Trading

The Spooky Quad Week

Quadruple witching, occurs on the third Friday of the month of every quarter, in March, June, September, and December, and refers to the simultaneous expiration of single-stock options, single-stock futures, and stock-index options and stock-index futures.

Stock index futures: Nasdaq, Dow Jones Industrial Average, S&P 500 and Russell 2000 will fully transition from the September contract to the December on Friday September 17.

Options volumes tend to be particularly elevated during quad-witching periods, which may also account for some of the choppiness associated with September as the worst-performing month for indices in general.
Quad witching usually only results in higher than normal volumes, and those usually peak on Wednesday or Thursday of the expiration week.
Options volume typically spikes around 3:30 p.m. Eastern Time on quadruple-witching days, but it remains to be seen on how that will play out in reality on Friday.

Historically, quad witching hasn’t been particularly characterized as a high momentum day not week. The S&P 500 index, for example, has a daily average gain of 0.04% since the first quad witching in 2002, according to Dow Jones Market Data.

The Volatility Index VIX (the fear gauge) – reflects bullish and bearish options bets on the S&P 500 in the coming 30 days, and tends to rise as stocks fall as investors turn to options to hedge against market downturns, has seen muted moves.

So how does this translate into the market and how to trade it?
Right before the quad week begins the price tends to remain range bound. As volatility increased mid week price tends to SHAKE.

For example if an index in into an uptrend during the quad week – it will tend to base, remain range bound for a few days and as it is getting closer to expiration then it pulls back into a prior resistance level, usually testing higher time frame support.

And this is not valid for QUAD week but for any options expiration in general….

So can we determine a pullback area with approximation? Yes and no. Every day, week and month is different in the market but based on price action, a few simple indicators and symmetry we can assume that pullback are likely repetitive based on price memory. If we look at the chart below of the SPY we can see that since January 2021 it tested and retested the 50 SMA on the Daily chart before rotating back to the upside and continuing the trend.

Also note that the weekly in 2021 (since January) has followed the 10 EMA rigorously.
So can we expect a test to the 10 EMA? Likely – SPY $443.00 area on watch.
Click the link below to zoom in.

The end of the month trading has a different vibe. Volume increases, institutions are hopping in the market, funds are making adjustments to their positions within the last 3-5 days to the end of the month and stock prices rise.

But who leads? What should traders focus on? The answer is SMALL CAP STOCKS The end-of-month phenomenon has a more pronounced effect on small-cap and low-priced stocks. Research shows that small-cap stocks have considerably higher returns on the last day of the month versus high-cap stocks. This finding is not considered a variation of the historical trend among small-cap stocks to outperform high-caps. Having said that, high-priced or large-cap stocks can also experience the end-of-month effect.

Below is the performance of IWM into the end of 4 consecutive months May – End of August 2021. Notice the rallies that are happening at the end of the month.

It should not come as a surprise for any trader that has been trading for a while that the market is more volatile and choppy around options expiration week and more precisely on the exact expiration date. It is known as the Shake n’ Bake week for the retail traders….

Options Expiration happens each third Friday of the month.
Options Expiration can impact the markets (etf’s, stocks and futures)
Even if you are not an options trader it is important to know how options expiration impact stocks, etf’s and futures index prices the week of the expiration and more so on the exact expiration day.

Within options expiration week the market tends to have a back-and-forth action driven by the exposure of option traders causes stocks to remain close or be “pinned” to strike prices. This is called PINNING.

“Pinning” refers to the price of an underlying stock trading closer to an actively-traded option strike price than it would absent the options activity.

Psychology: Many investors don’t wish to run the risk of the stock gapping down at the Monday open, so they enter stock positions designed to keep the stock price away from the short strike of their options — this is particularly true for investors and firms with large option positions relative to the trading volume in a stock.

So now that you know need to adjust to the market conditions and ride the waves. And this is what we did this week, we have adjusted our stops so we do not get dinged out of trades by institutional force selling in our long positions.

If you can’t measure it, you can’t improve!

Journaling is your self analysis tool where you are your own coach
You do not know whether or not you have a successful trading system unless you clearly define it and and track it. With a clearly established metric for success, you can quantify progress and adjust your process to produce the desired outcome. Without clear objectives, you’re stuck in a constant state of guessing.

A trading journal is one of the most powerful tools to track your performance . It is where you record and review daily, weekly trades. Entries, Stops used, targets, the time of the day you tool the trade, market conditions, etc… are just a few details that every trader needs to track down.
Journaling will not only track your progress but will point out your mistakes and trading system flaws. It will point out what strategies work for you and what …not. It created accountability and what are the areas you need improvement.

Journaling a self analysis tool where you are your own coach. Journaling your trades will help with trade development , tweaking and perfecting strategies, timing, risk and developing a well greased trading system. It will determine your strengths and weaknesses.
Here are some elements that you need to keep track of:

• Entries
• Stops
• Targets
• Strategy (set-up or pattern)
• Date and Time of the day you have entered the trade
• Position size used for the trade
• Duration of the trade
• P&L – the result
• Comments – ample description of the trade

Documenting your trades is an essential part of trading.
At the end of the month and quarter you can make a self evaluation, see what worked for you and what has not worked. A common mistake many traders make is either jumping in the trade too soon or chasing trades, exiting the trades prematurely, not letting winner run or waiting too long until the traded pulls back and wipes out all your profits. Another mistake is overtrading, or jumping from one ticker symbol to another, oversizing or revenge trading and doubling in. This tracking system will help you alleviate that.

