 18, 2013
Advanced Options, Chicago, November 2 3, 2013
Basic Options, Dallas, November 22 23, 2013

Notes


Inside Options: Anatomy of an Iron Condor
Todays Goals
Spreading your investment wings by using an iron condor can broaden your horizons to options strategies that are designed to
take advantage of the passage of time.
Understand premium selling techniques and theta decay

Determine how to potentially manage trade risk through risk-defined spreads
Describe how to use probability and analytical tools within the thinkorswim platform to help when building
complex options strategies
Iron Condor Strategy and Objective

This is a risk-defined strategy that is designed to profit from
positive time decay, also known as theta, and can be profitable
over a wide range of stock or index prices at expiration. Its
important to remember that theta is a measure of an options
sensitivity to time decay.
Iron Condor Position Structure
Selling an out-of-the-money (OTM) short call vertical spread and an OTM short put vertical spread creates two individual
credits in your account. Together, these two trades create an iron condor strategy. This options strategy allows an investor the
opportunity to keep much of the options premium if the stock trades between the two short options (also known as the wings).

INSIDE OPTIONS: ANATOMY OF AN IRON CONDOR KAUFMAN
Maximum Prot and Loss
The iron condor is a risk-defined trade. This means that the maximum profit and maximum loss are defined and
known when the trade is entered. Lets run through an example.
Maximum Profit = Total credit received

For illustrative purposes only. Transaction costs (commissions and other fees such as contract fees, exercise, and assignment fees, etc.) are important factors
and should be considered when evaluating any trade. To keep the math simple, they are not reflected in the example; however, online options commissions at
TD Ameritrade are $9.99 plus $0.75 per contract. Exercise and assignment fees are $19.99.
Maximum Loss = Total credit received Distance of either the short call or put vertical (whichever is greater)
$3.50 (credit) $10.00 (spread) = $6.50 (max. loss)
Iron Condor Fundamentals

Now you know that an iron condor is a risk-defined trade and have seen an example, its important to understand
this strategys key fundamentals.
Break-Even Points
Upside = Total credit received + Short call strike
Downside = Total credit received Short put strike
Capital Requirement
Your maximum loss
Candidates
Typically used on indices with medium volatility
Execution
Best if entered all at once
Attempting to leg in is difficult to time and may result in execution risk
Learning how to use the paperMoney Analyze tab is key to understanding the components of an iron condor.
With this tool you can see the risk graph of an iron condor and quickly examine the potential profit or loss at
different trading times and in different market conditions.

1. Candidate Selection
Index products with medium volatility
Option liquidity with tight bid/ask spreads
Examples include: SPX, RUT, NDX
When setting up an iron condor, consider selecting a candidate with medium volatility but one that you believe will trade within
a sideways-trending range. Potential candidates might include cash-settled indices such as the SPX, RUT, and NDX. Good
candidates also have underlying assets with high liquidity, tight bid/ask spreads, and high open interest. For ideal iron condor
trading candidates, the combined open interest of the options should be 10 to 20 times the number of iron condors you intend
to sell. Theoretically this provides traders with a better execution price when opening and closing positions.
2. Expiration Selection
Experienced traders often use iron condors to sell options that expire in four to 10 weeks. Traders may attempt to avoid selling
options that expire in less than four weeks because the credit received is too low and the trade may suffer too much from
negative gamma risk (i.e., gamma is a measure of deltas sensitivity to changes in the price of the underlying asset). To the
contrary, any trade entered into that is further out than 10 weeks may be negatively affected by fluctuations in volatility or
changing interest rates.

3. Strike Selection
Traders often look to sell an iron condor with a 60% to 70% probability of success. More experienced traders
might look for trades with success probabilities as high as 85%.
There are several ways to view probabilities. You can examine the options delta, use the probability of expiring
features within thinkorswim, or calculate it by hand. As you review delta, recall that its a measure of an options
sensitivity to changes in the price of the underlying asset.
Probability calculation: To calculate the probability of success by hand, consider the following example. A trader
sells an iron condor for a $0.90 credit. This iron condor is composed of a $2.00 wide call vertical and a $2.00 wide
put vertical. Calculate the real risk (max loss) of the iron condor, which in this case is $1.10 ($0.90 $2.00). Next,
divide max loss by the width of the spread (either the short call or short put spread, whichever is larger), which in
this case is $2.00. This simple math equation tells us that there is a 55% probability of success.
$1.10 (max. loss) / $2.00 (spread) = .55 or 55% (probability of success)
Keep in mind that probabilities are based on making one penny or more, and break-even points are also an import-
ant point in your probability and profitability analysis. When initially placing an iron condor trade, it is critical to
remember that the initial pricing ultimately determines the trades probability of success. Therefore, if an inves-
tor placed an iron condor and was risking $1 to make $1, the probability of success would be approximately 50%
because the reward is the same as the risk. The lower the initial credit the investor receives actually increases her
probability of success.
The above probability examples are for illustrative purposes only, are theoretical in nature, not guaranteed, and do not reflect any degree of certainty of an
event occurring.

Exit Criteria Considerations
Four to 10 calendar days from expiration
Consistency is key
Allows time decay to work
The value of the short call
If .05 or less, buy it back
Consider the reward to risk of closing
When trading an iron condor, it is usually best to hold the position until it nears expiration. This allows most of the time decay,
or theta, to decrease the short options values. Most traders close the position four to 10 calendar days before expiration, but
remember closing is a delicate balance between expiration and price.
For example, if an investor typically closes a position early, it is suggested to always close future positions early. Conversely, if
an investor allows the position to run until it is at or near expiration, it is suggested to always close future positions in this way.
Taking a consistent, unemotional approach to timing your exits may help probabilities work in your favor when using the iron
condor strategy.
However, it might occasionally be a good idea to close the position earlier than anticipated if either of the following occurs:
1. The sold call or put verticals are trading at 10% or less of the strike price increments originally used.
Example: If a $2.00 wide vertical used $1.00 strike price increments, then 10% of $1.00 strikes would be $0.10. An in-
vestor could close the position by purchasing back this spread at $0.10 or less. Options using a $5.00 strike price could
be closed if the spread is at $0.50.
2. The long option in any spread is trading very cheaply (.00 bid - .05 ask). When this occurs some investors choose to
only close the long option position if it at least covers the costs of commission. By only buying back the short option,
a trader could continue to own the long option, which may become valuable if the underlying makes a dramatic move
before expiration.

Next Steps
Learning to calculate and use iron condors to trade options can be an
intimidating step in your investment education. Using the thinkorswim
paperMoney platform to practice these concepts and exploring further
education by Investools can help you build the confidence you need to
spread your wings and use an iron condor in your investment strategies. To
continue to apply what you learned today:
Download the thinkorswim platform

Take advantage of Investools options education
Iron condors and other multiple-leg options strategies can entail substantial transaction costs, including
multiple commissions, which may impact any potential return. These are advanced options strategies and often
involve greater risk, and more complex risk, than basic options trades. Investors should also consider contacting
a tax advisor regarding the tax treatment applicable to multiple-leg transactions.

Notes

89
Strategies to Reduce Risk Over Time
Todays Goals
There are numerous options strategies that you could use to try and profit in any market condition. Today well examine one
strategy in particularthe collar.
Examine a protective strategy that could help you keep more of your portfolio invested in the market
Identify the advantages and disadvantages of trading short-term price corrections
Create an investing plan that will help you apply this strategy to your own portfolio
This Breakout Session Is for

To help you identify whether a collar is right for you, heres a list of traders this strategy might appeal to:
Trend investors
Investors with a self-directed 401(k), IRA, or margin brokerage account
Investors who consistently keep a large amount of funds invested in the market
Investors who have core holdings that provide exposure to key sectors or respond to
market posture
Covered Calls: Pros and Cons

A collar is essentially a covered call with a long put that offers additional downside protection. Lets examine the pros and cons
of these two similar options strategies. Well start with covered calls.
Pros:
Delta positive: As the price of the underlying equity, such as a stock or exchange-traded fund
(ETF), increases, a covered call will be profitable until the underlying equity reaches the strike
price.
Collect theta: Often the goal of selling a covered call is to have the option expire worthless. When
this is your goal, you hope the underlying equity will stay below the strike price until it is near
expiration, allowing time decay to work in your favor.
Protects in a slight pullback: The premium collected by selling the covered call can help offset a
minor pullback in the underlying equity.

STRATEGIES TO REDUCE RISK OVER TIME BOYD
Cons:
Limited upside potential on the underlying equity: Selling an out-of-the-

money (OTM) call option caps your potential gains beyond that strike price.
Limited downside protection: If the underlying equity moves too far to the
downside, your losses will outweigh any gains you might have made from selling
the covered call. In these situations, you may want to consider closing out your
underlying position and buying back the covered option you sold.
Assignment risk: If your option expires in the money (ITM) and is exercised by
the buyer, you may be required to sell your underlying equity. Some investors
who sell covered calls on a stock may not want to surrender the stock due to the
tax benefits related to the equitys holding period.
Collars: Pros and Cons

Now, lets examine the pros and cons of a collar.
Pros:
Delta positive: As the underlying equity increases in price, a collar increases in
value as well. Like a covered call, this positions profits only continue to increase up
to the strike price.
Typically theta neutral: Because this strategy involves both buying and selling
options with the same expiration, time decay is often balanced.
Can handle double-digit pullbacks: The long put helps protect your underlying
equities from significant losses. This is one of the main benefits of this particular
options strategy.
Cons:
Limited upside potential on the stock: By selling the OTM call, you cap your
upside potential.
Assignment risk: If your option expires ITM and is exercised by the buyer, you
may be required to sell your underlying equity.
Additional trade management steps: The construction of this trade is
more complicated than other strategies (one underlying stock or ETF
and two interrelated options). This trade also requires more advanced
trade management.
Transaction costs: A collar involves two options trades and one stock or ETF
trade. As a result, transaction costs will be higher than a covered call alone.

Denition of Success for this Strategy
The stock market is unpredictable. A collar is a strategy that investors can use to help
mitigate some risks related to holding equity positions. This strategy can be applied
when an investor feels the stock market is due for some turbulence.
Here are some of the strategys goals:
Keep up to 50% of the profit from the underlyings recent highs.

Weather short-term pullbacks in intermediate trends with less
emotional distress.
After a pullback, have the confidence to buy a bullish trend reversal.
Instead of licking your woundsyoure jumping on a new opportunity.
Watch List Criteria Example

Not every stock or ETF is a great candidate for a collar strategy. Before deploying this strategy in your portfolio, consider the
following elements:
Average stock volume of at least 250,000

Options spreads of .25 or less
Trending stocks or ETFs in your portfolio
Stocks and ETFs in the following sectors: Industrials, Technology, Financial,
Materials, Energy, Transportation, Health Care, and Consumer Discretionary
Examples might include stocks and ETFs with a beta of 1 or higher

Entry Rules: Strike Selection Example
After locating a potential candidate, its time to look for an appropriate entry. Potential entry ideas may include:
Price is 1% to 2% below support level

Price is within 1% to 2% of horizontal resistance
Learning to identify a potential opportunity to apply protective long put options in your portfolio is the first step.
Next, you need to decide which strike prices to use. Depending on your investing plan and personalized trading
style, you may consider one of the following approaches.
More Conservative, More Protective
Sell one ITM call and buy one OTM put

Forty to 60 days until expiration
Overall delta of approx. 20 to 30, reducing bullish delta down 70% to 80%
Less Conservative, Less Protective
Sell one OTM call and buy one OTM put

Find an underlying equity, such as a stock or ETF, to use for this strategy. Many investors start by considering a
stock that they have in their portfolio. Based on your risk tolerance and investment objectives, you may want to
select strikes for a more conservative collar or select strikes for a less
conservative collar. Either way, ensure the stock meets the optimal entry
criteria and then consider entering the trade using a conditional order.

A Covered Call in a Pullback
Many investors understand the potential benefits of a covered call, but they may not fully understand what really happens
during a pullback. However, as an investor, its your job to know thy numbers! The table below illustrates what might happen to
a covered call position during a pullback.
If price goes down... - - - - -
Delta of 100 shares of XYZ 100 100 100 100 100 100
Delta of 1 OTM short call -54 -54 -45 -36 -27 -18
Overall delta 46 46 55 64 73 82
Total profit $500 $454 $399 $335 $262 $180
Amount of profit given back $0 $46 $101 $165 $238 $320
% of profit given back 0% -9.20% -20.20% -33.00% -47.60% -64.00%

For illustrative purposes only.
A Collar in a Pullback
In a sideways or a slowly uptrending market, a covered call can be an attractive strategy. However, a covered call can leave you
unprotected in a pullback. Look at the following table to see how a collar strategy might fare during a pullback. Compare this to
the covered call table.
If stocks go down... - - - - -
Delta of 100 shares of XYZ 100 100 100 100 100 100
Delta of 1 OTM short call -54 -54 -45 -36 -27 -18
Delta of 1 OTM long put -28 -28 -36 -44 -52 -60
Overall delta 18 18 19 20 21 22
Total profit $500 $482 $463 $443 $422 $400
Amount of profit given back $0 $18 $37 $57 $78 $100
% of profit given back 0% -3.60% -7.40% -11.40% -15.60% -20.00%

For illustrative purposes only.

Money Management
In any investment strategy, you need to be prepared for three scenarios:
If the price goes down

If the price goes up
If the price does nothing
If the price goes down

After understanding how to use a collar as protection, it can help you be less concerned during market pullbacks.
If the price of your underlying equity falls, consider the following steps:
Exit the call when the delta is .10 or less. Consider selling another call 1 strike lower, 40 to 60 days out.
Exit the put when the underlying reaches a major horizontal support level. You could also look for
MACD divergences or bull trend reversals.
Exit the whole position (including the
underlying equity) if the price breaks
below intermediate horizontal support
level by 2% to 3%.

A collar offers protection in a down market but ideally the price of your underlying should be trending up slightly
or moving sideways. If the price does trend up, consider the following steps:
After the price breaks resistance by 1% to 2%, buy the call back.
This releases the cap.
This allows you to gain more bullish exposure back.
This is key!
After the price breaks resistance by 1% to 2%, sell the put. At this point,
the put may be nearly worthless.

Sometimes the price will move mostly sideways, avoiding any drastic up or down moves. When this happens during expiration
week, its important to once again review the technical analysis for your positions. If your analysis is the same as the previous
month, consider rolling the collar to the next month.
Find Your Exit
Identify two stocks or ETFs that are breaking through horizontal resistance levels by 1% to 2 %.
1.
2.
Identify two stocks or ETFs that have recently bounced off horizontal support levels and are
demonstrating a MACD divergence.
1.
2.

Routines
Anyone can buy a collar, but properly managing it can make the difference between a successful trade and an
unsuccessful trade. Successful investors have investing plans and a disciplined routine to follow with each
strategy. Here are some components of a sample routine:
Watch the delta of the sold call. If its delta is .10 or less, you have likely gained 80% of the
premiumand it may be time to exit the trade.
If the price pulls back for two to three weeks, watch for bullish trend reversals or MACD divergences.
Watch for longer-term horizontal support bounces. These could be bullish entry points.
Next Steps
To build on what you learned in this session, attend the following*:
Basic Options Trading Room: Thursday 6 p.m. and Friday 11:30 a.m. ET
Basic Options live or online workshop : See schedules on website
Advanced Technical Analysis Trading Room: Wednesday 9:30 a.m. ET

Contact your coach:
James Boyd
james.boyd@investools.com
Introduction to Trading Stocks Online Coaching: Monday 9:00 a.m. 10:30 a.m. ET
Introduction to Trading Stocks Trading Room: Monday 3:00 p.m. 4:00 p.m. ET
Introduction to Trading Stocks Trading Room: Tuesday 1:30 p.m. 2:30 p.m. ET
Advanced Technical Analysis Trading Room: Wednesday 9:30 a.m. 10:30 a.m. ET

Collar Investing Plan Example
Objective
Use collars to attempt to protect resent profits
Watch List Criteria
Average stock volume of at least 250,000

Options spreads of .25 or less.
Trending stocks or ETFs in your portfolio
Stocks and ETFs in the following sectors: Industrials, Technology, Financial, Materials, Energy, Transportation,
Health Care, and Consumer Discretionary
Examples might include stocks and ETFs with a beta of 1 or higher
Entry Rules
Strike Selection Example

Price is 1% to 2% below support level
Or, within 1% to 2% of horizontal resistance
More Conservative, More Protective
Sell one ITM call and buy one OTM put
Less Conservative, Less Protective
Sell one OTM call and buy one OTM put

Money Management
If the price goes down...

