Rebel Traders 033 : There is No Spoon…

When you look at the charts do you feel you are missing something, some undefinable pattern or activity and you just can’t see it. Feel like it could be the Matrix and you need to be Neo to actually make sense of it all? Well, the Rebel Traders will show you… "There is no spoon!"

In this week’s show, Sean and Phil are bending the lines of reality to give you, as a trader, the ultimate clarity to view the markets, charts and the data that makes it possible to trade. You don’t need to be an uber geek or cyber-punk and this isn’t the Matrix and with the Rebel Traders showing you the way you’ll be seeing the markets in a whole new way…

It won’t take you long to realize that with the right skills, the right strategies and the right guidance you can cut through the noise and potentially become great trader.

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Sean Donahoe: Stop trying to bend the spoon. That's impossible. Instead, I'm going to realize the truth, there is no spoon. What the hell am I on about? Ready to rock? Let's do it.
Automated: Rebel Traders takes you inside the world of two underground master traders who take an entertaining and contrarian look at the markets to cut through the noise of Wall Street, and help you navigate the trading minefield. Together Sean Donahoe and Phil Newton are on a mission to give you the unfair advantage of a Rebel trader. Now, here are your hosts Sean Donahoe and Mr. Phil Newton.
Sean Donahoe: Hey, hey, hey, this is Sean Donahoe, and I am joined by the birthday boy himself. Hopefully not in a birthday suit. Thankfully we are audio only, and we don't have to see this. Mr. Phil Newton, how are you sir?
Phil Newton: I'm pretty good thanks. As the saying goes, I've got a face for radio, to do the cliché joke. All these talks out there of spoons, combined with my birthday celebration, it is actually today on the day of recording. I do fancy some cake.
Sean Donahoe: There you go, have some cake while we're doing the podcast. Speak with your mouth full. Okay. With today's show, we're going to take a look at the charts. You know, when you look at the charts, do you feel like you may be missing something? Some undefinable pattern or activity that you just can't quite see, can't put your finger on? Do you feel like you could be looking at the matrix? Well, that's what we're going to be talking today, and we're going to take you from lump to Neo, really, here today. Make sense of, pretty much, everything we're looking at.
The ultimate truth is, there is no spoon.
Phil Newton: We've got the usual quick fire round where your trading questions are answered. My favorite section still is, and remains to be, the bull shit of the week. We call it the hype-bowl, the shenanigans of industry. Somewhere amongst all of this, maybe it's behind the spoon, it could be next to the knife or the fork, but there is the core question somewhere in amongst all of this cutlery.
Sean Donahoe: Where is the trade? Tell me, where is the trade? I'm just like, imagining him lifting up plates and napkins. It's like, "Where the bloody hell is it? I wrote it on the back of an end cupboard, it's not in the cupboard." Yes, it's not in the bloody cupboard.
Phil Newton: We should release one of those books, instead of Where's Wally, it's Where's the Trade.
Sean Donahoe: Actually, a bloody good idea. A kids book for traders, there you go. I like that, like that. Anyway, the reason we're doing this show today is I was actually flicking through some old movies. I was bored, there's no new movies that have been released that I actually give a rat's about. So I went back to my infamous collection of touchstones. One of them was the Matrix. I sat there realizing, this is how I felt, because the first movie, The Matrix, was released in 1999. I was looking over this and was like, "Yeah, that's when I placed my first trade", and it's how I felt looking at the charts.
Phil Newton: That's nearly 20 years ago, Sean.
Sean Donahoe: It is.
Phil Newton: Can't believe that.
Sean Donahoe: I mean, I know. It's, kind of, ironic because I've always had an interest in-
Phil Newton:
Sean Donahoe: Well, yeah, coming from the old fart, yeah. I'm a couple of years older than Phil, but it does feel that way sometimes. It's like, "Where the hell did the time go?" When I placed my first trade, I'd already had an interest in the markets, what money was doing, why and everything else. I looked at the charts and I had no idea what the hell I was doing. I mean, a lot of people when they first come to trading, they look at the charts and they could say, "Oh, this is a stock chart." We have instant recognition. We see them on TV all the time, but actually understanding what is going on with any single stock chart is often where you first start, a mystery.
One of the things that I really, kind of, wanted to break down is trying to decipher what you see in front of you, and actually recognize the patterns, the shapes, the actual data. It helps you, obviously, with your trading. I mean, looking at a lot of these charts, they tell a story. They tell you a story about what's happened, what's happening, and what could, potentially, happen. When you start looking at these and getting more and more involved with reading charts, understanding the patterns, it all becomes clear. It takes that kind of green streaming data to becoming the world that we see around us, it's very much the same way with stock charts.
Phil Newton: There's a learning curve involved.
Sean Donahoe: Absolutely.
Phil Newton: Yeah, there's a learning curve involved.
Sean Donahoe: One of my favorite quotes, and I'm going to go through a series of quotes. I've pulled out what I thought were pretty cool, and then, kind of like what we did with the Princess Bride episode a few weeks ago, I wanted to take one segment, one quote, and then break down how it relates to tradings. Here's the first one, Neo asks Morpheus ... If you haven't seen the movie, that's your homework this week. "Why do my eyes hurt?"
Phil Newton: It's just a good movie, yeah.
Sean Donahoe: It really is, and Morpheus replies, "You've never used them before." This is a lot of the-
Phil Newton: Maybe you've been looking at too many charts, you idiot.
Sean Donahoe: Well, that could be. This is one thing that Phil and I were discussing yesterday, funnily enough. Really what we do, our entire ethos, is that we teach trading, professional level trading, for busy people. It's trading for busy people. We don't want to be stuck in front of charts every single day, reading charts, glued to the screens, because we have busy lives. We do ... We are-
Phil Newton: Or, we've just got other things that we want to do.
Sean Donahoe: Absolutely, other priorities.
Phil Newton: I mean, personally Sean, I'm not a busy person. I'm, I wouldn't say a lazy person, but I certainly want more free time.
Sean Donahoe: Me, I'm all over the bloody place.
Phil Newton: So, not necessarily just for lazy ... Sean, not just for busy people, even if you don't want to be busy.
Sean Donahoe: There you go.
Phil Newton: Maybe?
Sean Donahoe: The funny thing is, I mean like I've said many times, I run multiple businesses. One of the things that are one of my priorities is trading is not an extra business, it's a way to make my money grow, and I can get on with the rest of my business. That's it. Although, I treat trading like a business, funnily enough, but I don't want to dedicate 12 hours a day. Oftentimes, to be quite honest, a lot of my work days are 16 hour days. I mean, that is how intense my life actually is, running all the interests I have. I have to make sure that I'm not in a position where I'm glued to the bloody screens, and tied down.
Now, I can create my own work hours, and I have that flexibility. I choose to work that way, because that's my life and I enjoy it. I am a true workaholic, but I don't want trading then to be detrimental to all my other income streams and businesses.
Phil Newton: Yeah, another full-time job, yeah.
Sean Donahoe: Exactly.
Phil Newton: Yeah, you don't want that.
Sean Donahoe: It's not something I can outsource to someone else, or that I'm comfortable outsourcing to anyone else, i.e., brokers, fund managers, and everything else, because it's my bloody money and I have the full interest and control of what I do and how that money grows. I have an awareness within this matrix, so to speak.
Phil Newton: Another reason why ... Sean, just to interject why I go along that. I mean, as we've established previously, I'm the exact opposite. I don't want ... I've been there, trading has been my full-time gig most of my working life. So, I come at it from a different perspective. I don't want to be glued to the computer either, but that aside, another reason why it might be a bad thing to be flicking through chart, after chart, after chart, even if you've got the time, the means, and the capability to do that is as a brand new trader, it's easy to go and push the buttons and put necessary trades on.