When you have all your data at the end of the month or quarter you can evaluate and determine all the mistakes.
A great way to add to your metric is charting. Print 2 charts of the same stock / futures / forex / options trade you took:

• On one chart mark the area where you entered, where you placed your stop and your exit.
• On the second chart analyze where the entry should have been, the stop and how it needed to be managed.

Do this every day for all your trades. It will make you more selective, patient and you will learn from all your trades.
There are 253 trading days in one year. Imagine taking only one trade / day and analyzing it – at the end of the year you would have 253 charts analyzed in depth, 253 lessons to consistency.

Sow the seeds of hard work and you will reap the fruits of success.

Journaling can be done manually or using a journaling software like TraderSync (our partners) where you can upload your data directly from your broker or input it manually – whichever you prefer. If you want to give it a try CLICK HERE to get a 7 DAY FREE TRIAL

All successful traders will say it is important to have a system in place that enables us to automate and organize our actions throughout the trading day.

This trading system should be a well greased machine that should function based upon a few essential components: healthy trading habits fueled by proper mindset (trading psychology), money management  (your ability to manage risk) and method (implementing with ease your trading strategies).

Implementing healthy trading habits and routine will help with all the components above. Successful trading is all about respecting key rules to minimize stress. Healthy trading habits results in excellent results.

Here are some of my healthy trading habit tips.

1.    Have a plan before you initiate a trade. A detailed trading plan is your blueprint to success. It will help you define you as a trader, the way you trade, will help you find, execute and manage trades with ease and most importantly will help you put the education puzzle together.

2.    Always analyze all closed trades, winners and losers. Having a trading journal will help you identify what works for you and what not; it will funnel you in the right direction. It is by far the most helpful method of personal trading introspection.

3.    Maintaining a positive trading attitude will improve your money management and risk management skills. A negative trading mentality will alter your thinking and mindset. Your attitude will determine whether or not you are profitable with your trading. Your attitude is more important than your market knowledge and even your level of experience. It is important how you react to the market and not what the market will do to you.

4.    Controlling Emotions. Emotional swings and emotional stresses impact your mental state of mind and will affect your trading decisions. When you trade with emotions you don’t trade clearly and rationally. Some books talk about separating your emotions from trading. But how is this possible?  To even try to separate emotions is like fighting a losing battle, taking control over them that is a different story. Trading involves the most emotional COMMODITY in the world which is….money. Money outlasts hate, love, greed and anything else you can ever imagine. The only way to control your emotions as a trader is to have a solid trading plan.

5.    Trade in the zone –Focus is key in trading. Make sure you are do not have any distractions around, no internet browsing, no phone answering, no kids playing, it should be just you and the charts. Let the charts speak to you and they will tell you what to do.

6.    Have the right tools. Trading and the whole psychology is hard enough, having to worry about an unreliable trading platform, poor charting and layout, bad internet connection can take a hard toll on your trading and the future success of your business.

7.    Position sizing. Maintain a healthy position size for your account. Recommended size is 1 to 2% of the capital risk on a trade. This is the one thing that will make or break your trading account.

8.    Develop and cultivate discipline. In my opinion this is the most important element of trading. Discipline is translated in the ability to follow your trading plan. Discipline is the essence of all of the psychological issues. All the rules and strategies do not count if they are not followed to the T. Discipline is what differentiates a successful trader from a trader that struggles.

9.    Patience. Take time to evaluate your plan before even thinking to place a trade, analyze market conditions before pulling the trigger. Patience is one of the key qualities you need to have in order to be able to deal with different situations in trading from the point you decide to enter your trade, to how you manage your trade to setting and waiting for your targets.

“I just wait until there is money lying in the corner and all I have to do is go over and pick it up. I do nothing in the meantime. In essence, by not wanting to trade, I have inadvertently transformed myself into a master of patience. By forcing myself to wait until there was a trade that appeared so compelling that I could not stand the thought of not taking it, I had vastly improved my odds.” Jesse Livermore

10.    Market conditions. Always respect market conditions and take what the market offers you. Never try to outsmart the market.

11.    Alleviate impulse and revenge trading.

12.    Keep it simple.

13.    Never force a trade. If you have to squint at a chart, it means that the trade is not there, move on to the next possible trade.

14.    Gain confidence. Confident traders rely on their own judgment and not what others are saying.  Take full responsibility for your trading decisions. Being successful requires you to trust and follow your own trading plan.

Regardless of what instrument you are trading whether it is stocks, futures, forex, it is important to develop healthy trading habits right from the beginning, this will fast track your trading to success and profitability.  Developing healthy trading habits is as important as your trading strategy and personal trading plan. Having the right approach and self discipline is what makes a trader successful.

What trading habits would you add to this list? I encourage you to leave your comments.