Exit the call when the delta is .10 or less. Consider selling another call 1 strike lower, 40 60 days out.
Exit the put when the underlying reaches a major horizontal support level. You could also look for
MACD divergences or bull trend reversals.
Exit the whole position (including the underlying equity) if the price breaks below intermediate
horizontal support level by 2% to 3%.
After the price breaks resistance by 1% to 2%, buy the call back.
This releases the cap.
This allows you to gain more bullish exposure back.
This is key!
After the price breaks resistance by 1% to 2%, sell the put. At this point, the put may be nearly worthless.
Review the technical analysis for your positions. If your analysis is the same as the previous month,
consider rolling the collar to the next month.
Routines
Watch the delta of the sold call. If its delta is .10 or less, you have likely gained 80% of the premium
and it may be time to exit the trade.
If the price pulls back for two to three weeks, watch for bullish trend reversals or MACD divergences.
Watch for longer-term horizontal support bounces. These could be bullish entry points.

Notes

Notes

Swap Time for Money with Calendar Spreads
Todays Goals
As an option seller, you can benefit from time decay by selling options that expire worthless. This presentation highlights one
options strategy, called a calendar spread, which seeks to profit from time decay.
In this session youll:
Understand why you might buy options

Understand how calendars make money
Evaluate calendar trade decisions step-by-step
Use the Same Logic as Smart Lenders
Banks borrow money at low interest rates from the Federal Reserve and then lend that same money at higher interest rates to
consumers and businesses. The difference between these two rates is a yield spread and is a source of profits for banks. The
options strategy taught in this session allows investors to use similar logic when buying and selling options premium.

SWAP TIME FOR MONEY WITH CALENDAR SPREADS FOLLETT
Options Have a Decay Rate
Options have time/extrinsic value: Like most contracts, options have a limited life span
and eventually expire. Part of the premium paid for the option is the opportunity that it may
exponentially increase in value before a given time.
Time value melts over the life of the option: As expiration approaches, however, the stocks
potential to still make large moves before expiration diminishes. With less time before expiration,
the extrinsic portion of the options value diminishes. The option is literally melting like an ice cube
as it approaches expiration.
Buyers have melt risk: Time decay works against option buyers. Understanding this relationship
between time and price is the beginning of understanding the options greeks.
Sellers have melt reward: Option sellers benefit from this time decay.
Theta = Melt Rate (Example: 620 Puts)

The daily rate of time decay is called theta. Think of this as the interest rate buyers pay to own an option. The lon-
ger they hold it, the more it costs them. Theta rates vary from one expiration month to another. In addition, the rate
that time decays is higher in options that are closer to expiration and continues to melt away the options value as
its expiration approaches. Eventually, the extrinsic value is depleted by expiration.
Theta is a primary factor for profits in a calendar spread trade. You use theta to your advantage by buying options
that are further away from expiration and simultaneously selling options closer to expiration. In the example below,
notice how the options that are further from expiration have lower melt rates:
Longer-dated option has a smaller rate ($20)

Shorter-dated option has a larger rate ($33)
Create a calendar by buying the longer-dated option and selling the shorter-dated option
Collect $13 per day (+ theta)

Impact of Volatility
Easier to hit a bulls eye from 10 yards
Less time for something to go wrong
Greater distance = Greater difficulty
More time for error to be magnified
Now what if the wind starts to blow?
What distance experiences greater difficulty?
In target practice, the further away you are from the bullseye, the more difficult it is to hit your target. The same principle
applies to options tradingoptions that are further away from expiration are more sensitive to changing market expectations
and more likely to miss your price target.
Expected volatility changes are priced into the options contract as part of its extrinsic value. When prices arent expected to
move much, options are less expensive. However, when volatility expectations are high, the same options are more expensive.
Volatility expectations are constantly changing.
When overall implied volatility levels are low, its a good idea to buy options that are far from expiration and sell options that
are closer to expiration. This way, if volatility subsequently rises, the options value you own will increase much faster than the
near-term option, thereby generating a profit.
Vega = Impact of Volatility (Example: 620 Puts)

Vega indicates an options sensitivity to changing volatility levels. Options further away from expiration have more vega. Vega
defines how much an options extrinsic value will change with a 1% change in the implied volatility levels.
Longer-dated option is more impacted ($134)

Shorter-dated option is less impacted ($87)
Create a calendar by buying the longer-dated option and selling the shorter-dated option
Changing volatility impact of $47 per 1 pt change (+ vega)

Apply +Vega to Trading
Lets take what youve learned so far and apply it to a calendar spreads structure. This
structure allows an option investor to:
Buy longer term options when theyre cheap (low volatility)

Sell closer to expiration: Options are cheaper when volatility is lower.
To take advantage of this, you can buy longer-term options when theyre
cheap and sell shorter-term options on the same underlying security. The
resulting trade works to capture time decay because shorter-term options
will not be as impacted by implied volatility fluctuations.
Make more money if volatility rises: The net effect of a calendar trade is
that investors benefit most when implied volatility is low at the beginning of
the trade and then starts to rise toward expiration. The trade also benefits
from time decay.
Creating a Calendar Spread

Buy the back month (i.e., later expiration)and sell the front month (i.e., closer expiration)
Greeks indicate how the money is made
Theta + (Daily collection rate): In the example below, the calendar spread trade is benefiting from time
decay (theta) by $8.29 per contract, per day.
Vega + (Premium buying strategy): Vega also helps reinforce the potential for making money through
buying options when implied volatility, in general, is low.

Impact of Stock Price
Extrinsic value is greatest at the money (ATM).
The further away an option is from the stock price, the smaller the extrinsic value becomes. Its important to understand that if
the stock moves far from the strikes in your spread, in either direction, it will not only hurt the options sold, but it would also have a
greater negative impact on the option you own. If the underlying stock moves too much from your strike prices, the spreads entire
value could be lost as the extrinsic values in both options reach zero.
At-the-Money, On-Expiration Disappearing Act

On expiration, if the stock price is ATM for both options in your spread, something wonderful happens:
Sold option = Dust (expires worthless): The option you sold now is worthless to the person who purchased it. Its
worthless because the buyer can trade the stock in the open market for a better price than the contracted price of
your option and you get to keep the premium.
Purchased option = Maximum extrinsic (time value): In addition, if volatility is higher on expiration than when you
purchased the spread, you can sell the spread or roll it to seek even larger profits. The further-dated option you
purchased is worth more because of the rise in volatility.

Three Keys to Maximum Return
2
1
1. Stock at selected strike

2. At expiration for sold option (completely melted)
3. Implied volatility up (option you own is gaining value)
Although the likelihood that all three of these events will happen simultaneously at expiration is relatively low, the
maximum risk profile provides a visual representation of how calendar spreads can make money. The dark gray
line represents the shape of potential profits at expiration, along with potential break-even points on the
horizontal zero line. The peak of the dark line represents the maximum profit of the trade based on current
implied volatility levels at expiration.

Exit Decision Process
Youve already learned the basic components of how a calendar spread is constructed as well as how to achieve profits and mini-
mize losses. The next step is to know how and when to exit a trade. Lets break the decision process down into three main parts.
The first two parts are related to time remaining to expiration.
1. If 20 days or less until expiration, exit if the stock touches the short price:
Consider scaling out of to of your contracts. Although this is not a huge win, consider exiting because
otherwise you risk the stock moving far away from the short strike. This exit technique is a risk reduction
measure and allows for greater profits with the remainder of the trade.
2. If 10 days or less until expiration, consider exiting if:

The stock touches or moves closer to the strike that was sold
Implied volatility goes up
The last potential exit strategy applies any time during the life of the trade.
3. Any time during the trade, consider exiting if the short option is valued at 10 or less:
If the value of the option is 10 or less, it is considered worthless. By exiting at this point, it helps
prevent losing any more money and ensures you can sell the back-month contract before it also loses all
extrinsic value.

Check Your Progress
Complete each sentence below to review what you learned:
Calendars are a value swap.

Time value melts faster in -term options.
Implied volatility changes have a greater impact on -term
options.
One More to Grow on

What are the three ingredients for maximum profits in calendar spreads? Complete each sentence below:
Stock at price.
Expiration day for the option.
Implied at higher levels for the purchased option.

Sample Investing PlanCalendar Spreads, Advanced Options
Objective
To make money on time decay and rising implied volatility while buying premium
Watch List Criteria

Liquid stocks or ETFs
Narrow bid/ask spreads (penny-wide spreads preferred)
Best if implied volatility is relatively low
Entry Rules
Sell 20 to 50 days
Buy 50 to 150 days
Strike Selection
Your expectations on where the stock will be trading when the near-term expiration is about to expire:
When bearish, buy an OTM put calendar
When bullish, buy an OTM call calendar
If you have no bias, sell the OTM puts with a prob. of expiring of 30% to 40%
Roll Values
Using the Theoretical Price calculator, find the potential roll value using perfect price and expiration Saturday
Buy the cheapest per month calendar
Look for a 100% return on the calendar to enter
Money Management
Position Size
Formula: portfolio risk / trade risk = # of contracts
Position Size: Position size small and layer (scale) in through the life of the expiration cycle
Exit Rules
Trade Management
When managing, consider scaling out to of the contracts at a time when:
The stock is at your strike 10 to 20 days before expiration
Scale out when the stock moves toward your short strike
Extrinsic value of the short option is 10% of the strike width in the option chain , or if entire short contract is worth
less than $.10
Exit Rules
Routine
Calendar spreads need time to work as time decays. Be sure to check your position approximately 20 days before
expiration. Pay attention to where price is relative to your strikes and make adjustments as the rules state above.

Next Steps
Using calendar spreads can seem confusing for many new option traders, so its best to learn with
paperMoney. Learning to use time decay and implied volatility to your favor is one of the many benefits of
calendar spreads. Continue to apply what you learned today by following these steps:
Paper trade using logic taught in this session

Increase your skill levels with:
Advanced Options*
Options Capstone in Chicago*
Use coaching products to your benefit

Contact your coach:
Michael Follett
michael.follett@investools.com
Advanced Options Trading Room: Friday 9:30 a.m. 10:30 a.m. ET

Basic Options Online Coaching: Tuesday 12:00 p.m. 1:30 p.m. ET
Advanced Options Online Coaching: Tuesday 7:30 p.m. 9:00 p.m. ET
Introduction to Trading Stocks Online Coaching: Friday 4:30 p.m. 6:00 p.m. ET

Notes

BONDS FOR
SWAP TIME BALANCE
FOR MONEY WITH CALENDAR SPREADS FOLLETT
SETTLE
113
The Wide World of Options Uncovered
Todays Goals
Today there are more people investing in options than ever before. In addition to regular options, the options market has ex-
panded to include quarterly, weekly, and mini-options.
Understand different options trading types including quarterly, weekly, and mini-options
Understand options expirations, requirements, and pricing
Identify which options types can be used for different market conditions and different trading goals
Quarterly Options
Quarterly options have their own unique characteristics. These characteristics include:
Delivers 100 shares of the underlying. The terms of the contract stipulate that 100 shares of the underlying, such as
a stock or ETF, will be delivered for each options contract.
Listed for at least four consecutive quarters. When quarterly options are available, investors can buy and sell
contracts for at least the next four quarters. These quarters have the following expirations:
March, June, September, and December
Expires the last day of the listed quarter. Unlike regular options, which expire the third Friday of the month,
quarterly options expire the last day of each appointed quarter.

THE WIDE WORLD OF OPTIONS UNCOVERED KINAHAN & QUIRK
Weekly Options
Like quarterly options, weekly options have their own unique characteristics. These characteristics include:
Delivers 100 shares of the underlying. Like quarterly options, each weekly options contract delivers
100 shares of the underlying equity.
Currently available on 212 plus securities and growing. Currently, weekly options can only be traded
on some securities. As these weekly options increase in popularity, so may the available securities
that offer them.
Listed on Thursday and expire the following
Friday. The expiration cycle for weekly options
is considerably different than the standard
expiration cycle of other options.
Not listed if the expiration is the third Friday.
This is because regular options essentially
become weekly options one week before
they expire.
Mini-Options
Mini-options are the newest type of options. They trade slightly differently than standard options contracts and
have the following characteristics:
Delivers 10 shares of the underlying. Instead of the normal 100 shares that most options require, mini-
options only deliver 10 shares.
Available on 5 underlyings.
AAPL, GOOG, AMZN, GLD, SPY.* As the popularity of mini-options increases, the number of
securities that trade them will likely increase as well.
Listed with standard options. As
shown in the image, mini-options are
listed in the option chain along with
regular, quarterly, and weekly options.
Expires the third Friday of the month.
Mini-options follow the same expiration cycle
as regular options, with expiration falling on the
third Friday of the month.
*Security symbols displayed list those for which mini-options are available in the
market. This is not a recommendation to trade any specific security.

Options Pricing
Regardless of the type, all options are priced the same way. An options price, also known as its premium, is comprised of two
partsintrinsic value and extrinsic value.
If you have not already completed the Investools Basic Options course, some of these terms may be new to you. Here is a quick
review of the course concepts.
Options Price (Premium): The amount that it costs an investor to buy or sell an option.
Intrinsic Value: This is the amount that the underlying stock is in the money (ITM).
For a call option, the intrinsic value is calculated by subtracting the strike price from the stock price
For a put option, the intrinsic value is calculated by subtracting the stock price from the strike price
Extrinsic Value: This is the remaining premium value after intrinsic value is accounted for. Extrinsic value is a combination of
the following:
Implied volatility: The future anticipated volatility of the stock

Time decay: Value of how much the option loses to the passing of time each day
Interest rates: A change in interest rates can affect premiums, primarily on options with further-dated expirations,
either positively or negatively
Dividends: Cash dividends influence option prices because they affect the underlying stock price
How Mini-Options Are Priced

One major difference that investors should be aware of is the amount of investment capital needed to enter a mini-options
trade versus a regular option. Because mini-options deliver 10 shares, its price is calculated by multiplying the options
premium by 10.
For example, if an option was priced at $2, it would cost the investor $200 to buy a regular option ($2 x 100 shares = $200). If an
investor bought the mini-option for $2, it would cost $20 ($2 x 10 = $20). These costs do not include commissions or
transaction costs.
Commissions, exercise, and assignment fees are the same for mini-options and standard options contracts. Mini-options do not reduce the per share cost
or price of options.

Option Considerations
When selecting which type of option to trade, consider the following:
Time Frame: How much time is needed for your intended strategy? Is it a short-term play over an earnings
announcement or a long-term trend trade? Answering these questions will help you choose the right expiration
cycle and option type.
Weekly Options: Ideal for short-term trades.
Quarterly Options and Mini-Options: Ideal for both short-term and long-term options trades. Mini-options
provide alternatives to investing in standard-sized lots as they require less capital. Conversely, quarterly options
may offer different entry points compared to monthly options because they have different expiration dates.
Risk to Reward: Before you open any options position, first consider the risk-to-reward ratio. This holds true for
every type of option and every options strategy.
Next Steps
Quarterly and weekly options allow experienced traders the opportunity to
leverage the power of options even more often and dynamically adjust
positions with the markets. Continue to apply what you learned today by
following these steps:
Download the thinkorswim platform

Take advantage of Investools options education

Notes

119
Notes
STOCKS
STOCKS
122Dening Entry and Exit Signals
134Finding Stocks at the Right Price
150Gauging Market Posture
166Getting Technical with Your Trading System
180High-Probability Price Patterns
190Top-Down Analysis: A 360-Degree View
200Up and Coming Global Phenomena
Dening Entry and Exit Signals
Todays Goals
Even if you pick great stocks, without properly timing when you enter and exit positions, you could have a losing strategy.
Review entry and exit order types
Examine the role of support and resistance
Develop trend-based entry and exit signals for bullish and bearish markets
Order Types and Dierences Review

Beginning investors are often only familiar with one type of buy or sell order. Its better for investors to familiarize themselves
with a variety of orders and how they may affect a trade.
Order Type Fill at...

