Tom Blackstone

Derivatives trading is generally considered to be something for the more experienced trader.  It is definitely the case that certain features of Futures and Options are unique to those instruments and need to be fully understood before you actually start trading them.  But it is worth approaching the subject with an open mind.  Even if you don’t actually go on to trade derivatives, improving your understanding will give an indication of the workings of more advanced strategies. Looking at how Futures and Options are constructed helps explain how they can be traded. If you are holding a long position in options you will have the ability, but not the obligation, to convert that position into an underlying instrument. The conversion from option to underlier, technically called the ‘exercise’, will have specified terms and conditions mainly relating to the price at which the conversion occurs and the date it has to happen by. Futures are contracts obliging the holder to buy or sell an asset at a particular price on a defined date.  Originating from the commodity markets Futures were originally designed to offer market participants certainty and allow them to make appropriate business plans to meet their future obligations.  They now exist in their own right and allow traders to gain exposure to price changes in a collection of underlying markets ranging from Stock Indices to Natural Gas. Buying a Put Option on a particular market would effectively be a form of insurance against the price of that market falling.  The premium paid to take that option position could be thought of in the same way as an everyday option premium.  There is an old adage of a City options trader who each year spent part of his annual bonus on buying to his personal account, Put options on major market indices, with a twelve month distant expiry date.  The thinking be should the markets crash, and his job be put at risk, then the profit on the options would cover some of their downside. Derivatives are nowadays traded in their own right and seen by some as less of a risk management tool but more as something to speculate on.  There are some valuable lessons to take on board before engaging in any such trading. Advice on options would include, but not be limited to: avoid selling options to other parties.  Should you be drawn to the idea of collecting the premium on an option sale then you become the party liable for any change in the value of the underlier. Futures roll over date is something to look out for.  This is more of an operational risk and is covered in detail by the Plus 500 FAQ Site. Unless you know with 100% confidence where the markets will be in the near future, make sure you are aware of the risks.

A trendline is a diagonal line that connects points serving as support or resistance. If the diagonal line connects points of support, it is called an uptrend line. If it connects points of resistance, it is called a downtrend line. Traders use trendlines to make educated guesses as to where the price will reverse. An example trendline From this chart, we can see that JPY/USD encountered three points of resistance from January to March, 2018. The first was hit in mid-January. The second was hit in early February. And the third was hit in late February. A diagonal line can be drawn connecting these three points. This implies that JPY/USD was in a downtrend during this time-period. We can also see that from March to November, two major areas of support were hit. The first came in late March, while the second came in October. A diagonal line can be drawn connecting these two areas of support. This implies that JPY/USD was in an uptrend during this time-period. Drawing a trendline To draw a trendline, simply locate two major tops or bottoms and connect them with a diagonal line. This line should not cross the price at any point. For example, the chart below shows an incorrectly drawn trendline. It might be tempting to draw the uptrend line this way, since it shows the price bouncing off the line four or five different times. However, this trendline is incorrect because the price passes through the line several times, instead of merely bouncing off it. By contrast, here is another valid uptrend line that could be drawn from this chart. This could be considered an alternative to the one shown in the first image A few points that should be kept in mind when using trendlines: A trendline can be drawn with only two points. But the strongest lines have at least three points to them The steeper a trendline is, the less reliable The more often a trendline is tested, the stronger it is   Channels Once we have a trendline drawn, we can draw a channel. Channels give us even more information about a particular trend. To draw one, simply create a line that is parallel to the uptrend or downtrend line already drawn. As with normal trendlines, the defining lines of a channel should not cross the price. A channel that slopes upward is called an ascending channel. A channel that slopes downward is called a descending channel. How to trade using trendlines and channels Here are a few ways to trade using trendlines and channels: Buy at the bottom of a channel. Sell at the top Go short at the top of a channel and buy back at the bottom To limit risk, put a stop just above the top of a channel or just below the bottom Buy and hold during an uptrend. Sell when the trend breaks down Go short during a downtrend. Exit when the trend breaks   Trendlines are diagonal lines that connect areas of support and resistance. When combined together to make channels, trendlines can be a useful tool to find entry and exit points in trades.

In Forex, a moving average (MA) is a line that depicts the average price of a currency pair over a number of previous periods. For example, a 10-day MA is a line where each point is made up of the average price for the past 10 days. Moving averages show dynamic levels of support and resistance. Prices often struggle to break through moving averages. And once the price does break through, it tends to carry momentum. Moving average example In this chart, the red line is the 10-day moving average. The price hit this line several times in September, 2018. But the first few times, this line offered resistance, and the price failed to break through. In late September, this line was finally broken. A strong rally followed this break as the price moved from 0.96662 to 0.99537. When this rally lost momentum around October 9th, the price returned to the 10-day moving average, which now offered support. The price then attempted to break this support, first in the second week of October and then again in late October and early November. In both cases, the 10-day moving average provided strong support, and the price continued upward. Types of moving averages Moving averages can be either simple or exponential. Simple moving average The points to a simple moving average (SMA) are calculated by adding the closing prices of the last X periods and dividing them by X, where X is the number of periods specified. For example, the point corresponding to the 21-hour SMA for USD/CHF at 12:00 noon can be calculated by adding the prices for USD/CHF at 12:00 noon, 11 a.m., 10 a.m., etc. all the way back to 3 p.m. the previous day (21 hours earlier), then dividing them by 21. If this point is recalculated and plotted each hour, it results in the 21-hour SMA. A simple moving average can be used to gain a broad overview of the direction a currency pair is trending. Because an SMA does not emphasize recent price action, it is slower to respond to changes in trend than an EMA is. For this reason, an SMA is most useful when the trader wants to filter out the “noise” of recent price spikes. Exponential moving average The points to an exponential moving average (EMA) are calculated using the following equation: {Current closing price times [2 ÷ (time period + 1)] + [EMA point from the prior day times {1 – [2 ÷ (time period + 1)]}}. EMAs respond more quickly to current price action than do SMAs. For this reason, they are favored for shorter time periods and for circumstances where a trader wants to catch sudden changes in trend. The moving average in the screenshot near the top of this page is an example of an EMA. Here are a few ways to trade using moving averages. If the price is below the moving average, wait for it to rise until it hits the MA, then sell If the price is above the MA, wait for it to fall until it hits, then buy Wait for an MA of a shorter time-period to cross the MA of a longer time-period from below. Buy when this happens. Exit when the crossover happens in the other direction Wait for an MA of a shorter time-period to cross the MA of a longer time-period from above. Sell when this happens. Exit when the crossover happens in the other direction   Moving averages are lines that represent the average price of a currency pair over the course of a specific time-period. They can be a useful tool to determine the overall trend of a currency’s price. Because of this, they can be useful for finding profitable trading opportunities.