It can be an easy trap to fall into, where because you're looking at the charts, or a chart, or evaluating an opportunity, just simply because you're looking at it, you go and click send on an order. It's not the right time, because you've got that almost new trader compulsion to go and put the trade on, because you're looking at it. This falls into the line, that there is no spoon, so you find trades that aren't really there, essentially.
Sean Donahoe: That's a very good point. Now, one of the things with reading charts, it doesn't have to be difficult. You can have the fundamentals and the basics, but what happens is, as you get more experience and more layers to your skills other things become apparent. Now the analogy that we use in ... If you haven't seen our free on demand training, I really encourage you to do that because one of the things we talk about in there is a Picasso painting. I show you a Picasso painting in the training, and say, "Look, you can see this and you might recognize the style as Picasso. That's, kind of, like looking at stock charts." I use this analogy to break down that as you look at this particular piece, I can't remember the name of the piece, it's La Guernica, I think it is, or something like that. It's about the Spanish Civil War.
Phil Newton: I'm not going to pretend to know Sean. I'm going to feign ignorance when it comes to art.
Sean Donahoe: Because I'm literally ignorant when it comes to art. My wife is the artist in the family. I'm the engineer. When you're looking at this, you can ... It's about the Spanish Civil War. Now, just that information alone, an extra layer as you're looking at this painting, you suddenly start picking out little pieces, little extra nuances because you now have that extra information. You now have that little insight, and then you start seeing more and more detail.
Phil Newton: You start to develop context.
Sean Donahoe: Context in and around this piece of art. You start seeing things. The thing is, reading a chart is exactly like that. As you start understanding the context, the content, the nuance, things start popping out. You start developing more and more skill. Now, here's another quote that I like, probably if you remember the movie, Morpheus is leading Neo, he's educating him. Then in this crowd there's a women who walks towards him with a red dress, and then Morpheus says, "Hey, did you notice the women in the red dress?" Neo suddenly turns around and the women has turned into one of these agents and has a gun pointed at his head.
The thing is, that while you're looking at the charts and everything else, you might see something that catches your eye, that stands out from the crowd. This is the whole point of this exercise, and it's like, "Oh my God, what is going on here?" One of the things that we talk about a lot, and Phil is one of the ones who really drums this in to our students, is look left, what happened? This is something, this is one of the best insights you can have into the charts. Phil, tell them why.
Phil Newton: Well, I was just trying to think of the comparison compared to the women in the red dress, I would, in this comparison example, I would say that the current live price is the women in the red dress because everyone's attracted to the ... You know, you're trying to look through the faces in the crowd and look for the thing that's standing out. Everyone's drawn in the woman in the red dress, and that is the live price on the charts. Everyone's looking at that live figure dancing up and down, dancing up and down, but the reality is, is they need to be looking and taking a full appreciation of the rest of the charts.
This is what we mean by "look left", because you're able to navigate through the crowd, again to stick with the example, rather than just focus on that woman, or ignore the woman in the red dress. You want to be looking left, so that you can navigate through the crowd and figure out, what are the obstacles, where are the stopping points? You know, can I get to my destination and plan suitable routes through the heavy traffic, or the heavy crowd. Looking left allows us to see what obstacles are there that may help support a trading decision, essentially.
Sean Donahoe: You know, an analogy just popped in my head. This is really, I think, the deeper nuance. It's seeing the forest for the trees. Instead of looking at the tree right now, you can take a 30,000 foot view and look at the entire forest. Rather than being obsessed with the woman in the red dress, you can take a step back. You can see the woman in the red dress, but it isn't enough that it's not a threat, as it turns out to be, because now you can see overall what's going on, why it's happening, and navigate accordingly. I think that's a very-
Phil Newton: I mean, most of the time I tell people to ignore the live price. I mean, for what we're doing, and my style of trading, I don't necessarily need to concern myself with what's happening right this moment, if the market's are open, the live price. I don't need to worry about it, because until today's price activity has completed, I'm only going to evaluate it tomorrow. It's constantly in flux, it's constantly changing. That woman in the red dress is moving around, it doesn't matter what they're doing. It doesn't matter what the live price is, because I can only make an evaluation of a completed piece of information, which is why I'm telling folks, "Hey, look left." The live price doesn't matter.
Most new traders are going to be so glued and fixated on the live price, whereas we want to be making all our evaluations off the completed information. That's basically, from a daily chart point of view, from yesterday, backwards. That's all I'm interested in. Most of the time, today just does not matter. To be fair, unless something crazy or funky happens, which we've seen a few times around some news events, but most of the time price will be moving steadily and I'll make an evaluation tomorrow on what happened today.
Sean Donahoe: Absolutely. One of the things we're looking left for is what we call, logical stopping points, but we also want to know if we're in an uptrend, a downtrend, a consolidation? Are we going up, down, or sideways? We can see, "Okay. Well, are we now just aren't making valuations of where we are right now with, are we in a correction in an uptrend? Are we in a rally in a downtrend? Or, are we looking at a slow down of an extreme? A turnaround?" There's many, many things, but we can't do that without the context of the wider view. That's what we're talking about here.
Phil Newton: I suppose this falls in line with what you were talking about with looking at the Constable painting, or whatever picture or landscape, or whatever it is you're looking at, but you're evaluating that piece of art. If you were just to look at one small section of it, you're not going to have as a great an appreciation if you had stepped back and try and take in the full picture. Look at the landscape, and look at the view, and just appreciate the artwork for what it is, rather than focus on the little signature and who it was painted by.
That doesn't make ... The signature on it is just a part of the appreciation of the painting, or the sculpture, or the art work that you were talking about. You want that full appreciation of the entire landscape. Again, it comes back that you're not looking at that live price. As you were just saying Sean, the first thing that we're going to do when we've selected a stock to look at ... Again, we're only looking at the stock when it's ready to be viewed. Again, we don't look at every chart, every day, all the time. When we do look at a chart, as you had said, the first thing we do is we take that step back. We look left. Well, to be fair, we look at the whole chart, and get that appreciation for what is price doing? Go for the last, sort of, 12 to 15 months. Is it going up, down, or sideways?
Then that can give us the context that you were talking about, again with the painting. It's a picture of the Civil War, so that gives me a context for why they're wearing certain clothing. Maybe why they're holding weapons, or maybe ... You get what I'm saying, you start to pull out some details because you've got context on what those detail's means, and how they can be interpreted. With the charts, that helps us if we know, which way is pointing first, the landscape. What's the overall environment? Okay, it's going up. Okay, we're in an uptrend. Okay, that's going to help me to provide some context for what I'm not looking at, and how I can potentially find that opportunity to trade that particular chart, or stock, or instrument, or whatever it is we're looking at.
Sean Donahoe: Now the other side of this, which is ... That's a very valid point. We also use filters to cut through the noise to basically cut through the crowd to focus on the woman in the red dress. The example is, we use different scans and different tools to find, filter and sort stocks. To literally cut through the noise, and we talk a lot about this in the on demand training. One of the things that we're doing specifically there, is looking at the lady in the red dress in a different way. We're cutting through the crowd, where we don't care, just to focus on those opportunities. We're going to present us with the highest probability of success, so that we can further refine and filter down even more. Without having to look at 27,000 US equities.
We're sorting those equities, looking through chart after chart. We don't need to. We only focus on ... We cut out a lot of the noise in the matrix just to focus on the one's that are going to give us the best chance of proceeding. There's many, many different ways to look at the same .
Phil Newton: Most specifically as well Sean, just to add in to that. Specifically was looking for what would make me place the trade today? It's not just a particular situation or set of circumstances developed. We're calling this, with the Matrix comparison, the woman in the red dress. That's the fixed condition that we're looking for. It's not just a condition because there's lots of conditions that we could look for that might make us look for a trading set-up, or an opportunity, but will I be likely to be trading it today? That's really the secret sauce that prevents us from unnecessarily looking through chart, after chart, after chart, after chart.