Market Best current available price
Limit Fixed price or better
Buy stop Buy market order at specific price
Sell stop Sell-market order at specific price
Buy-stop limit Buy-limit order at specific price
Sell-stop limit Sell-limit order at specific price
Buy Orders
When entering a long trade, place a buy order. And depending on your outlook on the position, consider setting a limit or
stop order.
Buy stop entry price: A conditional order to buy above a certain price
Entry orders placed at night: A buy stop can be placed when the market is closed and helps eliminate intraday
price noise

DEFINING ENTRY AND EXIT SIGNALS JOHNSON
Limit Orders
A limit order allows you to specify the price at which you wish to execute a
trade. Your price depends on your outlook on the position. When using limit
orders, you should be familiar with the following trigger methods:
During the day: Places limit orders during regular trading hours at
fixed price or better for the current trading day
Overnight orders: Places limit orders when the market is closed at

fixed price or better for the next trading day
Buy at a price lower than the current price: Limit orders that fill at
a lower price
Sell-Stop Orders: Insurance against a Large Loss

To exit a long trade, use a sell order. Depending on your outlook on the
position, you should be familiar with the following methods for triggering
a sell-stop order:
Percentage of price: A stop fixed at a percentage of the entry price
Fixed-dollar amount: A stop fixed at a specific dollar amount
Time: A stop fixed after a predetermined amount of time (effective

with long options and short-term technical analysis)
Momentum: Using the Parabolic Stop and Reversal (SAR) indicator,

adjust the stop based on time and price

Trend
Appropriate order types are only part of the equation for entering and exiting investments successfully. Trend also plays an
important part of any investment decision because it is used with other technical analysis techniques to try and predict entry
and exit signals. Securities trend in three directions: up, down, and sideways.
Support and Resistance

When securities are trending, price bounces between lows and highs known as support and resistance:
Highs are resistance: The area where price stops going up and starts going down
Lows are support: The area where price stops going down and starts going up
Examine the chart below to identify up- and downtrends, as well as support and resistance areas.

Dening the Three Trends
There are three primary trends in technical analysis:
Uptrend: Higher highs and higher lows
Downtrend: Lower highs and lower lows
Sideways Trend: Relatively equal highs and equal lows
Entry and Exit

As price bounces between support and resistance in a trend, it will create entry and exit
opportunities.
Traders look for trend setups around support and resistance.

Uptrend Entry and Exit
As price bounces between support and resistance in a trend, it creates entry and exit opportunities. Heres an example strategy
for entering or exiting an uptrending trade:
Enter trade near support (green arrow)

Exit trade near resistance (red arrow)
Uptrend Entry near Support

Entering a position near support is critical when timing entries. Here are examples of potential entry areas in an uptrend:
Horizontal support: Where support was created at least once
Diagonal support: Drawn by connecting at least two previous prices where support was created at
different levels, resulting in a diagonal support line
Moving average: Enter when price rises above the moving average
Fibonacci retracement: A percentage level between a resistance high and a previous

support low
Price gap: Enter near the level where a price recently gapped up

Uptrend Exit Target
Exit targets are just as important as entry targets. Here are examples of potential exit areas in an uptrend.
Horizontal resistance: Where resistance was created at least once
Price pattern target: Calculated from a price pattern (e.g., an ascending triangle)
Resistance Support difference = Measuring: The difference between

previous support and resistance levels, added to the resistance
breakout price
Fibonacci extension price target: A percentage level above a previous

resistance high
Uptrend Stops
Despite your exit targets, there are times when a trade does not go as planned and your target is not reached.
Stops attempt to protect the majority of the original investment and might be set at the following levels:
Horizontal support: Below where support was created at

least once
Pullbacks low day: The lowest day in the current pullback
Moving average: Below moving average when price is

above it
Fibonacci retracement: Below a Fibonacci retracement

level drawn between recent support and resistance levels
Price gap up: Below a recent price gap up, in case the
move is not sustained

Uptrend Rules
Having specific entry and exit points in your investing plan is an essential step in your success as a trader. Here are some rules
to consider:
1. Trend setup: Uptrending stock making higher highs and pulling back to higher lows
2. Entry: When price moves 25 above the high of the low day in the pullback
3. Stop: 1% below the low of the low day
4. Target: Prior resistance level, price pattern target, or Fibonacci extension level
Downtrend Entry and Exit

As price bounces between support and resistance in a downtrend, it creates entry and exit opportunities . Heres an example
strategy for entering and exiting a downtrending trade:
Enter the bearish trade near resistance (red arrow)

Exit the bearish trade near support (green arrow)

Downtrend Entry near Resistance
Entering a bearish position near resistance is critical when timing entries. Here are examples of potential entry
areas in a downtrend:
Horizontal resistance: Where resistance was created at least once
Diagonal resistance: Drawn by connecting at least two previous prices

where resistance was created at different levels, resulting in a diagonal
resistance line
Moving average: Enter when price falls below the moving average
Fibonacci retracement: A percentage level between a resistance

high and a previous support low
Price gap down: Enter near the

level where a price recently
gapped down
Downtrend Exit Target

Exit targets are just as important as entries. Here are examples of potential exit areas in a downtrend:
Horizontal support: Where support was created at least once
Support Resistance difference = Measuring: The difference between

previous support and resistance levels, subtracted from the support
breakout price
Price pattern target: Calculated from a price pattern (e.g., a

descending triangle)
Fibonacci extension price target: A percentage level below a

previous support low

Downtrend Stops
Despite your exit targets, sometimes a trade does not go as planned and your target
is not reached. Stops attempt to protect the majority of the original investment and
might be set at the following levels:
Horizontal resistance: Above where resistance was created at least once
Above rallys high day: The highest day in the current rally
Moving average: Above the moving average when price is below it
Fibonacci retracement: Above a Fibonacci retracement level drawn

between recent support and resistance levels
Downtrending Rules
Having specific entry and exit points in your investing plan is an essential step in your success as a trader. Here are some
rules to consider:
1. Trend setup: Downtrending stock making lower lows and rallying to lower highs
2. Entry: When price moves down 25 below the low of the high day
3. Stop: 1% above the high of the high day
4. Target: Prior support level, price pattern target, or Fibonacci extension level
Prot Protection
As your position matures, it is important to use profit protection techniques to lock in your gains. Here are some technical
indicators or concepts to help you determine appropriate protection measures:
Parabolic Stop and Reversal (SAR) for moving stop : Adjusts stop numbers based on time and price; if investors set
up their numbers to be automatically calculated, they can use a trailing stop to protect profits.
Fixed-dollar amount: Protects a fixed-dollar amount. For example, if $1,000 of unrealized profit exists, move the
stop to a fixed-dollar amount such as $700.
Percentage of target profit: When a percentage of the price target is achieved, move the stop to protect your profit.

Next Steps
Learning to effectively use entry and exit signals is a key part to mastering
the concepts of technical analysis. Continue to apply what you learned by:
Recognizing market changes using price patterns
Timing your entries and exits using candlestick patterns and

Fibonacci retracements
Learning to keep profits on short-term winners with

appropriate stop-management techniques
Learning at least seven trading strategies for changing

market conditions
Attending the Active Investing: Advanced Technical Analysis workshop*

Dave Johnson
david.johnson@investools.com
Or, attend one of the instructors upcoming online or live events*:
Advanced Technical Analysis Trading Room: Monday 8:00 p.m. 9:00 p.m. ET
Basic Options Online Coaching: Wednesday 7:00 a.m. 8:30 a.m. ET
Introduction to Trading Stocks Trading Room: Wednesday 3:00 p.m. 4:00 p.m. ET
Introduction to Trading Stocks Trading Room: Thursday 9:30 a.m. 10:30 a.m. ET
Wall Street Wrap-UpSM: Friday 4:30 p.m. 5:30 p.m. ET
Active Investing: Advanced Technical Analysis workshop 4 days
Advanced Technical Analysis workshop 2 days


Notes

Notes

Finding Stocks at the Right Price
Todays Goals
Learning to find stocks at the right price can be tricky.
Differentiate between investment and speculation
Identify enduring businesses with top-notch management
Explain how to find great stocks at bargain prices
Understand the benefit of adopting a rational, patient, and disciplined attitude and approach
Famous Investors1
Benjamin Graham was the dean of securities analysis and a pioneer of value investing. He maintained that successful
investing didnt require genius and once said:
What it needs is, first, reasonably good intelligence; second, sound principles of
operation; third, and most important, firmness of character.
Many investors studied under Graham including John Neff and Warren Buffett. Some of Grahams understudies achieved
remarkable and consistent annual returns by refuting the so-called efficient market and random walk theorytheories that
refuted the idea that someone could identify undervalued securities. In this session, well examine key topics of value investing.

FINDING STOCKS AT THE RIGHT PRICE KEALY
Brainstorm
Write down your description for the following terms:
Speculation
Investment
Speculation: All investments have associated risk; however, when speculating on the future price of a security,
investors take on higher calculated risks with the expectation of higher returns.
Investment: Attempting to invest in more secure, value-based companies with a longer time horizon is often
associated with lower calculated risks in exchange for the expectation of more stable and conservative
long-term returns.

Companies
You can identify great companies using several qualitative factors as well as traditional quantitative elements. The prebuilt
screening tools found in the Investools Investor Toolbox combined with the Company Profile page in paperMoney can help
you quickly evaluate a companys key fundamental factors and speed up your initial review process.
Qualitative Factors
Simple and easy-to-understand
Favorable long-term prospects
Competent and honest management
Quantitative Factors
Earnings, profitability, and debt
Business valuation
The first qualitative factor to look for is a company that runs a simple and understandable business. For example, a restaurants
business model is relatively straightforwardit makes money by selling food to customers. However, compare this to a highly
specialized tech company. A company that makes network communications solutions operates a business that is likely more
difficult to understand.
Finding stocks that fit a specific investment style and time frame does not have to be a
complex process. By analyzing a companys business model and income streams with the
help of the Investor Toolbox and Company Profile page in paperMoney, investors can begin
to understand how a company may be affected by different economic factors. When
choosing a company, ask yourself the following questions before investing:
Is the scope of the business within your circle of understanding?

Does the company have a manageable number of business lines?
Does the company have a solid structure of business operations?
Competitive pricing
Sizable market share
Exemplary profit margins

Count the Business Lines
Using the Company Profile page on paperMoney, lets view three example companies to gain a better
understanding of the structure of business operations and then determine whether these firms are
simple and understandable.
Example #1:
Circle of understanding? Yes No
# of business lines:
Most important forecasts for divisions:
Simple and understandable? Yes No
Example #2:
Example #3:

Favorable Long-Term Prospects
The next qualitative factor to determine is whether the companys business looks favorable over the long term. One way to do
this is to decide whether a company is a franchise or a commodity.
Lets compare the two types.
A franchised business has some degree of a consumer monopoly because it allows the company to sell its products at a higher
profit margin due to the following factors:
Needed or desired
Has no close substitute
Isnt regulated
Often survives inept management
On the other hand, the only differentiator for consumers in a commodity-type business is price. Commodity businesses
typically share the following characteristics:
Indistinguishable from competitors

Typically seek a low-cost advantage
Profitability highly dependent on management
Examples include steel companies and producers of raw foods such as rice, wheat, and corn.

Franchise or commodity?
Lets examine the same three example companies from the previous activity to evaluate whether they
demonstrate favorable long-term prospects.
Example #1:
Product or service is needed or highly desired? Yes No
Is there a close substitute? Yes No
Is it regulated? Yes No
Favorable long-term prospects? Yes No
Example #2:
Example #3:

Competent and Honest Management
The third and final qualitative factor is competent and honest management. Management often plays a key role in the
successes, or failures, of a company.
To help evaluate management, ask yourself these questions.
Does management unfailingly think and behave like an owner of the company?
Is management making rational decisions to increase shareholder value?
Some actions to look for that may increase shareholder value are:
Share buybacks
Share issuance
Dividends
Mergers and acquisitions activity
Stock options
Earnings, Protability, and Debt: Earnings

There are many factors that help determine shareholder value. To begin to determine shareholder value evaluate a company
against the key to being profitableearnings.
An ideal company should have:
No negative Earnings per Share (EPS) years in the past 10 years

Reasonable EPS growth (<20%)
Reasonable 15 year EPS growth (<20%)

Consistent Earnings Power
Using information from the Trend Analysis and Earnings Estimates pages, determine whether the three
examples have consistent earnings power.
Example #1:
Any negative years? Yes No
Any EPS drops? Yes No
5-year EPS growth %: 10-year EPS growth%:
5-year sales growth %: 10-year sales growth%:
Demonstrated consistent earnings power? Yes No
Example #2:
Example #3:

Earnings, Protability, and Debt: Protability
Just because a company is making money by selling products or services doesnt mean its profitable. When evaluating a
companys profitability, look for the following:
Return on equity (ROE) consistently above average for past 10 years
High return on invested capital (ROIC)
High profit margins
Demonstrated Protability
Using the information from the Trend Analysis page in the Investor Toolbox, evaluate the example companies and
determine if they have demonstrated consistent profitability.
Example #1:
ROE consistently above average? Yes No
ROIC trend? Up Down Sideways
Profit margin trend? Up Down Sideways
Demonstrated consistent profitability? Yes No
Example #2:
Example #3:

Earnings, Protability, and Debt: Debt
Being bogged down with too much debt could potentially decrease a firms profitability because servicing these
debts could cut into the companys bottom line. Taking on too much debt can even cause a company to fail. As you
evaluate a company, ask yourself the following:
Can the company pay off its long-term debt with net income within two to five years?
Paying O Debt
Using the Balance Sheet and Income Statements, determine whether the three example companies can
pay off long-term debt with net income in the next two to five years.
Example #1:
Long-term debt:
Net income after taxes:
Pay off long-term debt with net income in the next two to five years? Yes No
Example #2:
Long-term debt:
Example #3:
Long-term debt:
Business Valuation: Identifying Bargains

The final quantitative factor to look for is how the stock is currently priced.
Most consumers love a good sale on their favorite products; however,

this doesnt always translate to the investing world. Many investors
dont take the time to figure out if their potential investments are
also a good value. Many investors look for:
Price-to-Earnings (P/E) ratios 40% to 60% below market P/E
Intrinsic value > stock price

Spot the Bargain
Lets identify if the three example companies qualify as bargains. Use the Earnings Estimates page in the Investor
Toolbox and the Company Profile feature in paperMoney to complete the following:
Example #1:
P/E ratio: Market P/E:
P/E ratio 40% - 60% below market P/E? Yes No
Intrinsic value: Stock price:
Margin of safety %? Bargain? Yes No
Example #2:
Example #3:
Business Valuation: After You Purchase a Stock

Researching an investment is only one part of the process. After you buy a stock,
you need to continue monitoring the company for potential changing conditions, such as:
Earnings yield should be greater than Treasury yields

Earnings Yield = EPS (ttm) / stock price
Wall Street estimates on five-year growth should remain favorable

Expected Growth
Using the three example companies, determine both the earnings yield and expected long-term growth
rate on earnings using the Corporate Snapshot and Earnings Estimates pages in the Investor Toolbox.
Example #1:
Earnings yield: Expected long-term earnings growth rate:
Example #2:
Example #3:
Be Rational, Patient, and Disciplined

If your investments start to reverse direction, it can be difficult sticking to your original investment goals. Here
are some important things to keep in mind over the long term:
Ignore the markets overall movements and forecasts as best you can
Dont buy or sell stocks based on other peoples opinions
Become comfortable as a contrarian
Next Steps
Finding stocks at the right price can be challenging without a thorough and systematic
approach. Make several copies of the following worksheet. Use it when evaluating
your investments to help you review the concepts taught in this session.

