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How To Place A Covered Call Strategy With optionsXpress

 Introduction

Retail brokerage firm optionsXpress provides services to traders in the Untied States and internationally. While optionsXpress specializes in catering to options traders, the firm is also notable for its browser based execution platform as well as the variety of markets tradable from within the platform. optionsXpress was acquired by the Charles Schwab Corporation in 2011.

Source: investopedia.com

How to Set Stop Losses

Stop placement is a topic that sometimes causes confusion amongst traders. This Price Action article is going to be a complete guide to how to set stop losses for the pin bars, fakey’s , and inside bars. Hopefully this will eliminate any confusion you may have had about this topic and will give you a guide that you can refer back to as you need. Consider this another supplement to the course material. Enjoy.

Setting stop losses on the pin bar setup:

• Standard pin bar stop placement

The “standard” or “normal” stop placement on a pin bar setup is near the high or low of the pin bar tail (depending on the direction you are trading of course). I normally place my stop 5 to 10 pips above the high or 5 to 10 pip below the low. No need to play the game of “how many pips above or below the tail is best?”…just place it at least 5 to 10 pips above or below, either the setup works or it doesn’t, don’t over-analyze it.

Now, placing your stop above the high or below the low is the “default” stop placement, meaning, if you are in doubt, place it there. It’s also the most logical stop placement since you are forcing price to invalidate the setup by violating the high or low.

Price-action-trading1

• 50% pin bar stop placement

When you enter a pin bar at the 50% retrace level, you obviously have to place your stop above the high or below the low, or further out if there’s an obvious level close by. When you enter a pin bar setup on a stop entry on a break of the pin low or high, you have the option of placing your stop near the 50% level of the pin bar, this works especially well on long-tailed pin bars that don’t retrace.

You can think of the 50% level of the pin bar as an “imaginary” pivot area. It can be a stop reference / placement point and also an entry point, depending on how you are trading the pin bar and current market conditions.

Price-action-trading2

Setting stop losses on the fakey setup:

• Standard fakey stop placement

For the fakeysetup, the “safest” place to put our stop loss is generally going to be just above the high of the false-break bar or just below the low of the false-break bar (depending on the direction you are trading of course).

Price-action-trading3

• 50% fakey stop placement

Two other options are to place our stop near the 50% level of the false-break bar or near the 50% level of the mother bar. These options give us a little more flexibility; especially on fakey setups with larger mother bars they give us the ability to get a better risk : reward to make the trade setup more practical.

However, if you are placing your stop near the 50% point of the mother bar or false-break, you are better off waiting to enter on a break of the mother bar high or low instead of entering on the inside bar break, this will ensure that momentum is in your favor, which will be important since you don’t have the added “protection” of having your stop above the false-break high or below the false-break low.

Setting stop losses on inside bar setups:

• Standard inside bar stop placement

The safest place to put your stop loss on an inside bar setup is just above the high or below the low of the mother bar. This gives your inside bar setup the most “room to breathe” and forces price to invalidate the setup by moving past the mother bar high or low before stopping you out, if it moves against you.

Price-action-trading4

• 50% inside bar stop placement

You also can place your stop at the 50% level of the mother bar. This gives you the ability to get a good risk : reward but you also sacrifice some of the room to breathe that you have with the standard inside bar stop placement. The 50% inside bar stop placement is best suited for inside bar that are larger in range, for smaller inside bars you will want to use the standard stop placement. Once again, this is obviously a bit of a discretionary decision, but price is a discretionary trading strategy, so you will get better at this over time.
Price-action-trading5

How To Identify The Trend

Here is where things get crazy!
Not really, actually this is the simplest part of the entire method. Albert Einstein once said “Make things as simple as possible, but not simpler”, and to that end, here is a good way to identifying if a market is in a trend.

Use two Exponential Moving Averages:

21 EMA
55 EMA

When the 21 EMA is over the 55 EMA, the trend is up.
When the 21 EMA is under the 55 EMA, the trend is down.

This definition of a trend is an oversimplification, but it’s where we start.

Keeping my charts clean is important to me, and adding the additional moving averages can make things a little more cluttered than I usually like to see.
For this reason, I color the 21 and 55 EMA’s a grey color so they blend into the white background of my charts to some degree. On a black background, a darker grey color for the EMAs would be my preference.

Below is an example of what my chart looks like with the 21 and the 55 EMA’s.

EMA-trend-line

The lighter grey color on the white chart doesn’t become overwhelming and distracting, and this is important to note. As we trade FMM, we will be taking trades that occasionally go through the lines, and other times we will be using the lines as both targets and as areas of support and resistance.

I don’t want you to become too distracted by the lines, and having them subdued  is one way to keep them in the background. They are there when we need then and quiet when we don’t.

Why the 21 and 55 EMAs ?

You can experiment with other settings as you like. The 13 and 21 are common for moving averages. Over a lot of testing, I have found the 21 and the 55 to be the most reliable in determining a trend. They are slow enough that they determine when a real trend has legs, but fast enough to not lag behind the change of a trend too long.

As you look at a chart with the 21 and the 55 EMAs, you will see that both of  these MA’s are extremely strong levels of dynamic support and resistance, and this element makes these great MA’s for trend following.

Price never strays too long before returning to the 21 EMA and then the 55 EMA.
This is an important aspect to counter trend trading, price moves away from the moving averages, but very quickly will return to these levels. And because of the excellent ability to provide support and resistance, these moving averages also make incredible targets.

The 21 and the 55 EMAs work on all the timeframes, from the 1 minute to the monthly. This simplifies things as well, not having to look at different MAs for different timeframes, and as you know, simple is good!

Feel free to try out your own settings, experiment with many combinations, with  exponential and simple, or a combination of the two, you might find something that you feel works better for you. Either way, the following pages will show you how to use them.

21 EMA and 55 EMA as support:

EMAs-support

21 EMA and 55 EMA as resistance:

EMAs-resistance

Even as the 21 and the 55 are great areas of support and resistance, they are also excellent at drawing the price back to it. This concept all on its own makes these moving averages great targets on counter trend trades.

Below is an example of Gold (AU). Lately, Gold has been on an incredible trend,  and as you can clearly see, the moving averages have provided excellent support as price has been moving up, but at the same time, Gold prices have always come back to the moving averages.

Viewing the MAs as support, resistance and targets opens up a new world of  trading possibilities!

EMAs-magnet

Download How to Create Better Trading Opportunities through Hedging

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