It's that qualifier of, it's not just the mechanical condition. It's, is that mechanical condition likely to cause me to trade it today? That's what we want to look for, so again, that's the secret ingredient, really. Right there. It's whatever you're looking for that would cause you to place that trade today. How can you mechanize that evaluation so that you can just be given a list of stocks, like in a spreadsheet or a watch list that you can just rank and sort stocks? Say, "Okay, these are the ten stocks that you need to look at today", and double-check the other things that you would typically look for when you're placing a trade.
We've got the woman in the red dress, that's the mechanical condition because, hey, it's the one thing that's constant. Now we've got that, what other conditions would cause me to place that trade today? If they're not there, then we still don't need to look at that chart. It's that additional qualifier of, would I trade this today? That's as specific as we need to be with this type of scanning and sorting and filtering.
You can do this with any tool, any methodology. We've got our own preferences. Sean and I, with the types of things that we're looking for, which are relevant to our strategy and methodology, and the things that we want. It's that, "would I be trading it today" condition. Whatever that is for you, that's the thing that you need to mechanize so that you can just go, "Okay, these are the five stocks for today", then go and check all the other things that would cause you to get into the trading.
If they're there, that's when you can place the trade. That's what makes it time efficient. That's what's going to prevent us from flicking through chart, after chart, after chart. Just so that we can zoom in and trade that opportunity, and be a battle of business and go look at something else. That means that if you're a busy person, you're not necessarily wasting time doing things that you don't need to.
Sean Donahoe: Abso-bloody-lutely. Love it. Now here's the next one. When Neo asks a question of Morpheus, "What are you trying to tell me? That I can dodge bullets?" Morpheus, in his very authoritative tone, "No, Neo. I'm trying to tell you that when you are ready, you won't have to." Now here's the thing, if you imagine this in the environment we're in right now, again, we've had major stock rallies. I mean, we're setting records, it seems, day after day. I think it's the S&P 500 that's up 44% since this current administration took office, that's the number I heard touted the last couple of days. 401K's sky-rocketing. It's happy, happy days.
Me, when everyone's greedy ... I mean, I've got to take Warren Buffett here. Yeah, exactly. When everyone's greedy, this is what Warren Buffet says, this is paraphrasing, "When everyone's greedy, be cautious. When everyone's cautious, be greedy." I can't remember the exact quote, but that's paraphrased again. In a market like this, I'm always a little more defensive. I'm always getting prepared and raising the awareness that if there's any weaknesses in my portfolio, I don't want to be caught with my pants down, because that's not cool.
Again, be flexible enough to pivot. Now the way ... Our particular style of portfolio trading allows us to have many positions. It allows us to have many insights, but with an awareness that if situations change, our ass is covered, or we can pivot, or we can change in a heartbeat to adapt to the environment we're in. I mean, what's your opinion on that, because I know we've talked about this, and being defensive, and being conservative with your portfolio. Where do you think this falls in with this current environment?
Phil Newton: Okay, so you're absolutely right Sean. The market at the moment only seems to be going up, which makes everyone, kind of, happy and complacent. You know, what we do know is that that's not going to carry on forever, despite what everyone thinks. People do think that that's going to carry on forever, that the stock market only goes up. What I would be thinking about, just to add on to what you were saying Sean, is when everybody is bias in one way, in this case, everyone thinks that the stock markets only going up. The Warren Buffet type quote is, when everyone else is doing one thing, we want to be thinking and preparing for the exact opposite, or doing the exact opposite.
We've talked about it quite a few times in the past when, you know, the crowd, the herd is predominately bullish and only thinking that the stock market goes up. I certainly want to be prepared for the downside movements, because it will happen. It's not a case of 'if', it is literally a question of when. To tie into your Matrix quote, you're trying to tell me when I can stop bullets. Well no. If you've got this awareness, you won't have to stop the bullets because you would be prepared for the possibility that something like this could happen, and the bullets coming at you would be a very quick change in the market. Maybe another market crash, maybe a bear market.
If you're prepared, and you've got that awareness, you don't have to stop the bullets. You don't have to think, "Oh, booger. My portfolio is suddenly going in the exact opposite direction", and you start panic selling along with the herd. You'll be prepared for that, and you won't have to dodge the bullets because you'll be, hopefully, buying some of your portfolio in the opposite direction. You probably would have started loading up in the opposite direction, because, you know, these things, the writings usually on the wall when something major happens.
The fact that everyone is talking about the markets only going up, and everyone's happy, and everyone's going to be multi-millionaires, and every stock is a winner. That's an alarm bell, and we've been talking about this for a long, long time. It's not the first time it's happened. You've only got to look through history, the dot com bull, the housing crash in 2007-2008. These things aren't new occurrences, history does repeat itself. It happened in 1929, it happened in 1934, it happened in the 50's blip. You get the point. These things are events that have happened in history. It leaves clues, it leaves footprints, and everyone's going in one direction.
When I say everyone, it's like when the taxi driver and the barber start asking me about investments and trying to give me investment advice, that's when I know the market's about to turn. The writings on the wall because the general public are typically the last to know everything. They're going to be the last in the markets, and the professionals are going to be first out. This is what we've been talking about for a long, long time. When the market's going one way and everyone's complacent and happy, I'm certainly prepared to be the other way. I'm not going to be looking at dodging bullets when the bear market starts to happen, or even a crash happens, I'm prepared. I'm on some element, some portion of my portfolio is bearish, because that's just the nature of the beast. There are set-ups that will develop and you should be on the right side of the market when it turns.
Sean Donahoe: Absolutely.
Phil Newton: A little bit of rambling, meandering thought process there. It's stuff that we've talked about many times before.
Sean Donahoe: Absolutely. Moving on, now here's the thing. Imagine the scene, Neo's there, he's just found out that reality, the reality around him is not real. That this is all some sort of AI construct. Again, you can see why this is a movie that I absolutely love.
Phil Newton: It's the red pill, blue pill scene, isn't it? Yeah.
Sean Donahoe: Oh, I love that scene. He says ... The quote here is, "Unfortunately no one can be told what the Matrix is, you have to see it for yourself." Now here's the thing, you imagine that you're looking at these stock charts, and you're seeing all these charts with trend line trending up, trending down, going sideways, or a combination there of. It's all over the bloody place, like the markets are this morning.
Phil Newton: It's like a spider on acid.
Sean Donahoe:
Phil Newton: That's what I like to say.
Sean Donahoe: Oh, there's a mental image for everyone there. A spider on acid. Actually, funnily enough bloody random.
Phil Newton: Random stuff.
Sean Donahoe: It is. They actually put spiders on-
Phil Newton: Various narcotics.
Sean Donahoe: On ecstasy, and you can actually look this up, and you can see the webs they create. They're all over the place. They're like, you know, the same spiders that would be the perfect patterns, and then when they put them on drugs they're all over the bloody place. I think that's absolutely hilarious that someone came up, "Let's see what would happen if we put a spider on pot." You're just say in the lab, you sat in the science cafeteria thinking, "Okay, what are we going to do today?" "I don't know, let's give that tarantula some crack."
Phil Newton: "Do you think we'd get some funding for this?" "Yeah, that's it."
Sean Donahoe: Truly am. Anyway, back to the same swing in markets, if you're looking at ... I'm not suggesting you take narcotics and look at the markets, but what I am saying is look at the markets for the patterns that emerge. This is going to go on forever, but anyway, the idea here is that, looking at the markets, as I said, build that level of awareness. You start experiencing more and more activity in the markets. You see things that are unfolding, head and shoulder patterns. Again, usually you know what the pattern is after it's formed, which means oftentimes it's too late.