Contact your coach:
Michael Kealy, AAMS

michael.kealy@investools.com
Or, attend one of the coachs upcoming online or live events*:
Advanced Fundamental Analysis workshops
Introduction to Trading Stocks Online Coaching: Thursday 4:30 p.m. 6:00 p.m. ET

Investment Analysis Worksheet
Symbol:
Date:
Qualitative Factors:

Quantitative Factors:
Any negative EPS years? Yes No
Long-term debt: Net income after taxes:
Can long-term debt be paid off with net income in the next two to five years? Yes No
Business Valuation:

Notes

Notes

Gauging Market Posture
Todays Goals
As you work toward becoming a successful investor, it is essential to learn how to gauge the overall market posture. After learning
how to do this, you can combine this analysis with your investing rules to better determine when to enter or adjust your positions.
Explain the importance of incorporating the Market Forecast into your investing plan
Describe how to determine market posture
Identify rules and checklists that you can apply in any market direction
Determine a directional market bias in order to execute high-probability trades
Are you mentally LAZY with your investments?1

Successful investors assess the current markets, evaluate available choices, and then take appropriate, disciplined action. This
is in strong contrast to investors who simply let things happen. Think about what type of investor you would like to be.
Mentality of Poor People Mentality of Wealthy People

Life happens to me I create my life
I want to meet my financial goals I expect to exceed my financial goals!
Procrastinate Take action!
Blame Take responsibility!
Focus on obstacles Focus on opportunities
Try = Fail Commitment = Success

GAUGING MARKET POSTURE MARTIN
What is the Market Forecast?
The Investools Market Forecast is an indicator that can help determine possible market reversals. Similar to
other oscillators, the Market Forecast gauges overbought and oversold conditions.
Potential Trend Reversals

The Market Forecast is a momentum indicator that not only identifies possible trend reversals, but also shows
clusters, which form when multiple momentum time frames all point to a potential trend reversal.
The Market Forecast helps identify when current market trends may be about to change
Clusters are infrequent but considered reliable
Clusters may not happen very oftenonly about eight to 15 times a yearbut when they do occur, theyre consid-
ered a reliable indicator.

S&P 500 Market Forecast Graph
The Market Forecast is a proprietary tool that helps gauge overbought and oversold regions. These regions help identify
potential market reversals.
Overbought conditions occur when the line(s) cross above the 80 level, known as the upper-reversal zone. Oversold conditions
occur when the line(s) cross below the 20 level, known as the lower-reversal zone.
Three LinesTrend Analysis

Determining market posture is important in order to identify potential trend reversals. Within the Market Forecast graph,
there are three lines and each has a corresponding time frame and trait.

Bullish Cluster
As shown below, a bullish cluster occurs when all three linesgreen, blue, and redappear
in the lower-reversal zone, below 20, on the same day. This usually occurs in a short- to
intermediate-term bearish trend and is a potential bullish reversal signal.
Only eight days after the cluster, the S&P made a 90-point move upward.

Bearish Cluster
As shown below, a bearish cluster occurs when all three linesgreen, blue, and redappear in
the upper-reversal zone, above 80, on the same day. This usually occurs in a short- to
intermediate-term bullish trend and is a potential bearish reversal signal.
Ten weeks after the bearish cluster, the S&P 500 fell over 200 points.
For illustrative purposes only. Past performance does not indicate or guarantee
future success.

Market Forecast Clusters
The cluster indicates a time when all three linesgreen, blue, and redare turning, indicating a possible
reversal. In order to incorporate the Market Forecast cluster into your investing plan, you need to understand
the timing involved.
Market Forecast Clusters: Timing

Watch for all three lines to turn direction within five days.
Use the cluster as an entry or exit signal along with your other investing plan rules.

Importance of Trends
Trend is a key component of analyzing a stock. Trend helps identify the prevailing direction of a stocks movement. Here are
some things to remember when trading with the trend.
A trend in motion tends to stay in motion
Trading with the trend helps increase probability of being right
Identifying a stocks trend is important because trading with the trend may increase the probability of the trade being success-
ful. Trends often continue until something like news or a change in investor sentiment alters the direction. Following the trends
direction is considered going with the flow and is the foundation of technical analysis.
Trend has three directions:
Up
Down
Sideways

Uptrend
A series of higher highs and higher lows.
Downtrend
A series of lower highs and lower lows.

Sideways Trend
A series of relatively equal highs and equal lows.
Top-Down Analysis
Determining your market posture with the help of the Market Forecast is the first step to selecting an individual stock position
using top-down analysis. Top-down analysis starts with your market posture and drills down to specific sectors, industries, and
then individual stocks.
Markets M
Sectors
Industries
Stocks

Dene Your Posture First
To avoid trading against the market trend, it is important that you form a market bias before entering individual
stock positions.
Using the table below, write down your current market posture.
Index Bullish, Bearish, or Neutral?
S&P 500
Dow Jones
NASDAQ
Bullish Watch List

Its a good idea to keep track of stocks you find during the top-down analysis process with a bullish watch list.
This allows you to watch them closely for entry signals based on your investing plan rules. Here are a few steps
you can follow to create a bullish watch list.
Criteria #1: Uptrending or sideways-trending stock with volume 150% of average

Look for stocks that are already in an uptrend or have been trending sideways but breaking out with big volume.

Criteria #2: 3 green arrows
Uptrending stocks showing three green arrows are experiencing buying pressure, which pushes the stock price higher.
Criteria #3: 2 green arrows in Phase 2

Stocks showing two green arrows after scoring Phase 2 indicate the stock has some fundamental strength. Uptrending stocks
that are fundamentally strong tend to maintain uptrends.

Criteria #4: Uptrending industry group
Look for stocks in uptrending industry groups. Institutional investors tend to choose stocks in the same industry
with the idea that a rising tide lifts all boats. Using the Investools Big Chart, you can see the relative strength
for this example.
Criteria #5: Broken resistance or bouncing off support

Entry rules are often based on getting in when a stock is breaking out from previous resistance or bouncing up
from prior support. This indicates buying pressure may likely increase and the stock price will move in the
trends direction.
Systematic and Unemotional

Even with the Investools Method, new investors struggle with systematic and unemotional decision making when
trading. Using top-down analysis to build a market posture and locate potential industry groups is only part of the
process. All markets trend in one of the three directions. Master at least two strategies for each market direction.

Strategies Based on Your Directional Bias
Bullish Examples
Stock
Exchange-Traded Fund (ETF)
Mutual Fund
Long Call
Directional Spread
Consider dividing up the strategies you execute between extremely and moderately bullish.
Neutral Examples
Covered Call
Directional Spread
Iron Condor
Neutral markets often allow you to execute trades that benefit from range-bound prices.
Bearish Examples
Long Put
Directional Spread
Inverse ETF
High-probability bearish trades begin with your analysis of market conditions.

For illustrative purposes only. Not a recommendation of any strategy.

Next Steps
Forming a market posture is an important step in choosing investments that
move with the overall trend of the market. Continue to apply what you learned
today by following these steps every Monday for the next 30 days:
Record the posture of the Dow Jones, S&P 500, and NASDAQ
Examine the Market Forecast to see if it supports this posture
Record at least two strategies you could incorporate to

take advantage of your findings
Call your coach to discuss the results*

Scott Martin
scott.martin@investools.com
Or, attend one of the instructors upcoming online and live events*:
Introduction to Trading Stocks online workshops

Investing Foundation workshops

Notes


Getting Technical with Your Trading System
Todays Goals
Identifying and creating a trading system that fits your investing style is an important part of your investor education. Today
youll learn important components of a trading system and how to backtest your own system using paperMoney.
Understand the style and components of a trading system
Use paperMoney to backtest and forward test various trading systems
Understand the importance of using risk management in a trading system
System Style Expectations

When developing a system, consider your goals and expectations. Most investors keep the following in mind:
Large profits: Everyone wants to win big!
High reliability: Everyone wants trades go their way every time.
Small losses: Everyone wants to keep their capital.
But desired expectations and outcomes dont always reflect reality. When trading, you need to set
realistic expectations and understand the trade-offs of different styles.

GETTING TECHNICAL WITH YOUR TRADING SYSTEM MCNICHOL
System Style Expectations Trade-Os
Every system has potential advantages and disadvantages, and there is no such thing as a perfect system. Here are some
things to remember as you build your own system:
Reliability and frequency: These are two important factors when setting realistic trading system expectations.
More reliable systems will typically be less frequent. More frequent systems will typically be less reliable.
Large profits: A few large profits must accept many small losses or lower reliability, while higher reliability
increases risk of loss or less frequent trades.
High reliability: This comes at the expense of many small profits and a few large losses or fewer opportunities to
reduce risk.
Small losses: Keeping losses small comes at the expense of lower reliability or more frequent trades that result
in small profits.

Match System Style to Investools Course
Complete the table with the trading style or Investools course that matches the System Style Expectations.
Reliability Frequency
A few large profits and many small losses. More opportunities with greater risk.
Many small profits and a few large losses. Fewer opportunities with less risk.
Which system is right for me?

Answer the following questions to determine if a trading system is right for you.
Do I understand the rules?

Make sure you understand a systems objectives and rules as you execute
your plan. And more importantly, make sure youre comfortable with the
objectives and rules before live trading.
Will I follow the rules?

There is no use in having a system if you dont follow it. Be disciplined.
Do I have time to trade it?

Some systems generate many trades and require more of your time to plan,
place, and monitor trades. Make sure the system you choose fits your
time commitment.
Will I backtest and forward test my rules?

Testing how a system worked in the past and forward testing it with
paperMoney can help build confidence in applying your system to different market conditions. Make sure to
test your system.

Some Guidelines for Building a System
Building a system starts with an idea and, over time, evolves into a consistent approach to trading the market.
Here are some steps to consider as you build a trading system:
Define your objective

Are you trading the trend, swing trading, or looking to trade a given range? Clearly defining the
goal of your system is the first step to building any investing plan.
Do the simplest things first

Add indicators and tools that support your objective and help
you spot trade opportunities.
Build one step at a time

You dont need to start with a masterpiece. Systems are built
from the ground up. Build it one piece at a time and create a
strong foundation.
Check for errors and omissions

As you test your system, make sure its meeting your original
objective.
Optimize
If the system is not producing desired results, make minor
adjustments and retest for improvements.
Components of Your System

You need to define the components of your system in your investing plan. These components can include:
What to buyETFs, growth, value, income stocks
Indicators usedMoving averages, stochastic, MACD, etc.
When to enterEntry rules
How much to buyPosition size and risk management rules
When to exitExit rules

Investing Plan Example: Sell in May and Go Away
Here is a simple example of a trading system using the capabilities in paperMoney:
Define your objective

Try to profit from the market cycle known as the Halloween indicator.
Do the simplest things first

Add a 50-day simple moving average (SMA) to charts.
Build one step at a time

Use simple entry and exit rules to build the strategy.
Backtesting a Strategy with paperMoney

The Halloween indicator is one of many strategies that are prebuilt into the paperMoney software. These indicators are built
with a language called thinkScript. Here is a breakdown of the Halloween indicator script code:

To learn more about thinkScript, click the Help tab in paperMoney and go to the Learning Center.
This software application is for educational purposes only. Successful virtual trading during a one-time period does not guarantee successful investing of
actual funds during a later time periodmarket conditions change constantly. thinkScriptTM and Condition Wizard are functions of paperMoney that may allow
Investools students to automate some of their hypothetical investing activities, but does not relieve investors from the responsibility of making their own
investing decisions.

Backtesting in paperMoney
The thinkBackTM features in paperMoney allow you to go back in time and study simulated trades based on a decade of
historical stocks and options data using your custom system. To learn more about this tool, watch tutorials located in the
thinkorswim Learning Center.
The Fabulously Fantastic Fibonacci

After you begin to test your system, the next step is to refine it. One way to do this is to use indicators like Fibonacci numbers.
Characteristics of this tool include:
Fibonacci numbers and ratios are used in technical analysis to help identify potential areas of
support or resistance
Fibonacci sequence: 1,1, 2, 3, 5, 8, 13, 21, 34, 55, 89...
We will test 5,13, and 55
Use a Fibonacci number moving average that is half the length of the cycle that youre tracking.
If the peak-to-peak cycle length is roughly 30 days, then a 15-day moving average is appro-
priate. The numbers 5, 13, and 55 are Fibonacci numbers. On a daily chart 5 is half of a 2-week
cycle, 13 is half of a monthly cycle, and 55 is half of a 6-month cycle.
Keep in mind that shorter length moving averages generate frequent signals and identify new
trends earlier, but also give more false signals that can be less reliable. Longer moving averag-
es are more reliable but less frequent, only picking up the larger trends.

Investing Plan Example: 5-13-55 Fibonacci Crossover
Objective
To capture intermediate- and long-term trends on daily charts in less trades compared to the 5/10/20 cross-
over using the power of Fibonacci numbers 5, 13, 55
Watch List Criteria
Liquid ETFs and growth stocks
Entry Rules
Enter when both the 5 and 13 exponential moving a verages (EMA) have crossed above the 55 EMA
Additional entries possible on 5 EMA crossing above 13 EMA while both averages are above 55 EMA
Money Management
Stocks : Allocate % that represents your diversified Stock Allocation

Options: Position Size according to option trading plans
Exit Rules
Exit when both 5 and 13 EMA are less than 55 EMA

Or, exit when low is 2.5 x Average True Range(13) below entry price
Routines
Review watch list charts for 5-13 EMA crossovers

Look for Entries when 5 and 13 EMA are above 55 EMA

The 5-13-55 Fibonacci trading system illustrates the capabilities of paperMoney by testing moving average crossovers. Again,
here are the steps to help build a system:
1. Define your objective

To identify trends on daily charts using the power of Fibonacci numbers 5, 13, 55.
2. Do the simplest things first
Add 5-,13-, and 55-day exponential moving averages to charts.
3. Build one step at a time
Use the entry and exit rules from the investing plan to build the strategy.
Backtesting a Strategy with paperMoney

Here is a breakdown of the thinkScript as it applies to the Fibonacci crossover plan.
# 5-13-55 Fibonacci crossover

To learn more about this and other strategies, click the Help tab in paperMoney and go to the Learning Center.
This software application is for educational purposes only. Successful virtual trading during a one-time period does not guarantee
successful investing of actual funds during a later time periodmarket conditions change constantly. thinkScriptTM and Condition Wizard are functions of
paperMoney that may allow Investools students to automate some of their hypothetical investing activities, but does not relieve investors from the responsi-
bility of making their own investing decisions.

Expectancy
Expectancy estimates what you might anticipate to win or lose per trade. It should address:
Reliability: The percentage of time you make money. This helps you understand if your system has a low or
high reliability.
Relative size: Compare profits with your losses. Bottom line is that you want profits to exceed losses.
Costs: Due to commission and slippage, a potentially profitable system could turn unprofitable or much less desirable
due to transaction costs.
Frequency: How often does your system generate a trade? Because the expectancy number is calculated per trade,
when your system has an expectancy of only $100 and generates 30 trades per year, it may be better than a system
that has a $1000 expectancy and only generates two trades per year.
Expectancy Formula
Calculating the expectancy is an important part of analyzing any system. There are two ways to calculate this:
1. (Probability of win * Average win) (Probability of loss * Average loss) = Expectancy
2. Net profit (or loss) / Total number of trades = Expectancy
Risk Management
There are several ways to address risk in a trading system. Here are some of the most common.
Diversification: By using index and sector ETFs and a basket of stocks, you can try to spread out your risk across
several different securities.
Portfolio risk: A fixed-dollar amount of risk per trade that is a percentage of your portfolio.
Stop loss: Can be used in a system as an additional stop to exit rules when there is a large move in the stock or market.
Average True Range (ATR) is a one of several indicators that can be used make stop losses more systematic.

Next Steps
In this session you learned the importance of choosing a trading system that is right for
your investment style. However, as with any new concept, learning how to implement a new strategy takes prac-
tice and patience. Continue what you learned today by following these steps:
Add Sell in May strategy to paperMoney charts to review
Attend Advanced Technical Analysis Trading Room:

System Creation on Thursdays*
Register for the next Automated Investing online workshop*
Access Community for this presentationAll systems and

thinkScript discussed will be provided in the Community at
http://community.investools.com/groups/getting-
technical-with-your-trading-system

Contact your coach:
John McNichol
john.mcnichol@investools.com
Advanced Technical Analysis Online Coaching: Monday 11:00 a.m. 12:30 p.m. ET
Introduction to Trading Stocks Online Coaching: Tuesday 4:30 p.m. 6:00 p.m. ET
Advanced Technical Analysis online workshops


Notes

179
High-Probability Price Patterns
Todays Goals
Using technical analysis as part of your investment review can offer additional support for initiating or closing out a position.
Identify trends using technical analysis
Identify high-probability price patterns
Identify entry signals for spread trades using technical analysis
Recognize exit signals for spread trades using technical analysis
What is a trend?
The trend is the direction of trading.
Defining the trend enables you to follow the prevailing direction of a stocks price movement. Identifying and trading a particular
trend is how experienced investors put probabilities on their side. Trends occur over various time cycles. Short-term trends are
typically weeks to months. Intermediate-term trends are months to one year. Long-term trends are more than one year.

HIGH-PROBABILITY PRICE PATTERNS JOHNSON
Three Directions of Trends
Uptrend is a series of higher highs and higher lows
Sideways trend is a series of similar highs and similar lows
Downtrend is a series of lower highs and lower lows
Identifying the trend is a key first step in using technical analysis. Without doing
this first, you may open positions that actually move against the trendwhich is a
difficult investment proposition even for a seasoned investor. Many investors use
short-term trend analysis to help identify entry points for positions. Remember
the adage the trend is your friend as you make investment decisions. When iden-
tifying short-term uptrends, compare recent and previous highs. When identifying
short-term downtrends, compare recent and previous lows. When identifying
trend reversals, locate at least three higher highs and lows.
Top & Bottom Reversal Price Patterns

When price reaches similar highs and lows multiple times during part of an overall trend, it indicates an area of
support or resistance. These resistance points create recognizable patterns where the assets price stays within a
trading range and indicates trader indecision known as consolidations. These patterns are typically intermedi-
ate-term trends that last several weeks to months. The parallel support and resistance levels can be horizontal or
have a slight slope. Some common top and bottom reversal price patterns include double top, double bottom, triple
top, triple bottom, head and shoulders top, and inverse head and shoulders.

Benets of Candlestick Price Patterns
Reversal price patterns are used to help identify short-term reversals in the markets.
After strong moves in the trends direction occur, it triggers profit taking and counter-
trend traders look to capitalize on a short-term pullback in the market. These
patterns are typically made up of two or three candlesticks but can have as many
as five. Similar to price patterns, investors use candlestick patterns to help
identify changes in an existing trend.
When identifying a new trend, investors should ensure that the

prior trend is clearly identified first. This helps because the old
trend adds validity, or discredits, the newly identified candlestick
pattern. For example, a bullish reversal candlestick pattern does
not take place at the top of an uptrend. Also a bearish candlestick
reversal pattern does not take place at the bottom of a downtrend.
Its import to first identify the prior trend and then look for poten-
tial reversal patterns. If there is no clear trend and the stock is moving
sideways, then the candlestick pattern has little weight.
Shows daily and very short-term market psychology. Candlestick patterns give a view of the short-term
psychology of market participants.
Best used at defined support and resistance. Candlesticks can confirm a top in conjunction with price patterns
when multiple time frame pivot points meet and create a potential investment idea.
Triangle Price Patterns

An ascending triangle pattern appears during an uptrend when a stock begins to consolidate between a horizontal resistance
level and a rising support level. To be a valid ascending triangle, the price must bounce twice off both the support and resistance
levels. The pattern forms over weeks to months and is usually complete when the price is about three-quarters of the way to the
triangles apex.
A descending triangle is a pattern that appears during a downtrend when a stock begins to consolidate between a horizontal
support level and a falling resistance level. To be a valid descending triangle, the price must bounce twice off the support and
resistance levels. The pattern usually completes when price is about three-quarters of the way to the triangles apex.

Price Pattern Failure in Bull Markets
In the Encyclopedia of Chart Patterns1 , Thomas Bulkowski performed an extensive statistical
review of more than 50 of the most common technical analysis patterns over various long-term
periods and compared their effectiveness in historical market conditions. He summarized his finding
by breaking down the most beneficial patterns, based on their failure to achieve at least 5% of the
anticipated direction after the breakout. Below is a summary of his findings.
Price Pattern Type Failure* Failure Rates
Double Bottom (4 variations) 4-5% 51 of 1,098
Head & Shoulders Bottom 3% 15 of 554
Triple Bottom 4% 12 of 286
Double Top (4 variations) 8-14% 103 of 902
Head & Shoulders Top 4% 26 of 640
Triple Top 10% 29 of 278
Price Pattern Type Failure* Failure Rates
Ascending Triangle (up) 13% 83 of 663
Symmetrical Triangle (up) 9% 44 of 476
Descending Triangle (up) 7% 21 of 312
Ascending Triangle (down) 11% 25 of 237
Symmetrical Triangle (down) 13% 48 of 361
Descending Triangle (down) 16% 91 of 561

* Failure to move 5% in the direction of the breakout.
Which spread would you trade?

Review the examples above and identify which trades you would consider as part of your portfolio.

Spread Trades for Uptrend: Short Put Spread
Learning to trade spreads in any market condition allows you to consider investments, regardless of the markets trend. The
purpose of a short put spread is to make money if the stock goes up, sideways, or down within a given range. The primary driver
of success in this position is time decay. Below are steps that can be used to help identify the setup for a short put spread.
1. Identify an uptrend on a stock/ETF making higher highs and higher lows

2. Identify a support area when a stock/ETF pulls back for entry into a bullish spread trade
3. Identify the strike price immediately below support
4. Sell that strike price as a vertical trade and buy the next lower strike to complete the spread
5. Identify the resistance area of the recent high before the pullback as the exit area
Following along with the presenter , label steps 1-5 on the below graph.
For illustrative purposes only. Not a recommendation of any security or strategy. Past performance does not indicate or guarantee
future success.

Spread Trades for Downtrend: Short Call Spread
This strategy should sound very similar to short put spreads. The goal of this strategy is to make money if the
stock goes up within a given range, down, or sideways, once again, using the only constant in options trading
time decay. A short call spread is a directional strategy that allows you room to be wrong in your technical analy-
sis and still be profitable. Steps that can be used to help identify an opportunity for a short call spread are:
1. Identify a downtrend on a stock/ETF making lower highs and lower lows

2. Identify a resistance area when a stock/ETF rallies for entry into a bearish spread trade
3. Identify the strike price immediately above resistance
4. Sell that strike price as a vertical trade and buy the next higher strike to complete the spread
5. Identify the support area of the recent low before the rally as the exit area
Following along with the presenter, label steps 1-5 on the below graph.
For illustrative purposes only. Not a recommendation of any security or strategy. Past performance does not indicate or guarantee
future success.

Sideways Trend - Bullish: Short Put Spread
A short put spread is a bullish strategy. Selling out-of-the-money (OTM) options creates a buffer between the current price and
the strike price. This strategy is considered to have a higher probability of success because you profit if the stock moves up,
sideways, or even down within that buffer range. Below are steps that can be used to help identify the setup for a bullish short
put spread.
1. Identify a sideways trend on a stock/ETF making similar highs and similar lows
2. Identify a support area of the sideways channel when a stock/ETF pulls back for entry into a bullish spread trade
3. Identify the strike price immediately below support
4. Sell that strike price as a vertical trade and buy the next lower strike to complete the spread
5. Identify the resistance area of the sideways channel as the exit area
Following along with the presenter, label steps 1-5 on the below graph.
For illustrative purposes only. Not a recommendation of any security or strategy. Past performance does not indicate or
guarantee future success.

Spread Trade Technical Analysis
Now that you learned more about spreads and their entry points, identify the potential trends that corre-
spond with the following trades. Identify the trend direction and entry point for the following spread trades.
Spread Trade Trend
Short Put Spread Example: Uptrend at support
Short Put Spread
Short Call Spread
Short Call Spread
Next Steps
Learning to identify the trend and potential reversal patterns can help you better identify an investments entries
and exits points. In addition, the use of options spreads can offer additional opportunities for risk-defined trades
to capture market movements. To continue learning about spread trade entry points, follow these steps:
Identify the trend of a stock you want to spread trade
Determine the entry area for the spread trade
Paper trade the spread to practice entry and exit

Dave Johnson
david.johnson@investools.com
Advanced Technical Analysis Trading Room: Monday 8:00 p.m. 9:00 p.m. ET
Basic Options Online Coaching: Wednesday 7:00 a.m. 8:30 a.m. ET
Introduction to Trading Stocks Trading Room: Wednesday 3:00 p.m. 4:00 p.m. ET
Introduction to Trading Stocks Trading Room: Thursday 9:30 a.m. 10:30 a.m. ET
Wall Street Wrap-UpSM: Friday 4:30 p.m. 5:30 p.m. ET
Active Investing: Advanced Technical Analysis workshops 4 days
Advanced Technical Analysis workshops 2 days


Notes

189
Top-Down Analysis: A 360-Degree View
Todays Goals
To become a successful investor, you must first overcome existing preconceptions about the markets and building wealth.
Learning to be systematic and unemotional as you select potential investments is part of the foundation to build your future
successes on.
In this session youll :
Learn the benefits of Market 360
Discover how to navigate Market 360
Understand how Market 360 supports top-down analysis
Expand your analysis to include world markets and ETFs
Learn how to build a watch list
What is Market 360?

Market 360 is a revolutionary feature built specifically for Investools students that:
Aggregates a wealth of ranking information to allow you to quickly evaluate markets from around the globe
Consolidates market, sector, country, and industry group information into a single view
Allows you to drill down to both domestic and international stocks with ease
Enables you to sort through your watch list for companies with strong fundamentals
Market 360 is helping revolutionize the way Investools students perform a top-down analysis to search for potential
investment opportunities. It helps investors quickly drill down from a global market, strong sectors, and then industry groups,
to individual, well-performing stocks.

TOP-DOWN ANALYSIS: A -DEGREE VIEW MARTIN
Benets of Market 360

The benefits of the Market 360 tool include :
Easier top-down analysis and the ability to analyze from the global level
Lists of exchange-traded funds (ETFs) that track a variety of sectors, industries, and countries in
the market
Key indicators that provide quick snapshots of important sector data
Finding Stocks with Market 360

Market 360 is a proprietary tool made specifically for Investools students. It helps you find great potential
stocks by aggregating some of the most important decision-making information in one central place. Market 360
also helps you narrow your search for stocks by:
Highlighting top dividend-paying stocks in each sector

Grouping stocks by both highest historical surprises and EPS revisionsthese stocks may
have the potential to outperform the market
Including Projected 5-Year Growth Rates to help you quickly identify potentially strong
growth stocks

Top-Down Analysis
Using a top-down approach narrow your search to help you find high-performing
stocks. By starting your search on the large market scale, then drilling down to
sectors and then industries, you can more easily find individual stocks that have
the potential to present better investment opportunities.
Dene Your Posture First

An effective top-down analysis requires that first you define the overall market posture. By reviewing the major
indices trends, you can better ensure you align your individual strategies with the markets overall trend.
Index Bullish, Bearish, or Neutral?
S&P 500
Dow Jones
NASDAQ
Market 360 by Sector

Market 360 allows you to drill into individual sectors, industry groups, and even specific global markets. You can customize
your filters to try and locate the stocks that best fit your specific investment goals. Market 360 also gives you the ability to
sort the search results by sector, industry, or market. By sorting, you can quickly identify outperforming areas of the mar-
ket and possibly potential
investments. To review an
individual company from within
the search results, click the
industry group name and it will
display all individual stocks for
that group.

Securities View: Best & Worst
Market 360 also allows you to determine the best- and worst-performing stocks within an industry. Sorting the
search results based on past performance can help you find stocks that have outperformed in recent history. As
always, you can determine a short-, intermediate-, or long-term time frame to match your investing goals.
Securities View: Quotes

You can also see detailed price quote information along with a review of percent changes over various time
periods. Reviewing recent percent changes can help you identify a stocks momentum. These are just some
features to help you find the highest-rated stocks within the highest-rated industries.

Analyst Ratings
In addition to confirming your own analysis, you can use Market 360 to see what professional analysts recommend. The tools
in Market 360 allow you to sort your results by Strong Buy or Strong Sell. Analysts may not always be right, but what they
say about a stock can still influence market movement. For example, if an analyst upgrades a stock, it may climb higher. On the
other hand, if an analyst downgrades a stock, it can move the price lower.
A score of 1 is considered the highest rating and is often referred to as a Strong Buy
A score of 5 is considered the lowest rating and is often referred to as a Strong Sell
Nothing Moves a Market Faster than NEWS

In addition to reviewing analyst ratings, investors can also
check economic news before each trading week begins.
When checking the news, consider reviewing the Economic
Calendar, earnings releases, and the Splits Calendar.

Find ETFs for World Markets
If your investing plan includes diversifying into companies or ETFs outside the U.S., then viewing your results by
Market will help you search for top-performing potential investments throughout the global markets.

World Market: Comparison Graphs
In addition to searching for global investments, youre also able to review the historical returns of common market indices or
other stocks. Historical returns help you analyze how an investment would have performed in comparison to another invest-
ment made in the past. This can be helpful when comparing the historical returns of individual stocks against the returns of a
broad market index.
ETF Big Chart

In addition to the tools found in Market 360, the Investor Toolbox has a variety of ETF tools to aid in your investment searches.
The Fund Selector works much like the Investools Big Chart because it helps isolate outperforming funds or ETF from the
ETF List.
Carefully consider the investment objectives, risks, charges, and expenses of any exchange-traded fund (ETF) before investing. To obtain a prospectus containing this and other
important information, contact your broker. Please read the prospectus carefully before investing.

Next Steps
The Investor Toolbox and its various tools, including Market 360, enable
investors to perform comprehensive searches to help isolate a variety of
different potential investments. To apply what you learned today, follow
these steps:
Revise your stock investing plan to include specific steps

involving the use of Market 360
Every Monday for the next 30 days search for three stocks that
match your revised investing plan criteria
Attempt to include at least one international stock
Review your results with a coach weekly until youre proficient with Market 360*

Scott Martin
scott.martin@investools.com
Introduction to Trading Stocks online workshops
Investing Foundation workshops


Notes

199
Notes
Up and Coming Global Phenomena
Todays Goals
The worlds economies are in a constant state of development and progression. As countries grow, new opportunities can
emerge for investors.
Develop a sense for future global growth
Define where growth is likely to be concentrated
Identify potential growth industries
S&P 500 from 1933 to 2012

When looking at an 80-year chart of stock market performance, you can see several long-term bull and bear markets.
Historically, the market experiences periods of sideways trends followed by periods of growth. Although the market has
recently been trending sideways, many investors are curious when the next bull rally may occur and what may cause it to rise.
S&P 500 from 1933 to 2012*

UP AND COMING GLOBAL PHENOMENA MULLALY
The Rise of the Emerging Market Middle Class1, 2, 3
When the economy in a developing country grows,
people who were once impoverished slowly move into
middle-class society and become consumers of
discretionary goods. In the next 10 years, the middle
class in several developing nations is anticipated to
grow significantly.
Indias middle class population is expected to

grow from 5% to 40% by 2025
India is expected to become the fifth largest

consumer nation
Chinas middle class has grown to 400 million
40 million Brazilians have moved from poverty to middle class
African countries are emerging similar to Asia and Latin America
Rising Middle Class Means More Consumption4

As populations move from poverty to middle class, they consume more goods. As a result, many expect the con-
sumption of discretionary goods to increase as well. Discretionary products are nonessential, everyday-life items
such as appliances, electronics, and cosmetics.
To better understand the relationship between growth and consumption, consider these figures.
2013:
2 billion people
$7 trillion spent in annual consumption
2025 (estimates):
4.2 billion people
$30 trillion spent in annual consumption

Youre New to the Middle Class
Put yourself in the shoes of an individual who has transitioned from poverty to the middle class of a developing
country. Your very basic needs for food, shelter, and clothing are met. What do you think you would buy next? Take a few
moments to write down your ideas.
Targeting Middle-Class Spending

Consumption is directly related to economic status. Some products are typically only purchased by the upper-middle class,
while other products are more often purchased by the lower-middle class.
To help spot which products are being purchased by the new middle class, investors can watch for trends in industry groups.
Industry groups are categories of companies that specialize in a distinct industry, such as mobile phones or footwear.
As the middle-class population grows, which industry groups do you anticipate will grow?
Connecting the Dots

Growing economies means growth in a variety of industry groups. However, in order for this growth to continue, infrastructure
must be built or upgraded to support the production and distribution of consumer goods. This can be a big hurdle for
developing countries.