Phil Newton: You're not supposed to be telling that thing, do we?
Sean Donahoe: They don't mention that. They don't mention that.
Phil Newton: You said many times ... They don't mention that bit.
Sean Donahoe: There are things that you can do, and can see, that will help you develop that greater insight. I mean, we're talking trend lines, consolidation, extremes. You know, recognize, practice, and learn. I mean, this is a prime ... I don't know if this is something that Phil wants to talk about, where were talking about ... I'm setting him up now.
Phil Newton: No, Sean, I can talk about it.
Sean Donahoe: Yeah, exactly. Phil was talking, telling me about a strategy that he's been testing. That he's producing really fantastic results. Do you want to give it an overview? Again, this is based on your observations and something that you said.
Phil Newton: Exactly.
Sean Donahoe: You know, this is actually ... Go down this rabbit hole a little bit, because you have started experiencing this little jump in the matrix.
Phil Newton: Well, yeah. I think just to firm up what we're talking about, is when you say, "The Matrix", using the movie example. Everyone experiences it differently, so you can't be told what it is. It can be certainly described to you, which is what we try and do every week. We try and give you the benefits of our insights, our experience, but until you've actually experienced it for yourself, you're not going to have exactly the same experience. Even if we sat side by side, we're going to see different things because we bring different viewpoints and personalities.
For example, you Sean, you've got a very programming and technical background, I don't. So, just for that reason we can look at the same things and we'll approach how we view the markets in two very different ways. Now we'll probably end up with the same conclusions because we are, ironically, very similar traders and have similar trading styles, but we get to our end results through different methods and means.
Sean Donahoe: Absolutely.
Phil Newton: Strange as it may be. Ultimately what we're doing, it's about observation. The new trader is going to have a very limited experience, if any experience at all, of assessing and evaluating trading opportunities. It doesn't mean that you can't successfully trade because of lack of experience, but this is why we're always hammering home the need and the necessity, and the importance of having a systematic approach to find, filter, and sort stocks, and deploy a trading strategy. To manage profitable trades. You know, we constantly stress that because the lack of experience that you might have means that you're more heavily reliant on that systematic approach.
Now, when you start to look at the markets, and even though we're only talking about a short period of time looking at opportunities every day, you will build up experience. It's that experience that means you can start to add your own flavor the way that you view the charts and the markets. You can start to lay that on top of that base strategy, you know, the foundation stone that everyone starts with. It's that experience that means that you can start to do other things and experiments. By all means, it's a constant evolving process.
Just recently I've managed to firm up something that I was already doing. To be fair, I was already treading this way. It's not like it's a new strategy, or a new methodology, but what I'm able to do by having enough occurrences where this particular set-up develops. It's allowed me to firm up what, how, and when I'm deploying what is now, effectively, a standalone strategy. Then, because of that, I can simplify it down into its component parts. When you know more exact, and more fully, what you're doing, you can then start to boil it down and just get to those ... Make it into a base level strategy that you can then explain to someone else so that they can replicate it for themselves, and then add their own flavor onto your understanding of a particular set-up.
That lead in makes sense.
Sean Donahoe: Yes. Yes, yes.
Phil Newton: How it all works perfect. So, recent strategy, we thought we'd actually give some goodies out this week, didn't we Sean? We were talking about this yesterday. How can you take a strategy, how can you take an understanding of my viewpoints? As I've already described, already mentioned, the way that we boil down a strategy is ... Well, we're in the midst of earning season for a start, as we're doing this. It's topical and timely to have a news type of strategy. There's lots of different ways of trading the news. Certainly with stock options, but one way is, I like trading directionally.
Again, the other side of the coin is to not trade directionally and to be a seller of options, but to trade directionally you need to be a buyer of options. I like doing that. That's just ... That's my cup of tea, as the saying goes. How can I buy options that are not too expensive, because as we approach news events then the implied volatility, which has an impact on the price of an option, starts to increase. If the implied volatility increases, then the price of the option, ergo, will increase in anticipation of something potentially explosive happening.
Sometimes, sometimes Sean, that doesn't get factored in straight away. There's the opportunity number one. A mechanical way to find ... We don't want to be flicking through chart, after chart, as we keep describing. What mechanical way can I find an opportunity that might be about to explode on the horizon? The mechanical scan, if you like, is to look for stocks that have low implied volatility rank. Does that make sense for us? I'll just recap what ...
Sean Donahoe: Absolutely, yes.
Phil Newton: Implied volatility.
Sean Donahoe: Finding something with a low volatility.
Phil Newton: A mechanical way to find, filter and sort stocks, yeah, a quick way of doing. Implied volatility, at the ranking, is, if the implied volatility of a set of options was as low as it's been in the last 12 months, we might have a reading of zero. If it's near the low of it's reading in the last 12 months, it might be one, two, three percent. On a sliding scale of zero to 100, were trying to rank where the current implied volatility is, compared to where it has been. The extreme high and the extreme low over the last 12 months.
Sean Donahoe: Surprise, surprise, look left.
Phil Newton: Yes. So, we're comparing implied volatility to itself, and trying to rank the current reading over the last 12 months. What I'm looking for is a mechanical way to find stocks that have low implied volatility. I'm looking for an implied volatility rank of less than 15 percent. That's going to take a big list of stocks down to a small list of stocks. That's mechanical filtering number one. Now, that's going to give me a list of stocks, does that makes sense for us? That's the first thing that we're doing, ranking the stocks relative to implied volatility.
Sean Donahoe: You can do this on your watch list. I just want to say, you can create a watch list, add your indicator to that watch list, click a button to sort, you're done.
Phil Newton: Perfect. That is exactly it, yeah. So, my apologizes if I never explained that, that's the mechanical process that means that we don't have to flick through the charts. Like you would do on spreadsheets, you click the column header and as Sean just said it, it ranks and sorts the stocks relative to implied volatility.
So, I'm looking for an implied volatility rank of less than 15%, ideally. Then I'm going to take that short list of stocks, and I'm going to filter it again, because I need an event that might cause price to pop. Like, an earnings' event. We know when these events happen, so somewhere in the next 45 days I'd like to see an option that has ... I'm sorry, I'd like to see a stock that has an earnings' announcement in the next under 45 days, with that low implied volatility. Implied volatility under 15 percent, and a known news event, like an earnings' announcement that might cause price to pop. Then that's going to give me an even shorter list of stocks there, so I've got two mechanical ways to filter stocks.
I've got inexpensive stocks because of the low implied volatility. Now, why is that important? Because, after the earnings' announcement, implied volatility usually contracts. If I'm buying options when the implied volatility is at 12 months and historical lows, then that contraction of implied volatility should, theoretically, be minimal. That's why I'm looking at that. When the oomph goes out of the options, it's not going to be that much. I've got two mechanical ways of filtering stocks. I've got low pricing, and the potential for the price to pop on the back of new events. There are the mechanical ways.
At this point I would not have looked at any of the charts. I'm doing all of this in the watch list, which is like a spreadsheet, if you've not seen them before. It's just in your charting software. Are you still with me, Sean?
Sean Donahoe: Yes. I mean-
Phil Newton: I'm getting a little bit excited.
Sean Donahoe: Again, it's a simple one, two, three step. That's step one and two, IV low, under 15, and an event, like an earnings' report, coming out within the next 45 days.
Phil Newton: Yeah, I mean, the sooner the better. I mean, it could be anywhere from six days up to 45 days, but under 45 days certainly. Usually just for reference I'm looking at around about the 30 day mark.
Sean Donahoe: If tomorrow I wouldn't do it, that was one of the things we were talking about. If it's sooner than six days, you're not giving it time to do its thing.