Estimated Infrastructure Spending 2013 20301
Over the next 17 years, some analysts expect that nearly $57 trillion dollars will be spent on global infrastructure
enhancements. They anticipate that the majority of the funding will be spent to further develop the Transportation
and Energy industries.
Expected Road Demand1

Poor transportation infrastructure can negatively impact a countrys economic growth by decreasing productivity.
Lack of road capacity consumes billions of dollars each year. In fact, some analysts estimate that Indias economy
suffers almost $7 billion per year and that the United States suffers up to $100 billion each year due to poor or
deteriorating transportation infrastructure .

How do I nd investments?
When searching for investments, consider performing a top-down analysis. This type of analysis allows you to start with the
overall market and drill down to an individual stock. Heres how it works:
Determine the trend of a major index

Find a sector that is following the same trend
Review the list of industry groups
Look for outperforming stocks within that group
After searching for potential investments, investors may decide to use exchange-traded funds (ETFs) to help diversify their
holdings. While some industries have specific ETFs, others do not. Even if an industry group does not have a specific ETF,
almost all major industries have companies that are part of a related ETF holding.
For example, railroad stocks do not have a separate ETF but can be well represented in many transportation ETFs.
Carefully consider the investment objectives, risks, charges, and expenses of any exchange-traded fund (ETF) before investing. To obtain a prospectus containing this and other
important information, contact your broker. Please read the prospectus carefully before investing.
Three-Step Process for Finding Investments

Finding out which stocks are held in sector- or industry-tracking ETFs can help you identify individual stocks that might be
affected if different areas of the global economy, like the development of transportation infrastructure, experienced a boom.
By locating an industry group, youve completed step 1 of the following three-step process for finding investments:
1. Identify a sector or industry group with potential for growth

2. Move to the Great Earnings, Sales, and Cash-Flow Growth prebuilt search
within identified sector or industry group
3. Confirm global exposure in company financials and 10-K reports
By isolating a particular area of interest, Investools students can use features within the
Investor Toolbox, like the Great Earnings Sales and Cash Flow Growth prebuilt search, to
further isolate stocks to place on their watch list. After identifying individual stocks, investors
can use the information found in these companies annual financial reports to examine poten-
tial global exposure and long-term investment projections.

Energy Use by Country in 20115
With nearly a fifth of the worlds population currently living in China, its no wonder that China is the worlds
largest consumer of energy. However, Chinas widespread use of coal is creating a significant pollution concern.
Because of this, China is increasing its use of alternative fuels as the country looks to build long-term economic
viability. This alternative fuels trend is expected to happen in other developing countries as well.
Energy Use by 20356

Some analysts expect worldwide energy usage to rise 53% by 2035,
with much of the consumption coming from China and India. Its
estimated that by 2035 China and India together may be consuming
nearly 30% of the worlds energy. At the same time, demand for
renewable resources, like wind and solar power, is projected to grow
2.8% each year. Even though alternative renewable resources are
expected to rise, these types of resources are often much more
expensive. As a result, low-emission combustible fuels, like natural
gas, are currently used more commonly.
United States
In the last decade, many parts of the Energy industry have been growing in the United States. This growth is
partly attributed to the production of shale oil and additional exploration for natural gas. Despite this, the
majority of the United States existing energy infrastructure exists to help import resources. With the increased
international demand for natural gas, many companies may start to build or retrofit processing plants to help
meet expected demand.

Projected Global Demand6
Based on current market fundamentals, some analysts anticipate that there will be increased opportunity for the United
States to offer natural gas worldwide. As a result, some analysts predict that the demand for liquid natural gas could even
outpace global production capacity at some point. In the meantime, increased exportation of natural gas to developing
countries would likely fuel environmentally friendly development in emerging markets as well as improve the balance of trade
in the United States.
Next Steps
Learning to analyze the global market and identify potential growth industries
can help investors identify potential investment opportunities. Continue to
apply your education by following these steps:
Identify global consumer shifts

Build a watch list of companies that could have market advantages
Develop Community discussions

Contact your coach:
Pat Mullay, CMT

patrick.mullaly@investools.com
Futures Online Coaching: Tuesday 9:00 a.m. - 10:30 a.m. ET
Technical Analysis Investor School: Tuesday 3:00 p.m. - 4:00 p.m. ET
Advanced Options Trading Room: Wednesday 6:30 p.m. - 7:30 p.m. ET
Introduction to Trading Stocks Online Coaching: Thursday 9:00 a.m. - 10:30 a.m. ET

Notes

SPECIAL SESSIONS
STOCKS
SPECIAL SESSIONS
210Balancing Your Portfolio with Fixed-Income ETFs
224Forex Tides Move Markets Day and Night
232Live Trading Room: Advanced Technical Analysis
240The Technical Side of Futures Trading
Balancing Your Portfolio with Fixed-Income ETFs
Todays Goals
Investors often understand the importance of diversification but few achieve it. One way to diversify your portfolio is to invest in
fixed-income products like bonds.
Identify the three main fixed-income types and how they work
Develop a plan for investing in bonds
Structure and manage bonds in a portfolio
Reasons You May Not Own Bonds

In the space provided, write down reasons you may not have invested in bonds previously.
Why should you invest in bonds?

In addition to diversification, what are some other reasons you might consider bonds as a strategic part of your
investment portfolio? Use the space provided to write down your reasons.
Investments in bonds and fixed-income products are subject to various risks (including liquidity, interest rate, financial, and inflation risks) and special tax liabilities. You should
discuss any/all implications of investing in such products with your broker and/or tax advisor.

BALANCING YOUR PORTFOLIO WITH FIXED-INCOME ETFS SETTLE
Three Bonds Types
There are several bond types, each with specific maturity lengths and varying risk and return levels. In this
session we will focus on three: short-term Treasuries, long-term Treasuries, and corporate bonds.
1. Short-Term Treasuries: Backed by the U.S. government,

short-term Treasury Bills (T-bills) and Treasury Inflation-
Protected Securities (TIPS) vary in length from three months
to seven years. Return rates are typically lower than long-term
Treasuries and corporate bonds.
2. Long-Term Treasuries: Also backed by the U.S. government,

long-term Treasury notes and bonds vary in length from
seven to 30 years. Return rates are typically higher than
short-term T-bills and TIPS but lower than corporate bonds of
a similar maturity.
3. Corporate Bonds: This group primarily includes bonds that

are backed by the issuing company. Length, terms, and
yields are specific to each individual bond and are
evaluated based on the companys credit rating. Corporate
bonds typically offer higher yields and higher risk than
short- and long-term Treasuries.

How Bonds Work
Newly issued bonds may trade at par (face value). Par value for bonds, except money markets, are $1,000 and represent what
is returned to the investor at maturity.
In the secondary market, bond prices fluctuate due to:
Changing interest rates: As interest rates climb, bond prices fall because new bonds will pay a higher yield,
which make lower yielding bonds worth less. Of course, the reverse is also true: falling interest rates will send bond
prices higher.
Credit quality: A nations or corporations credit rating will affect the demand for its debt offerings. As credit ratings
change, the yield of the bond will fluctuate. Lower credit ratings typically mean higher risk but also higher yield.
General economic conditions: Interest rates can be affected by general economic conditions through monetary
policy expectations. These fluctuations are often a key component in the Federal Reserves interest rate decisions,
which drive the yields, and therefore, the price for bonds.
Supply and demand: Bond market yields are constantly changing. As investors move to more favorable investments,
the bonds increased demand or supply can change its price.
Bonds can trade above face value (premium) or below (discount): Due to fluctuations in supply and demand,
changing economic conditions, and varying credit ratings, the price of bonds may be higher or lower than their
par value.

Yields and Prices
As bond prices move higher, bond yields fall. As bond prices move lower, bond yields rise.
Suppose theres a bond with a face value of $1,000 that offers an 8% return. With this coupon rate, the
bond would yield regular payments of $80. Using this information, fill in the blanks below.
If the yields on new bonds rise to 9% annually, then the price of the previously issued bonds would fall to .
If the yields on new bonds fall to 7% annually, then the price of the previously issued bonds would rise to .
Hint: The original $80, or 8% of par value, payment would be 9% or 7% of what amount?

Additional Risks that Aect Bonds
Youve already learned common risks of bonds. Now lets discuss additional risks:
Inflation risk: Although still likely a better investment than cash,

bonds can be affected by inflation. Inflation risk is the risk that
prices will rise, thus, reducing the purchasing power of future
dollars received.
For example, suppose long-term inflation rises to 4% per year and

your bond return is 3%. By the time the bond matures, you will have
lost, in real value, 1% per year.
Event risk: This is the risk of a significant event occurring that would
seriously impact an issuers credit rating and its ability to repay
its debt obligations.For example, if an issuers credit rating was
downgraded, then the yield on newly issued bonds would rise. Your
previously issued bonds price will then drop as investors sell the old
bond, creating extra supply and lower returns, to purchase the new
bond with a higher return.
Currency risk: Currency risk occurs only when an investor purchases a bond that is denominated in a foreign currency.
If the currency value changes in comparison to U.S. dollars, it will also affect the overall return and complicate the
bonds overall value.
Political risk: Political risk is associated primarily with emerging governments or significant corporate changes that
threaten overall stability. This is less of a concern in well-developed countries or companies.
Other risks: The value of your bond assumes that you will hold it until expiration. However, some factors may
prevent you from holding the bond until it reaches maturity. For example, the issuer may decide to pay the bond early
and give you a portion of the initial agreed upon return. On the other hand, if you decide to redeem your bond early,
you may find that, due to low liquidity or demand for your bond, it may sell for only a fraction of your
initial investment.

Individual Bonds vs. Bond Funds
Once investors realize that bonds are an important part of a diversified portfolio, the next step is to look for in-
vestment opportunities that attempt to meet their investment objectives and risk appetite. Below is an introduc-
tion to some advantages and limitations of individual bonds versus bond funds.
Individual Bonds Bond Funds & ETFs

Fixed maturity dates Diversification
ADVANTAGES
High yields Convenience (taxes, rebalancing)

More predictable interest payments Professional management
Helpful for fixed and known future obligations Liquidity
(zero coupon) Dividends can often be reinvested
automatically
Less liquidity No fixed maturity date (interest rate risk)

LIMITATIONS
Investor must manage Lower yields

Interest payments cannot be automatically Income stream not as predictable
reinvested Inflation risk
Inflation risk
Creating a Watch List

Various exchange-traded funds (ETFs) can help gauge the current economic environment. The makeup of an ETF

is regularly updated; however, you can use the Investor Toolbox ETF List for US Fixed Income as a starting point
to create watch lists.
In the space provided below, write down examples that fit in each category.
Long Term Short Term Stock Junk

What moves bonds?
As you develop a plan to build and manage a portfolios bond allocation, it is important to examine how news announcements
may affect bond markets.
Two categories of economic indicators include:
1. Trade flow, which as announcements about production and manufacturing
2. Capital flow, which are announcements that stimulate capital flowspecifically those that affect interest rates
through personal consumption expectations (e.g., housing, employment, inflation, etc.)
When analyzing the performance of economic indicators, review the following:
1. General trend of indicators growthpositive or negative
2. Performance of actual results versus estimatespositive or negative
Using the information above, examine the relationship between bonds and economic indicators and then circle the
correct answer.
1. If Nonfarm Payrolls Report dropped compared to last months results and came in below analyst estimates, how do
you think bond prices would react?
Rise Fall Unaffected
2. If Consumer Price Index (CPI) is greater than analyst expectations and showed increasing growth rates, how do you
think bond prices would react?
3. If National Institute of Supply Management (ISM) Manufacturing Survey rose higher than analysts expected, how do
you think bond prices would react?

All markets are linked together through risk trade. Assets classes, like bonds, stocks, currencies, and com-
modities, are all interrelated. Investors often move assets from one class to another depending on their toler-
ance for risk and desired rate of return.

In a deflationary environment, the following correlations exist.
Bond Prices Bond Yields Stocks Commodities U.S. Dollar
Bond Prices -- Inverse Inverse Inverse Positive
Bond Yields Inverse -- Positive Positive Inverse
Stocks Inverse Positive -- Positive Inverse
Commodities Inverse Positive Positive -- Inverse
U.S. Dollar Positive Inverse Inverse Inverse --
Using the table above, circle the correct answer.

1. If the S&P 500 Market Forecast chart showed a strong bullish intermediate posture, how do you think bond prices
would react?
2. If the U.S. Dollar Index broke above its technical resistance level, how do you think bond prices would react?
3. If the price of crude oil continued to downtrend, how do you think bond prices would react?

Other Important Bond Concepts
1. Yield Curve: Normally, yields are higher at longer maturities.
This relationship exists because investors often require
a higher yield to tie up their investment funds for longer
time frames.
2. Yield Spread: The yield spread is the difference in yields

between two different bond maturities. For example, $TNX
(10-Year Treasury) minus $IRX (3-Month T-bill) is a commonly

monitored yield spread. Within ProphetCharts
the relationship between these two investments can be
charted as $TNX-$IRX. The graph to the right helps visualize
the relationship between maturities and yields.
How to Manage Moving Interest Rates

Duration: In general, the rates of return on longer maturity bonds will rise or fall more than shorter
maturity bonds.
Convexity: Prices for bonds with longer maturities rise at increasing rates and fall at slowing rates.
Investing Plan
1. Watch List: Create a list of potential investments based on your appetite for risk and
investment horizon.
2. Fundamental Analysis: Using economic indicators, review your watch list for entry signals.
3. Technical Analysis:
Based on your understanding of intermarket relationships,
watch for potential investment opportunities.
Review the comparison between long- and short-dated
maturities to examine the yield spread.
4. Adjust Allocation of Treasuries and Corporate Bonds based on
Fundamental and Technical Analysis
5. Adjust Allocation of Long-Term and Short-Term Treasuries
based on Duration and Convexity

Structuring and Managing Bonds
The following are sample bond allocations and how the steps in an investing plan might apply.
15%20% Bond Allocation
1. Watch List (refer to the sample lists)
2. Fundamental Analysis
Do economic indicators signal a growing or shrinking economy?
Are economic indicators positively beating estimates or falling short?
3. Technical Analysis
What is your market posture for stocks, currencies, and commodities?

What is the current long-term trend of the yield spread?
4. Based on your risk tolerance and fundamental and technical analysis, allocate the bond
portion of the portfolio between Treasuries and corporate bonds.
5. Based on the direction of the yield spread and concepts of duration and convexity, allocate
the Treasury portion of bonds between short- and long-term maturities .
40%60% Bond Allocation
1. Watch List (refer to the sample lists)
2. Fundamental Analysis
Do economic indicators signal a growing or shrinking economy?
Are economic indicators positively beating estimates or falling short?
3. Technical Analysis
What is your market posture for stocks, currencies, and commodities?

What is the current long-term trend of the yield spread?
4. Based on your risk tolerance and fundamental and technical analysis, allocate the bond
portion of the portfolio between Treasuries and corporate bonds.
5. Based on the direction of the yield spread and concepts of duration and convexity, allocate
the Treasury portion of bonds between short- and long-term maturities.