Phil Newton: Yeah.
Sean Donahoe: That's a little soon. A little too soon.
Phil Newton: Yeah, exactly. We've got two mechanical events, so we want the trifecta. We want three things, and this is when I'm going to look at the charts. Then I'm going to go and have a look at those stocks to see if I like the look of them, essentially. What I'm looking for on the charts is I'm not necessarily worrying about the overall direction, what I want to see is, at least in the last couple of days, couple of weeks, maybe even couple of months, I want to see price having contracted. It's just paused and stagnated. If price is in an uptrend, for example, on the charts, it's not drastically important, but just in this example. It might be in the last two to three weeks that the stock has contracted and is literally in a very, very tight consolidation.
It might be that the overall chart in the last 12 months is in an overall consolidation. I'm looking for, usually, the typical things, but I want to see price at ... It's doing something that's recognizable. If it's in a consolidation in the last 12 months, and it's the upper or the lower boundaries, if we're in an uptrend I want to see price having contracted and a very tight consolidation. It might be that there's some patent that you recognize, that is indicative of a potential movement. It might just suggest a trading opportunity.
Most of the time it's going to a nice two to three days, or two to three weeks, the price has ... I don't know why I'm using my hands to illustrate this, we're on the radio essentially. Price has contracted, and that's the key point there because like a coiled spring, it might just suggest price is just pausing. It's getting tighter and tighter, and tighter, and the news event might just mean that price can pop out. That's what we're looking for.
We've got these three things, low implied volatility, we've got a news event on the horizon, and price is like a coiled spring. It's just tightening up more than normal, more than it usually was, ahead of this news event. There is then the opportunity to get paid. Now, what I would then typically do is to not worry about the direction of the expected movements. I can buy a long strangle in a very unique way to us. That's it. We're trying to take advantage of the way that price is calculated on a long strangle, and take advantage of gamma.
Just to be a little bit nerdy, we're going to skip the nerdy, the why, the how's, and the why for. I'm just going to go straight to, I want to be buying options. I'll put in a call at the 30 delta level, or slightly further away than 30 deltas. That takes advantage of the way that gamma impacts delta, just to give you the back of the envelope version. That's where we're at. That's the full enchilada. Low implied volatility, news event on the horizon. That's it, yeah. Low implied volatility, under 15 percent on the ranking, which is different from IV. It's the IV rank that we're looking for. We want a news event on the horizon and price needs to be like a coiled spring, or it needs to be contracting and squeezing together as tight as possible.
Do not worry about which way price goes. I can buy a long strangle, take advantage of the way that options are priced by buying a put and a call at the same time, that's called a long strangle. I'm looking for the strikes, or the strikes closest to, or a little bit further away than the 30 delta level. That's where we're at. That's the set-up. That's the strategy, and to be fair, it's working very, very well this earning cycle and last earning cycle. It's doing all right for me, Sean.
Sean Donahoe: Bloody brilliant. There you go, so you just got one on a silver platter there.
Phil Newton: Yeah. How do we get paid, just to, kind of, round it off? How do we get paid? There's a couple of ways you can get paid, firstly, while it's not primarily the way that I'm planning on getting paid. There could be on the run up to the earnings, an expansion in implied volatility, because the anticipation that something funky could happen because of the news, starts to get factored in. Then it might mean that the options start to become more expensively priced without the stock moving. That's one way that we can get paid. It's not what I'm hoping for, but it is certainly the cherry on top, if it happens. It doesn't always happen.
Sean Donahoe: Absolutely.
Phil Newton: Then, on the news event itself, again, either in anticipation of the news, the stock might start moving quite sharply away from that contraction, or on the news event itself, it would pop because of the news event. There could be some explosive movement because of the news when it's released, or surprisingly, the anticipation of the news. That's typically what happens.
Quite often I can be out of the trade for a nice return on that capsule, a nice profit. Prior to any news events, that ever happens, but if it doesn't move than the pop, because of the news could then just produce the profits. I don't need to worry so much about the implied volatility contraction because I'm already buying at historical lows. There will be some contraction, but hopefully it's not going to be a major contraction. There are the couple of ways that we can get paid on the stock moving, or the implied volatility increasing. Occasionally, it'll be both.
Sean Donahoe: Perfect. Like it. Ladies and gentlemen, there you, strategy on a silver platter to round out this section. This is very much like there's no turning back. It's an insight into the matrix. There's no turning back. You take the blue pill, the story ends, you wake up in your bed and believe whatever you want to believe. When you take the red pill you stay in wonderland and we show you just how deep this rabbit hole goes. That's what we do every single day here at Trade Canyon, and with the Rebel Trader methodology, we actually do this. We walk the walk, we talk the talk, and we show people exactly how to do like we've just described here. Just one strategy out of many.
Phil Newton: A very detailed, step-by-step of where the trade is, yeah.
Sean Donahoe: There you go ladies and gentlemen. With that being said, let's move on.
Automated: Now it's time for the Rebel Trader tip of the week. Brought to you by Tradecanyon.com. Ready to take your trading game to the next level? Discover where smarter traders come to get coached by the best, and learning to trade just got way easier. Trade Canyon, smarter traders live here.
Sean Donahoe: Now in keeping with the theme of the show, this one is actually from The Matrix as well. It's when Neo has a cable in the back of his head, and they're force uploading information. Every martial art, every fighting style, weapons training, literally everything-
Phil Newton: Can I say, Sean, can I say it?
Sean Donahoe: Said? You said something.
Phil Newton: I just learned kung fu.
Sean Donahoe: That's it. "I know kung fu." Then Morpheus leans over and says, "Show me. Show me." I love that line, and its great. It's actually one of the greatest scenes, and the greatest fight scene in the movie. In this scene, as I said, he's all ... I actually wish this technology existed. Where you could just put a cable in the back of your head, and you could upload all the knowledge, and the data you need, or that you want. You know, hey, I'm a futurist. I believe we'll get there.
Phil Newton: We're getting closer.
Sean Donahoe: A few decades away. I mean, either supplemental nanobot technology.
Phil Newton: I'm a believer Sean, I'm there, yeah.
Sean Donahoe: I would have that in a heartbeat. I would have that cable.
Phil Newton: Random side bar, Sean, I was talking to my mother earlier to today, and she was talking about technology and said, "I wonder what the future holds?" I said ... One of the things I was talking about is maybe a contact lenses over the eye that just augments the virtual world with the real world, but via contact lenses. Imagine walking down the streets and a little name pops over someone's head. You know, 'This is Bob, he's got two kids.' "Hey Bob, how's the kids?" You just get that information overlay, over a contact lenses on your eyeball. This is realistic. It's so futuristic, but we're very close to it.
Sean Donahoe: We actually are. They're actually developing ... Okay, random side bar before I get to the tip. They are actually developing a contact lenses that does have a display purpose on there. Right now they've only got a few pixels. It's only, like 16 bit pixels, but we're using it to help blind people. I don't think ... We're probably a couple of decades away-
Phil Newton: We're getting closer. We're getting closer all the time.
Sean Donahoe: I don't think anything like that, but that's certainly a technology I would ... I'm a technologist. I'm a futurist. I would become a complete bloody cyborg if I had the opportunity to.
Phil Newton: Hey, why not? Technology's there. With your dodgy knees you're going to need it.
Sean Donahoe: Oh, this true actually. That's actually too true, but hey, we're going to borrow-
Phil Newton: My deep analogy.
Sean Donahoe: Right now, we're not.
Phil Newton: I do slightly.
Sean Donahoe: There you go.
Phil Newton: Neo is on the bed, he's jacked into the matrix. He's being coded up. He's just sat up and he said, "I know kung fu." He's been asked to be ... You know, "Show me", so that's where we're at for the moment. Tip of the week.