Next Steps
Learning to use bonds as a strategy within your balanced
portfolio can be intimidating. However, with education and
practice, you can overcome this fear. Continue your learning by
following these steps:
Allocating the bond slice of your portfolio allocation

model in your investing plan
Forming a weekly routinewatching economic
indicators, yield spread, interest rate movements,
etc.to reassess your allocation model
Readjusting allocation, if necessary
Attending the Portfolio Strategies Online Coaching/Trading
Rooms for additional support*

Contact your coach:
David Settle
david.settle@investools.com
Advanced Options Trading Room: Monday 5:30 p.m. 6:30 p.m. ET

Forex Trading Room: Thursday 1:00 p.m. 2:00 p.m. ET
Introduction to Trading Stocks Online Coaching: Monday 12:00 p.m. 1:30 p.m. ET
Forex Online Coaching: Tuesday 9:00 p.m. 10:30 p.m. ET
Combined Online Coaching: Friday 6:00 p.m. 7:30 p.m. ET
Basic Options Online Coaching: Saturday 9:00 a.m. 10:30 a.m. ET
*May require additional purchase of products and services. Speak with an Investools representative for more details. Events may be
subject to change.

Notes

223
Forex Tides Move Markets Day and Night
Todays Goals
The forex market is the most actively traded market in the world. Because it trades currencies, the forex market and its cor-
related global markets can help identify and hedge against inflation risk.
Understand the forex market and its breadth

Recognize the impact currencies have on equities
Identify intermarket correlations that connect all markets
Understand how to hedge inflation using currencies and commodities
Investment Riddles
Fill in the answers as you learn more about the forex market.
What is the average daily volume traded in the forex market?

What is the average daily volume of the NYSE ?
What are the most active currency pairs in the forex market?
During the business week, how many hours per week is the forex market open for trading?
Which market is quickest to adapt to inflation?
What makes up half of every equity trade that is ignored by most traders? _
The forex market is the largest and most active financial market in the world and therefore has a rippling effect on the strength
and stability of other global markets, especially in the United States.

FOREX TIDES MOVE MARKETS DAY AND NIGHT YOUNG
Building from our knowledge of stocks
Now that you know how important the forex market is to the global economy, lets examine how it works by
reviewing an example:
1. A single share of Google (GOOG) is 770 USD.
2. The GOOG/USD pair is trading at $770. Google is the base and the dollar is the quote.
3. If investors expect GOOG to rise in value, they buy GOOG with dollars. This would be similar to
buying the GOOG/USD pair, if it existed.
From this example you can see how investment transactions have a direct correlation to the dollar. If youre
purchasing stocks with dollars and not including the forex market in your investing strategies, youre ignoring the
largest portion of your accountthe strength or weakness of the U.S. dollar. Taking a risk-adjusted approach to
the forex market, rather than just ignoring the dollars impact, could help you manage your investment accounts
with more knowledge and understanding.
Long and Short in Pairs

To be long means to buy and to be short means to sell. In the forex market, to be long means to buy the pair
that is long the base and short the quote. You would want to be long if youre bullishly expecting the stock to rise.
You would want to be short if youre bearishly expecting the stock to fall.

Forex Market Benets
Learning to trade the forex market can be challenging, even for seasoned traders. Its important that traders understand the
many benefits and risks associated with this market, such as leverage, liquidity, time, and taxes.
Leverage: 50 to 1 on major pairs

Liquidity: $4 trillion in daily trading volume
Time: Market remains open Sunday through Friday
Tax: 60/40 LT/ST Tax Treatment
Investools does not provide tax advice. It is recommended that you consult with a tax advisor regarding your
personal tax situation.
Forex Market Risks

All investments have some associated risk. Because leverage can help or hurt, its important to understand that volatility
can impact your position intraday or potentially overnight as well. There are no commissions in forex trading, but there are
spreads between bid and ask prices, which can cut into profits. This potential cost is why its important not to over-trade.
Leverage is a double-edged sword

Potential large and volatile price movements overnight
Active market can lead traders to over-trade
A solid investing plan, good money management, and a firm understanding of the fundamentals of the forex market can help
mitigate some risks.
Forex Market Pip Values

A pip is any movement of the exchange rate, up or down, by one hundredth of a penny. For example, if a currency pairs exchange
rate moved from 1.2749 to 1.2765, the value, or price, increased by 16 pips.
Due to leverage in the forex market, the pairs are quoted in pips
Pips are 1% of the smallest denomination (4th decimal point for most pairs)
For most major pairs, a 1-pip move has a value of a $1 profit or loss
226
226 Investools
InvestoolsInvestor
InvestorConference
Conference2013
2013
Intermarket Correlation
The U.S. dollar is the worlds #1 reserve currency. Higher interest rates
usually increase the demand for and value of the dollar. However, if the
economy is falling or not growing, third-world countries may have higher
interest rates and better yields. But, because third-world economies
are less stable, the higher interest rates and better yields are offset by
higher uncertainty.
The British pound is one of the most active currencies in the forex market. The United Kingdom is also one of the
largest economies in the world and is watched closely. The British pound is also sensitive to energy prices. For ex-
ample, British Petroleum represents approximately 10% of the United Kingdoms gross domestic product (GDP)
each year. As energy prices rise, the British pound tends to benefit.
The Australian dollar is also correlated to commodity prices, particularly
gold. Australia produces about 10% of worlds gold resources, ranked
third after South Africa and the U.S. Some primary resources produced
in Australia are gold, sliver, basic materials, and metal ores, as well as
other precious metals, precious stones, and uranium.
Intermarket Correlation1
The Canadian dollar rises or falls with commodity prices because
commodities comprise the majority of Canadas exports. Almost 85% of
Canadian exports are shipped to the U.S., comprising about 19% of U.S.
imports. This includes oil, automobiles, lumber, aluminum, zinc, and other
metals. The U.S. now imports more from Canada than any other coun-
try and oil production in Canada has more than doubled in the past five
years. Due to this growth, analysts project that the U.S. could import up
to 37% of Canadas oil over the next five years.

Markets Commonly Correlated to the Forex
Intermarket analysis teaches you that all markets are interrelated. Before investing in a currency pair, its important to have a
basic understanding of how an individual currency is related to other industries, commodities, or market factors. Use the table
below to review some of the most common currencies and examine how they may be related to other markets.
Market Currency Current Trend

Gold Australian Dollar
Agriculture New Zealand Dollar
Treasury Yields Euro
Oil British Pound
Banking Swiss Franc
Commodities Canadian Dollar
Volatility Japanese Yen
Forex Hedge Example

To better understand the value or risk associated with leverage, review the following example.
Price Position Size Investment Margin

FXE $130 769 shares 100,000 $50,000
EUR/USD $1.3010 7 mini-contracts N/A $1,820
Forex trading is a new concept to many people. Beginning forex traders may look to trade a currency exchange-traded fund
(ETF) rather than the actual currency pair.
For example, FXE is an ETF that mimics the EUR/USD currency pair. With potentially rising inflation and a weakening dollar, it
may help to buy euros and sell dollars through the FXE. An investor could attempt to hedge $100,000 by purchasing 769 shares
of the FXE. This purchase would lock up between $50,000 and $100,000, depending on the margin required by your broker.
However, an investor could instead choose to hedge with a currency pair by purchasing seven mini-contracts. The same
$100,000 would still be hedged, but the margin required would only be $1,820. Because forex trades on margin, no actual dollars
are invested to hedge the $100,000 until you close the position. According to the chart above, the FXE is subject to gaps and
slippage while the EUR/USD pair typically has fewer and smaller gaps.

Based on what you learned about the forex market, consider the following questions:
Is the current market inflationary or deflationary?

What percentage of your account is in cash?
Which of the commonly correlated markets are trending?
What methods could you use to hedge the inflation or deflation risk?
Next Steps
The forex market is the largest market in the world, and many investors dont factor
in its influence into their portfolio. In this session you learned the importance of
the forex market and how you can use forex concepts as a part of your balanced
portfolio approach. To continue your learning, follow these steps:
Review your portfolio to recognize inflation and deflation risks

Use a correlations table to select the best hedge instruments
Join the Forex community group
Visit http://community.investools.com/groups/forex-online
Attend the Forex Trading Rooms and Forex workshops*

Contact your coach:
Blake Young
blake.young@investools.com
Advanced Technical Analysis Online Coaching: Monday 12:30 p.m. 2:00 p.m. ET
Forex Trading Room: Monday 9:00 a.m. 10:00 a.m. ET
Forex Online Coaching: Friday 9:00 a.m. 10:30 a.m. ET

Notes

231
Notes
Live Trading Room: Advanced Technical Analysis
Todays Goals
Advanced technical analysis and decisive investing plans can help you spot additional bullish and bearish investment
opportunities.
Recognize candlestick and price patterns
Describe characteristics of short-term pullbacks in intermediate trends
Practice identifying trend reversals
Demonstrate bullish and bearish trend reversal investing plans
Diagonal Break of Resistance
Past performance is not indicative of future results.
This example of a long-term bullish stock has several short-term resistance levels. These are pullbacks that form diagonal
resistance. The stock then breaks above resistance to create an intermediate trend reversal and goes on to make higher highs.

LIVE TRADING ROOM: ADVANCED TECHNICAL ANALYSIS BOYD
Sample Investing PlanBullish Intermediate Trend Reversal Setup
Objective
Identify entry signals on long-term bullish stocks that have short-term bearish pullbacks (approx. 10 days)
and are moving toward long-term (horizontal or diagonal) support levels
Watch List Criteria
Searches:
Investor Toolbox prebuilt searches: Simple Search to Bullish Stocks, Uptrending Stocks No Excuses
SM
Examine stock indices such as Dow Jones Industrial Average , NASDAQ , and S&P 500 , and review
stocks that are showing recent relative strength
Fundamentals:
Phase 1 score with a minimum of 5 green arrows, F/E score 2.5 minimum
Industry Group:
TM
Mostly groups with yellow or green rankings in Market 360
Market Conditions:
Flat to bullish
Search Routines:
Re-run the searches weekly
Potential Strategies:
Stock, calls, synthetics, selling puts, covered calls
Pick a strategy that has a minimum delta of +30

Entry Rules
Technical Analysis:
Identify a long-term diagonal or horizontal support level for a potential bounce
Identify a downward-trending diagonal resistance level
Check for a potential MACD divergence
Check for a rising slow stochastic for improving sentiment
Average volume or better
This example of a bullish entry demonstrates a MACD divergence, a rising slow stochastic, and a close above the high of the
low day that is accompanied by above-average volume.
Two main styles of price entry:

1. Close Above High Of Low Day (CAHOLD)
2. Close Higher Gap Setup (CHG)
To enter on a diagonal resistance breakout, you must have the following:
1. An open and close above diagonal resistance levels
2. A closing price that is above the open price
Note: if these criteria are met, the stop could be placed 3% below the diagonal line. This is typically a limit order for an entry. Also, the price should not be more than 5% beyond the
diagonal resistance level.

Money Management
Look to risk less than 8% of entry price

Example of a stock with a $42 entry price and a $40 support level
Support Level x 3% Stop Loss = Stop-Loss Value
$40.00 x 0.97 = $38.80
Entry Price Stop-Loss Value = Risk
$42.00 $38.80 = $3.20
Risk / Entry Price = Risk of Entry Price
$3.20 / $42.00 = 7.6%
Risk no more than 1% to 2% of total account value
No more than 10% of investment capital
Short-Term Exits
Target a 100% Fibonacci retracement
Long-Term Exits
Move stops up on higher lows / horizontal support levels

Move stops up on diagonal support levels
No exits until support is broken by 3%
Routines
Look for stocks that have been down lately. Look at a one-week percent change compared to a
one-month percent change :
These stocks usually have recently performed lousy and could be pulling back to
long-term horizontal support levels
Identify sectors that are near or at support levels:
Find sector stocks at horizontal support levels
Review the Sector ETF Holdings list

Sample Investing PlanBearish Intermediate Trend Reversal Setup
Objective
To identify broken support, lower lows and lower highs, and to learn how to make money on stocks returning to a
bearish pullback
Watch List Criteria
Searches:
Downtrending stocks with a high MACD, stocks trending down
Stock Indicies:
Dow Jones Industrial Average, NASDAQ, and S&P 500 and review high beta stocks on indices with a 1.5
beta or higher
Fundamental Analysis:
Phase 1 score with a maximum of 5 green arrows
F/E score maximum of a 2.75
Industry Group:
Mostly groups with yellow or red rankings in Market 360
Market Conditions:
Flat to bearish
Search Routines:
Rerun the searches weekly
Potential Strategies:
Puts, short call verticals, long put verticals
Entry Rules
Technical Analysis
Identify on a daily chart, with a minimum duration of three-months, a stock that is making lower lows and lower
highs, and determine a resistance area
Two types of bearish entry signals at resistance could be:
1. Close Below Low Of High Day (CBLOHD)
2. Close Lower Gap Down (CLGD)
Average volume or higher

This example of a bearish entry demonstrates a stock that is making lower lows with a close below the low
of the high day, accompanied by above-average volume.
Look for a 2:1 reward ratio with no more than 5% off resistance for initial entry:
CBLOHD has an initial stop 1% to 3% above the open of a down day (stop adjustments could be
moved off the intraday highs daily)
Enter on a break of support:
This setup will most likely be a descending triangle with a conditional bearish order if the
stock falls more than 1% to 3% below support
The bearish setup could still be CBLOHD or CLGD
Money Management
Portfolio risk per trade / investment between % to 1% of portfolio value:

Bearish trends can move more aggressively
Look to risk less than 8% of entry price
Example of a different stock with a $42 entry price and a $43 resistance level:
Resistance Level x 3% Stop Loss = Stop-Loss Value
$43.00 x 1.03 = $44.29
Stop Loss Value Entry Price = Risk
$42.00 $44.29 = $2.29
Risk / Entry Price = Risk of Entry Price
$2.29 / $42.00 = 5.4%

Exit Rules
Short-Term Exits:
Targets on bearish trades:
Next horizontal support
The diagonal channel support (if in a channel)
Exit if the stock trades to or outside the 8% moving average envelope line using a 10-day mov-
ing average
Time stops:
If the trade hasnt moved half the way to the first target in five trading days, exit the position
Routines
Identify which sectors are leading for the week/month:

If Utilities, Health Care, and Consumer Staples are at the top, the posture of market participants is defensive
Identify weakness by looking for broken support and lower lows on Energy, Basic Materials, Financials, and
Technology
Watch high-beta sectors (e.g., Energy, Basic Materials, Financials, and Technology) that are near or at support
levels:
Bearish trades/trends typically trend down for two to three weeks until reaching horizontal
support levels
Next Steps
Learning to identify technical analysis trends takes practice and patience.
Continue to apply what you learned today by following these steps:
Review the two sample trend reversal investing plans
Practice new bullish trend reversal setups
Call coaching* to ask for specific help recognizing patterns and

applying strategies via paper trading

Contact your coach:
James Boyd
james.boyd@investools.com
Introduction to Trading Stocks Online Coaching: Monday 9:00 a.m. 10:30 a.m. ET
Introduction to Trading Stocks Trading Room: Monday 3:00 p.m. 4:00 p.m. ET
Introduction to Trading Stocks Trading Room: Tuesday 1:30 p.m. 2:30 p.m. ET
Advanced Technical Analysis Trading Room: Wednesday 9:30 a.m. 10:30 a.m. ET

239
Notes
The Technical Side of Futures Trading
Todays Goals
Futures are an integrated part of the overall trading market. They offer a wide variety of leverage and allow traders the
opportunity to enter positions that would have otherwise only been available to instructional or professional traders with
much larger amounts of investment capital.
Describe how to potentially profit from intraday volatility by applying a short-term futures trading strategy
Demonstrate how to harness leverage by using futures to hedge a bullish portfolio
Why trade futures?

Futures are an investment type that speculates on the price movement of various assets, including stock market indices,
commodities, and interest rates. Benefits of futures include:
The futures market trades 23 hours a day, 5 days a week
Trades more dollar volume than ALL stocks in the S&P 500
Futures also have risks. Some of the most common are:
A futures contract is a leveraged investment
You could lose more than your initial investment.
As a basic review, its important to understand that a futures contract is an agreement between a buyer and seller to exchange
a specific quantity of an underlying asset at a set price on a specific date. However, when you purchase a futures contract,
youre not actually purchasing or selling the assets themselves. Instead, your role is that of a speculator and you are
speculating on the future price of a commodity. While you hold the contract, any price fluctuations in the underlying asset will
equate to a gain or loss in your account. With a leveraged investment, a small movement in the underlying index could have a
significant impact on your account value, in either direction. If the movement is far enough against your position, you may owe
more than your initial investment.

THE TECHNICAL SIDE OF FUTURES TRADING CROWTHER
Fade the Gap: What is it?
This example of a short-term futures trading strategy is a reversion to the
mean strategy, which means the strategy operates under the assumption that
the price will revert to the prior days closing price.
There are many reasons one may decided to trade futures. The following strate-
gy is an example to help illustrate how a trader could develop short-term trading
rules based on the intraday volatility and speculation of highly liquid futures
contracts. As with any trading system it is important to always back-test any
strategy to identify what works for your trading style.
Fade the Gap Ingredients

Three pieces of information are needed to set up the trade:
Entry: This is the current market value of a futures contract slightly before the 9:30 a.m. ET
opening bell.
Stop: This is the current market value minus 40% of the previous days 5-period Average True
Range (ATR). To obtain this, create a daily chart for the futures contract and add a 5-period
ATR indicator.
Target: This is the previous days 4:15 p.m. ET closing price. This price can be found on an intraday
five-minute chart of the futures contract

Entry
For this strategy to be effective, the premarket opening price on the /ES must be one to seven points from the
prior days 4:15 p.m. ET close. If this is the case, the entry is initiated at the opening bell (9:30 a.m. ET). However,
if the distance of the current price that morning is less than one point or greater than seven points, then no trade is taken. If the
morning price is within one to seven points below the prior days close, a bullish trade can be placed at the opening bell. If the
morning price is one to seven points above the prior days close, a bearish trade can be placed at the opening bell.

Stop
A stop-loss value is 40% of the prior days 5-period ATR value. Lets examine how this could be done
step-by-step.
Find the previous days five-period ATR value. To do this, look at the futures contract with a daily chart and apply
a five-period ATR indicator.
Multiply the previous days ATR by 0.4.

Add or subtract (depending on whether youre bullish and bearish) this value from the opening bell price
of the futures contract. This is the value of your stop loss.
For example, if the prior days ATR value was 15.00, multiply it by 0.4 (40%) (15.00 x .4 = 6.00). Note: Because /ES
contracts only trade in quarter-point increments, youll likely need to round to the nearest quarter point. You
would then set the stop loss 6.00 points from the opening bell price, which in our example is 1501.25. Therefore,
you would place your stop loss at 1495.25, just below the entry price to protect against downward moves. Keep
in mind that this is a bullish example. If the trade was bearish, you would set the stop a calculated distance
above the entry price because youre using the stop to protect you against an upward move.

Target
For this example we will again use the /ES (the futures symbol for S& P 500 Index), although other common,
highly liquid index futures could also be used with similar calculations.
Determine the target price by creating an intraday, five-minute chart of the /ES. The closing price of the previous days 4:10 p.m.
candle will be your target price.
Putting It Together
Lets review the basics components of this strategy.
Entry: Market open (1,501.25).
Stop: Your calculated stop range (-6.00) was subtracted from the opening price (1,501.25) to create a stop value of
1495.25
Target: Prior days close (1,508.00)

Would you trade it?
Use the examples to answer the following questions.
1. Calculate if this example constitutes a potential trade entry: The close of the prior day was 1516.50 and
the opening the following morning was 1519.25.
What is the point difference?

Does it qualify as a trade?
If so, is it a bullish or bearish trade?
2. Calculate if this example constitutes a potential trade entry: The close of the prior day was 1506.50 and
the opening the following morning was 1499.00.


3. Calculate if this example constitutes a potential trade entry: The close of the prior day was 1517.50 and the opening
the following morning was 1512.00.

Which example(s) would you be willing to trade? After choosing one, take it a step further and do the following:
Identify your entry (markets opening price)

Determine your stop-loss placement with a daily ATR of 10 opening price - (10 x .4)
Identify your target (prior days close)

Lets calculate todays values.

Identify your entry (markets opening price)
Determine the stop loss (daily ATR x .4) from opening price
Identify your target (prior days close)
Sample Investing PlanFading the Gap

Bearish Fade Rules
Objective
To identify opening market short-term trade opportunities using futures contracts
Routine
Check the futures contract shortly before the opening bell. Compare it to the previous days close for potential
trade setups.
Watch List
The S&P 500 futures contract (/ES) is often the ideal candidate for this particular trading system , although
other common, highly liquid index futures could also be used with similar calculations. As with any strategy its
important to backtest potential investment candidates with your system.
Chart Style and Indicators

Start with a daily chart to determine risk based on ATR(5)
Set Up
1. Must be above 4:15 p.m. ET closing price
2. Gap needs to be between 1.00 and 7.00 points
Entry
Enter with a sell order at market open (remember this is bearish)
Use a bracket order with a stop loss and target price
Money Management
1% of futures Account
(Previous Days ATR(5) x .4) x Point Value
Exit
Set your target price to match the previous days closing price
Add daily ATR(5) x .4 to the next days opening price to determine where to place your stop loss
Close the trade by 4:00 p.m. ET if the trade is still open

Bullish Fade Rules
Objective
To identify opening market short-term trade opportunities using futures contracts
Routine
Check the futures contract shortly before the opening bell. Compare it to the previous days close for potential trade set-
ups.
Watch List
The S&P 500 futures contract (/ES) is often the ideal candidate for this particular trading system, although other com-
mon, highly liquid index futures could also be used with similar calculations. As with any strategy its important to backtest
potential investment candidates with your system.
Chart Style and Indicators
Start with a daily chart to determine risk based on ATR(5)
Set Up
1. Must be below 4:15 p.m. ET closing price

2. Gap needs to be between 1.00 and 7.00 points
Entry
Enter with a buy order at market open (remember this is bullish)

Use a bracket order with a stop loss and target price
Money Management
1% of futures Account
(Previous Days ATR(5) x .4) x Point Value
Exit
Set your target price to match the previous days closing price
Subtract daily ATR(5) x .4 from the next days opening price to determine where to place your stop loss
Close trade by 4:00 p.m. ET if the trade is still open
Hedging
Traders often use futures to protect their portfolio against dramatic drops in the market. Selling
futures contracts that gain value as the overall market falls is a process known as hedging. Traders
use this strategy to attempt to offset any losses that are incurred in their other long stock positions.

Getting Started: Beta Weighting
Beta weighting helps investors understand how sensitive their portfolio is to market
fluctuations. When a portfolio is beta weighted, it produces a numerical calculation referred to as delta. The
higher the delta, the more your account moves in sync with the overall index it is compared to. For example, if an
account was beta weighted to the SPY and the delta was 1,200, it indicates that the account would gain approxi-
mately $1,200 when the SPY increases $1. In contrast, the opposite is true: if the SPY dropped $1, the account
would theoretically decrease $1,200.
Comparing Apples to Apples

To ensure youre comparing apples to apples when hedging, you could consider beta weighting your portfolio
against the SPY, an ETF that tracks the S&P 500 Index. This gives a numerical value that helps quantify a compar-
ison of how your portfolio may move against an index.
Traders attempt to reduce, or hedge, the delta exposure of their portfolio by selling futures contracts of the S&P
500 (/ES). Although any futures index can be used as a hedge, traders typically use the /ES because it represents
the broad market and often mimics the movement of stocks in most investors accounts. More experienced
traders may choose other indices based on their investment approach and portfolio allocations. When hedging,
traders often do not use a stop loss, even though the futures position has unlimited risk. In theory, any loss on
your futures contracts would be offset by your long stock positions.
Here are the rules to determine the number of futures contract you would need to sell to offset your portfolios delta:
1 /ES contract 500 SPY delta

1 /NQ contract 800 QQQ delta
1 /YM contract 150 DIA delta

Three Common Questions on Hedging
1. How many contracts do I sell?

How much of your portfolio to hedge is really a question of preference. It is similar to asking how much life insurance a person
may want. Many traders attempt to reduce their delta exposure up to 40%. This amount could provide a fair amount of protec-
tion but would not place significant limits on a portfolios upside potential.
2. When do I add the hedge?

A hedge can be initiated or removed at any time. But keep in mind that the strategys purpose is to protect your account after
the market experiences a strong sustained run and is beginning to enter a potential retracement that could last for weeks to
months. A hedge is generally not implemented on short-term moves, such as one- or two-day retracements. This is due to the
difficulty of precisely timing the move and that an investors long-term outlook should be unaffected by short-term pullbacks.
3. When do I remove the hedge?

After the market retraces to a support level or shows other signs of a trend reversal, you may remove the hedge.

How Many Contracts?
Reduce your overall delta by up to 40%.
How many /ES contracts would you sell if you have a weighted delta of:
1. 1,500?
2. 4,000?
3. -1,000?
Adding and Removing Hedges

Remember, the idea behind hedging is to reduce overall delta exposure during a market retracement and should
be applied over longer time frames, such as several weeks or several months. Also, you should remove the hedge
when your analysis indicates the correction is over and the bullish trend is likely to resume.

Next Steps
Learning to trade futures can be intimidating at first and may not be suitable for everyone. With additional understanding you
can become a seasoned futures trader and learn to benefit from the many possibilities the futures market offers. To apply
what you have learned:
Attend the Futures Trading Room*: Mondays at 9:00 a.m. ET
Sit in on Futures Online Coaching*: Tuesdays Fridays 9:00 a.m. ET
Practice the two strategies you learned today
Join me in the hall at 9:15 a.m. ET to see a paperMoney demonstration of these examples and more

Contact your coach:
Brett Crowther
brett.crowther@investools.com
Introduction to Trading Stocks Online Coaching: Tuesday 6:00 p.m. 7:30 p.m. ET
Futures Online Coaching: Thursday 9:00 a.m. 10:30 a.m. ET
Market WrapSM: Tuesday & Thursday 4:00 p.m. 4:15 p.m. ET

Morning HuddleSM: Friday 9:00 a.m. 9:15 a.m. ET

253
Notes
Bibliography
Manage Your 401(k)...Today, Michael Turvey, CFP, CMT

1. Fletcher, Michael A. 401(k) Breaches Undermining Retirement Security for Millions, The Washington Post, January
14, 2013,http://articles.washingtonpost.com/2013-01-14/business/36343600_1_retirement-savings-retirement-
security-retirement-funds (accessed June 30, 2013).
2. Munnell, Alicia H. Are Americans Really Able to Manage Their 401(k) Plans? NextAvenue.org, May 24, 2012, http://
www.nextavenue.org/article/2012-05/are-americans-really-able-manage-their-401k-plans (accessed June 16, 2013).
Overcoming the Person Within: Take Your Trading to the Next Level, Linda McCoy, CMT
1. Elder, Dr. Alexander. Trading for a Living. Hoboken, New Jersey: John Wiley & Sons, Inc., 1993.
2. Eker, T. Harv. Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth. New York, New York:
HarperCollings Publishing, 2005.
3. Howell, J. Rande. Mindful Trading: Mastering Your Emotions and the Inner Game. 2nd ed. Empowered Horizons,
2010 (p 121).
4. Steenbarger, N. Brett, Ph.D. Three Dimensions (3D) Trader Personality Quiz, brettsteenbarger.com, http://www.
brettsteenbarger.com/articles.htm (accessed May 31, 2013).
5. Shull, Denise. (2012, January 11). Better Trading Decisions and Lessons [Webinar from Trader Lounge Chat Room]. In
Webinar Series. Retrieved from thinkorswim trading platform, Chat, Seminars, Archived Seminars for January 2012.
2003-2012 The ReThink Group, Inc.
Finding Stocks at the Right Time, Michael Kealy, AAMS

1. Lowe, Janet. The Rediscovered Benjamin Graham: Selected Writings of the Wall Street Legend. Hoboken, New Jersey:
John Wiley & Sons, Inc., 1999.
Gauging Market Posture, Scott Martin

1. Eker, T. Harv. Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth. New York, New York:
HarperCollings Publishing, 2005.
High-Probability Price Patterns, Dave Johnson

1. Bulkowski, Thomas. Encyclopedia of Chart Patterns. 2nd ed. Hoboken, New Jersey: John Wiley & Sons, Inc., 2005.

BIBLIOGRAPHY
Up and Coming Global Phenomena, Pat Mullaly, CMT
1. Merco Press. Almost 40 million Brazilians climbed to middle class in the last eight years, MercoPress,
June 28, 2011, http://en.mercopress.com/2011/06/28/almost-40-million-brazilians-climbed-to-middle-
class-in-the-last-eight-years (accessed June 3, 2013).
2. Cui, Allison and Song, Kheehong. Understanding Chinas Middle Class, ChinaBusinessReview.com,
February 2009, http://www.questia.com/library/1P3-1637535351/understanding-china-s-middle-
class#articleDetails (accessed June 3, 2013).
3. Beinhocker, Eric D., Farrell, Diana, Zainulbhai, Adil. Tracking the Growth of Indias Middle Class, The
McKinsey Quarterly, 2007 Number 3, http://www.genesis.iitm.ac.in/downloads/resources/startup/
tracking%20the%20growth%20of%20indian%20middle%20class.pdf (accessed May 24, 2013).
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BREAKOUT SESSION

During the Conference

After the Conference

How this Guide Is Organized

Download an editable PDF for you electronic devices here:

Investools Investor Conference 2013 i

Investools Investor Conference 2013 iii

iv Investools Investor Conference 2013

Investools Investor Conference 2013 v

vi Investools Investor Conference 2013

Investools Investor Conference 2013 vii

Investools Investor Conference 2013 1

In this session youll learn how to:

Identify what a model equity portfolio looks like

Build a passive portfolio

Review market history to try and find an investing edge

Build an active portfolio

Build a super active portfolio

What is an exchange-traded fund (ETF)?

A basket of stocks that track assets like a mutual or index fund

Trades like a stock throughout the day

Typically has lower maintenance fees than mutual funds

2 Investools Investor Conference 2013

Filter individual stocks within the given sector or country

U.S. Market: S&P 500 Sectors and Stocks

U.S. Sector % Allocation Example Stocks

Investools Investor Conference 2013 3

Emerging Markets: Countries and Stocks

4 Investools Investor Conference 2013

Step 1: Select Your Allocation

Step 2: Select Your ETFs

Step 3: Invest in Your Portfolio

Step 4: Manage Your Portfolio

Step 1: Select Your Allocation

Step 2: Select Your ETFs

Investools Investor Conference 2013 5

Market Ticker Expense Ratio % Optionable Liquid Options

SPY .09 Yes Yes

Step 2: Select Your ETFs Global Markets

For illustrative purposes only. Not a recommendation of any security or strategy.

Step 3: Invest in Your Portfolio

Example Portfolio: $60,000 in equities

EFA 17% $17,000

Totals 60% $60,000

*# of shares = $ amount/current price

6 Investools Investor Conference 2013

Step 4: Manage Your Portfolio

Steps to Build an Active Equity Portfolio

1. Select Your Allocation

Investools Investor Conference 2013 7

Markets, History, and Your Portfolio

Index Nov. - April Avg. % Return May - Oct. Avg. % Return

S&P 500 6.9 1.5

Index Nov. - April Avg. % Return May - Oct. Avg. % Return

S&P 500 Overweight Equal Weight

8 Investools Investor Conference 2013

Example Portfolio in Equities = $60,000

Example Regular Reg. Port. New $ Current

SPY 35% $35,000

EFA 17% $17,000

Total Equity 60% $60,000

*# of shares = $ amount/current price

Example allocation percentages guidelines:

SPY +/- up to 10%