Sean Donahoe: Yeah, so now I wish this technology existed however, right now obviously it doesn't. Here's the thing, you started off with just a basic foundation, and this is where I want to really highlight this tip too. We all start somewhere. We learned to crawl, we learned to walk, we learned to run. You have to lay a foundation of success. That's something I talk about to entrepreneurs a lot as well. You will start somewhere, but you start with laying a solid foundation. Once you've learned that and created that solid foundation, you can then build on that continuously.
Now, I am ... Even though, like I said, this movie came out in 1999, and that was when I really put on my first trading and got hooked on trading. I wanted to learn and know everything. It's become a 20 year journey, and for Phil it's been a little bit longer, but at the end of the day I want to learn something every single day.
Phil Newton: Are you trying to say that mine's a little bit longer than yours Sean?
Sean Donahoe: Keep dreaming on son, keep dreaming on. Why do you think he's got a squeaky voice?
Phil Newton: The trading journey.
Sean Donahoe: Yeah.
Phil Newton: You knew what I meant, you had to go somewhere else with it?
Sean Donahoe: Yeah, yeah. Okay. I've got the tape measurer. You're going to need it.
Phil Newton: Asshole.
Sean Donahoe: Anyway, oh my God, I feel like Donald Trump standing up on the podium in the primaries. Anyway, and if you're in US, you might remember that moment in the primary debates.
As I was talking about here, laying a foundation for success. I'm on a continuous journey to learn more information. To always supplement and get more insights. I really make it my mission to discover, to investigate, and everything else. You don't have to.
Phil Newton: To seek out your wife in civilization. I thought you were going to go there.
Sean Donahoe: Absolutely.
Phil Newton: Go where no trader has gone before.
Sean Donahoe: Go before, yes indeed. I always like to develop those skills to create nuance, to create new understanding so that I have the opportunity to do more in the markets. I encourage every single person, if you're on this journey to become a better trader, to become a superior trader to everyone else out there, make sure you have a solid foundation. Strategies and an understanding that you're continuously applying, in the markets, you master the basics. Then once you have that, you can then start layering on and investigating things that are relative to you, to your particular style of trading. What's relative to me may absolutely not be relative to you.
We talk about different things, and Phil mentioned the different histories, and backgrounds that we both have. I lean more towards the AI, the high frequency trading, the cost to recognition and patent recognition from the computer side.
Phil Newton: I'm always a visual trader.
Sean Donahoe: Phil, he's a patent trader on the charts.
Phil Newton: Yeah, a very visual trader.
Sean Donahoe: That's it. Again, we have different mind sets, although we have a very similar style of trading and very similar outlook, we're approaching it from different angles. As you get more and more experience, things are going to appear to you. They're going to be presented to you, or you're going to have what I call the red Mustang syndrome. You start thinking about red Mustang's, you're going to start seeing red Mustangs everywhere. These are the ones, these awareness of the matrix, as we've been talking about. They'll present themselves to you, and you'll say, "Okay, let me go down that rabbit hole." You'll find your own rabbit holes to go down.
Again, I encourage you to develop that awareness. Not so much in the charts, but in yourself for trading, so that you, again, could go from Padawan to Jedi Master, if you like. Or you go from Mr. Anderson to a full on Neo, that's what we're looking at here. So again, it takes time, it takes effort, it takes commitment, but I do encourage it. It will make you a far superior and confident trader.
Phil Newton: I think, just to underscore, not to be put off by the amount of information and trading styles that are out there. As we've said many times before, go deep rather than wide on the knowledge. You don't need to know everything. Just find what you're interested in as Sean said, and go deep on that, and get to know that particular area of your trading interest. Get to know that very, very well, because over the last 17-18 years of coaching people, the one things that's constant, that I see of why people are confused and don't make a success of this, is primarily because they're trying to learn a little bit of everything. They don't really have a full understanding of that little bit of everything. If they went deep on just one or two things that they were really interested in, then they would become the expert in that particular style of trading.
Again, whatever it is for you, it's Dow three, , pick your tool. Whatever methodology, whatever foundation that you want to build on, just pick that. It's perfectly fine. There's no single right way to trade, but just go deep on that thing that you're drawn to. That will work for you, because you're going deep you'll have this greater understanding of it. To stick with the matrix type of philosophy. You'll stop seeing the digital world, and you'll start to see the code, the matrix behind the movie, as it were. You start to see the numbers and how it all plays out.
It's quite an eye-opening experience when you can start to just look at the chart and spot the trade relative to how the lenses that you're viewing the chart through.
Sean Donahoe: Perfect, perfect, perfect. With that being said, let's move on to the quick fire round.
Automated: If you've got questions, they've got answers. Sean and Phil dive into the virtual mailbag for this week's Rebel Trader's quick fire round.
Sean Donahoe: Okay, so a couple of interesting ones because of a little bit of volatility in the markets over the last couple of weeks. Certainly leading up to the State of the Union Address, which was last night from the day of recording. Some other news events that are driving the markets a little bit. This first question came right out of that, it's, "The recent decline in the markets suddenly hurt my portfolio. What do I do?"
Now here's the thing, I want to also qualify this. It's a pause in the market. It was a quick little clench, shall we say.
Phil Newton: A little 'oops' many would say.
Sean Donahoe: A little bit, a little bit, because, again, anticipation of what was happening with two major events happening in the US. Now, with that being said, Mr. Phil Newton, birthday boy, what do I do? What would this trader do in that situation?
Phil Newton: Well, to quote an old TV show from the UK, "Don't panic."
Sean Donahoe: Dad's Army, perfect.
Phil Newton: Yeah, "Don't panic", Captain Mainwaring. It's literally, don't panic. Again, take a step back. We said it earlier on in the show, it's take a step back and look at the context. Relative to the things that you're turning the investments that you have, the trading opportunities that you have open, and if they've been adversely effected in the last few days, or the last few weeks because of some market situation, look at the context that's in. Predominately when that was done, in this situation, it was the opportunities that are open here. They're all bullish, it's long term, multi-year up-trend. Within that context, this is literally a hiccup. It's a retracement. It's not even a major sell off within the context of ... Just look at the index. Within the context of the stock market, from an index point of view, it doesn't even qualify as a correction. It's a couple of days downward movements. It's nothing. It literally is nothing within that context.
We've had a whole show dedicated to this. Perception is everything. As we said, not just that there is no spoon here, there is no panic. There is no sell off. It's just literally a short term pause in anticipation of some news. Post news, post the event, in this case, what was it? The State of the Union? You know, post State of the Union, the markets are heading, guess what? They're heading right back up there, correctly. They're doing what they've always done. The philosophy that we completely advocate when it comes to charting and technical analysis is until something new happens, the same thing is probably going to continue.
Well, the markets going up, nothing new has happened, everyone just got a little bit shirty, and panicky, ahead of the State of the Union. Now that that's been and gone, normal service is resumed and back up it goes. So, whatever was going on previously is probably going to continue. In this case, it's an uptrend.
Sean Donahoe: Absolutely.
Phil Newton: So, don't panic.
Sean Donahoe: Yeah, absolutely.
Phil Newton: Yeah, sure. What should I do? Well, let's take it to the other end of the spectrum, shall we? We've got a little bit of a blip, a three to five percent retracement, if you like. You know, what do we do? Then the other end of the spectrum is, what do I do when a stock that I own falls more than, in excess of say, 30 percent?
Sean Donahoe: Well, that is an interesting scenario because at the end of the day, find out what moved that needle. A 30 percent decline is usually something has moved the needle. You want to understand, first of all, this is where-
Phil Newton: It could be fat finger trade.
Sean Donahoe: It could be.
Phil Newton: For that matter.
Sean Donahoe: It could be any number of things. It could be a big fund dumping a large holding. It could be any number of things, but you've got to understand what is driving that momentum, and is it likely just a temporary blip? Or, is this a major beast?
Phil Newton: Yeah, what's changed?
Sean Donahoe: 30 percent is a big number, but again, what else is in your portfolio? Is it what's in keeping with your strategy, or is suddenly changed your awareness? One thing that I'm always advocating for is I stay in a trade as long as I believe that that trade, what I believed in, is going to be happening. Would I still trade this today? Would I still be in this? Now, a 30 percent position shift, like that, or to the opposite, first of all, as option traders and with a lot of our strategies, we don't worry about that. That's like, "Okay, well we've got other diverse items in our portfolio, and we don't worry about it." We don't have stop losses because we don't need them with that particular style of trading. It's like, "Okay, fine."
What is happening? Is it likely to come back? Is it a temporary blip? Is it like a temporary news item that the news cycle then shifts to something else, and then all the confidence comes back in an uptrend? Is it a 30 percent decline in a very steep uptrend? Is that going to continue? Look on the different timelines. Is there sentiment?
Phil Newton: I think, not just context is what you're giving lots of different illustrations of. I think timing is also relevant here as well. If you'd entered this position, say, last week, at the peak of the movement and then it falls 30 percent. Then that's a very different situation than if you'd invested two years ago, and the stock or the opportunities already, say, tripled in price. Then a 30 percent decline is, within that context, probably a retracement. It's a big retracement, but it's a retracement nonetheless. Your perception based on the timing is going to be very different as well.
I keep coming back to, you know-
Sean Donahoe: Plus the investment, first, is the trader mindset as well.
Phil Newton: Yeah. I mean, I think it always comes back to, what's your objective? I mean, yes there's been a 30 percent decline, but if nothing fundamentally has changed, as Sean was just describing, then perhaps it's difficult, but if nothing's changed then you've got to sit through it. Arguably, if you've got that opportunity and you're an investor mindset, or it's going up, and you have this slight correction. Again, a big correction nonetheless, it's like, has something changed? What fail safes? Define what you're going to do when such an event happens.
From our perspective, we trade stock options, so that's built into the price of the option. It doesn't matter if we see a five, 15, or 50 percent decline in the stock if we're bullish, we're never going to be on the wrong side of that move from a major draw down in our accounts because we've got a fixed risk on the price of the option. My viewpoint of this would be very different. What's the worst that could happen? Well, I'm going to lose the price of the option.
Whereas if you're buying stock, it's going to be a very different experience if the stock gaps from one level to the other. In that situation I would probably close out, stop the pain, and reevaluate. Yes, it's a painful situation, but my reaction to those two situations, depending on how I've placed that position on, is going to be very different options. What's the worst that could happen? It can't get any worse. The price of my option is minimal, probably a penny or two at that point, but with stock it's like, "Okay, I need to stop the pain. I'm going to get out of that position. I'm going to reevaluate." Look for another opportunity.
Sean Donahoe: Absolutely, again that's very in keeping with, as I said, it depends on your intent, what your strategy is. One of my philosophy's is, would I still be in this trade today if that awareness has changed, or the opinion of the trade has changed based on the information, or new information. Then, yes, stop the pain, move on. If I've been in it for two years, and it's tripled and it's now come down 30 percent, fine. Okay, I'll cap my profits if I'm just in it-
Phil Newton: Context. There's a context, isn't there Sean?
Sean Donahoe: All context, it really is. Moving on to the next question, because this one's a new market. Oh sorry, a new trader in the markets question. Is, "I want to practice trading with paper trading, but does that actually mean I need to do this on paper?" This is one I want to throw to Phil because both Phil and I started off with pens and paper, as paper traders, where it actually came from. Thankfully, you don't need to do that now. I'll let you answer that one.
Phil Newton: Yeah, I mean, paper trading, that's where the name comes from. Today you can do it in a virtual demo account, if you like. If you've got, most brokers provide some form of virtual money in a virtual trading account that you can place virtual trades. That's usually described as paper trading, but in the old days and I use this phrase lightly because people talk about it as if it was last week, but back in the day, aka the '90's, when I was placing my trades. I think that deserves the title "back in the day" Sean, I don't know about you. I think its long enough ago to say, "Back in the day."
Sean Donahoe: I believe it does. It's your birthday, boy. You're an old man now. Back in the old days when you used to have to trade uphill, both ways. You know, he used to his toes, he couldn't afford ... He had to paint his toes brown just to tie the laces.
Phil Newton: Oh, you swine. Back in the day, many years ago, before such technological advance, because it's apparently quite difficult to get an accurate virtual trading account. What we had to do was to, literally, write it down. Write it down on paper, and just hypothetical. So, okay, well this is where I would enter. I would write that down, and you would write it down on paper. It sounds really obvious, it's really basic, but that is where the term "paper trading" came from. You would physically write it down on a piece of paper, and keep a note, keeping track of your trade ideas to see if they worked out.
Sean Donahoe: Or a spreadsheet. Actually we did it on spreadsheets. I did it on spreadsheets.
Phil Newton: Yeah.
Sean Donahoe: With that same idea.
Phil Newton: I mean, I was old fashioned. I'm looking behind me on my shelf, I've got stacks of notepads. I'm a little bit old fashioned in that regard. I've only recently upgraded to spreadsheets, believe it or not, and put everything in the Cloud. I would literally write it down on a notepad, and keep a track of it the old fashioned way. Even up to a few years ago I was still doing that, because that was the system that I had become accustomed to over the years. Just to write it down. Even my live trades, I would write them down on a piece of paper so I had it physically written down. My idea there was if my computer ever blew up, I had something written down and then I could just phone my broker and say, "I need to do this, this, this, and this." I could phone them without saying, "Could you just give me a list of all my positions, because I can't remember?"
Sean Donahoe: Oh my God. I'm sure all the brokers all used to have that. Oh, my bloody day.
Phil Newton: I know. "I can't remember what I'm in at this one, could you just check the price?", and let them sort it out. I could just phone the broker if anything. I only ever had to do it a few times where I had some electrical failure, or a computer had broken down or something. I could phone the broker and say, "Hey, can I make this adjustment on this position, this position, this position." Then job's done. That was it. I always had a paper backup, and I could just take that page out and put it in my pocket if I was ever out and about, and I needed to make a quick phone call. It was just easy to do.
Now, technology is a little bit more reliable. I've got a little bit more faith in it, and you can do all that on a spreadsheet or in a demo account. If you want to practice the art of trading, and to be fair on that note Sean, this is one of the few businesses in the world that we get to practice with virtual money. Just imagine for a moment if you could start a real world business. That shoe shop on the high street that I'm always dreaming and talking about, Sean. You know that's my dream to have a shoe shop on the high street.
Sean Donahoe: He wants his Jimmy Choo's and his Steve Madden's, that's it.
Phil Newton: Exactly. I always talk about it, but in a real world example, if you could have a business on the high street, and someone else takes care of the finance, the firing, the hiring, the stock taking, and explains to you and guide you through the process of operating a successful business. From start to seeing profits, and then you only take over that business when that is showing a consistent profit. Then you say, "Okay, I'll take control of this business now." Then you get handed the keys, and now it's your responsibility to continue to maintain an already successful business, because you've had, maybe a couple of months, or a couple of years of practicing at being a business owner without any financial risk to you whatsoever.
You would do that in a heartbeat. If someone came to you with that deal, you'd go, "Yeah. Hell, yes." We get to do that in trading. We get to practice, practice, practice in this virtual account, this paper trading environment. To see if we can consistently perform and test our ideas out, before we even place any money on the line. That's what virtual trading brings to the table. There's more to it then that because when you move from a demo account to the live account, there's going to be a very high impact of the emotional side of trading. The emotional impact of having real money invested, but from the technical, the foundational viewpoint that we've been talking about today, it's a good place to practice the skill, the art of trading before you actually place real money. You would do that in the paper trading, or a virtual account.
I think we covered every possible facet there.
Sean Donahoe: I think we have, and with that being said, ladies and gentlemen, let's move on.
Automated: Don't forget, if you have a question you want to ask Sean and Phil, just go to richardgrannon.wpengine.com/RTquestions, and your question may be featured on a future show. Uh-oh, what's that smell? It's time to call out the Wall Street shenanigans mainstream confusion and outright high jinks and how come, of so-called experts. Yep, it's time for bullshit of the week.
Sean Donahoe: Okay, this week's bullshit of the week is a doozy. In fact, this is one of those bullshit of the week that you could say it does exactly what it says on the tin. There was a cryptocurrency launched called PonziCoin. Okay-
Phil Newton: Sigh. Deep breath, eye-roll.
Sean Donahoe: I literally ... Again, this is another cryptocurrency bullshit, but it's really indicative of the industry. This was created, again, as another joke coin, but it got out of hand. Now here's the thing, the clue is in the name. PonziCoin.
Phil Newton: I , the clue is in the name people.
Sean Donahoe: I know. It really is. Here's the tagline from the site, "The world's first legitimate Ponzi scheme, because money doesn't grow on trees unless you're BitFinex", which is a scam exchange. I have to point, and again, we've included this white paper on the show notes, so if you go to richardgrannon.wpengine.com/rebeltraders, find this show, which is episode 33. I'll describe it to you. It's basically every ICO, every currency has a white paper describing what they do; the technical, the reason, the mission, the actual elements of the code, and all the details.
This one is just big shop, like it's drawn in a crayon with a blockchain written at the top, and a triangle. At the top of the triangle, me, the bottom of the triangle, you, and then the extrapolation of this future, your friends college fund, and that's it. Again, just highlighting a pyramid scheme. Even from the frequently asked questions, one of the question, "Is this a scam?" Yes. It's as much of a scam as 99 percent of ICO's out there, but way more transparent about it.
Phil Newton: We're saying that words count.
Sean Donahoe: The other question was ... Yeah. "This seems too good to be true, how am I-
Phil Newton:
Sean Donahoe: The answer is, it's a ... Yeah, indeed. Pretty much, right it's implied. It's a literal pyramid scheme. You are fairly likely to one of the last people to buy PonziCoin's, so another 100 tokens probably will not be sold, and the price may not even double again, which the case of about 75 percent of your investments. Also, there's a chance the contract runs out of money, or gets hacked, in which case, you could lose all of your investment. I mean, this is seriously a tongue in cheek coin. The problem is, again, it got out of hand because people bought it. People were buying it, it got out of hand. He had to shut it down, and sell no more because it started selling like hot cakes, and people getting in on it, even though it was blatantly tongue in cheek.
Take the piss. Again, just this entire industry is so screwed up. The crypto side of things, and these bloody ICO's, it's screwed up to hell, and it's just absolute bullshit. I've included the links, you can go check it out. Please, for the love of God, do not go try and buy this. They even say right on here, "Please do not buy this, this is a joke."
Phil Newton: Yet, people were buying it. They were loving it. That's what's crazy about it.
Sean Donahoe: It's really indicative of this industry. I mean, even to the point where Facebook is now banning all cryptocurrency ads, anything related to ICO's, binary options. You're basically, this entire ... I'll actually include this link as well, just for general references. This entire industry, anything that's detrimental to the customers.
Phil Newton: That should be telling in itself. I mean, the advertising companies are getting on to the fact that anything related to this industry is now been deemed as not a good user experience. That's, kind of, paraphrasing some of the wording.
Sean Donahoe: Yeah.
Phil Newton: That's a bad thing. I mean, that should be telling. I mean, there's probably some ... As we've said many times before, the technology, the future of a digital currency, in some form, will happen. I'm in no doubt of that. It's just that right now it's the wild west, and what we're witnessing is the wild west of digital currencies, because any Tom, Dick or Harry can, as we can see, can develop a PonziCoin.
The advertising companies, their objective is to provide a safe environment for their users, so that they get to be fair. They can make money from them for advertising, and this has been deemed not applicable for kids, or adults, or anyone. It's turned out, most of it's nonsense. Surprise, surprise.
Sean Donahoe: Absolutely, and at the end of the day, I mean, Google is going to be doing the same I've heard. I mean, it's really-
Phil Newton: Most dot platforms probably will, I would imagine.
Sean Donahoe: Yeah. I think most legitimate ad platforms are going to be slapping the crap out of these.
Phil Newton: Protecting their users, yeah.
Sean Donahoe: Yeah, so it's coming, and that means your Facebook feed is going to have a lot less crypto BS in it. Hey, we'll have to look elsewhere for the BS of the week, because it usually turns up in our newsfeed somewhere along the line. Again, that's all good, and it's a mess. Yeah, PonziCoin, that is the BS of the week, and with that being said, that's it for this week's show. Thank you for listening. Please remember-
Phil Newton: That's all folks.
Sean Donahoe: This show is not for ... That's all folks. It will cost you a five star review. I can't believe I just did that, but anyway, just go to richardgrannon.wpengine.com/rebeltraders. Hey, someone says, "Are you going to go there?" I usually do. You can go to /rebeltraders, on our website. You can subscribe, review us on your favorite way to hear the show, and this helps us reach more traders out there just like you.
Phil Newton: You can also connect with us on Facebook, the Twitter machine. You can go to the same link, richardgrannon.wpengine.com/rebeltraders. If you'd like to get in touch with us, or send us some fan mail. Have you been receiving some fan mail, Sean? I've been getting one or two Tweets and emails just to say, "Hey, love the show."
Sean Donahoe: Yeah. People are loving this show, and yeah. I mean, we're still in the top ten of business on iTunes. We're top three on the investor side, on iTunes. Again, thank you to everyone whose made that possible. We've had hundreds and hundreds of reviews, and it does ... We like to hear about what you think of the show, any ideas or suggestions, or like I said, there's ways to reach out if you've got questions as well. If you want to just chat with us about your trading, again-
Phil Newton: We've got a lot of time for serious traders. You know, we're quite open and if you want to shoot us a message, if you've got a quick question, by all means just shoot us an email. Yeah, we'll try and answer. As we keep saying, it's your questions and answers.
Sean Donahoe: Absolutely.
Phil Newton: Either publicly, or privately.
Sean Donahoe: There you go. Awesome, all.
Phil Newton: What are we? To be frank, Sean, I can't believe it's the end already. It's been another great show. It's been a little bit bizarre because was it there, was it not there? Are we in the matrix, are we not? Is there a spoon involved? I don't know. I certainly, I'm a little bit hungrier now. I want some pudding with all this talk of cutlery.
Sean Donahoe: Awesome.
Phil Newton: It's been an interesting show, Sean. What have we got coming up next week?
Sean Donahoe: Next week I'm actually going to be, funnily enough, we talk about it a lot, but I'm going to be in Las Vegas. I'm doing-
Phil Newton: Literally, not figuratively.
Sean Donahoe: It's going to be viva Las Vegas. I am going to be ... I'm going to be broadcasting from my suite in the Bellagio. I'm actually there for speaking at a conference, and a Master Mind, private Master Mind, with some of the top people in the industry. We're going to be ... I'm going to be broadcasting from there, having a blast.
Phil Newton: It's going to be a jolly good time.
Sean Donahoe: Absolutely.
Phil Newton: Yeah.
Sean Donahoe: Abso-bloody-lutely. There are going to be many, many analogies, I'm sure.
Phil Newton: It's going to be a bit of live, on location, then? Yeah.
Sean Donahoe: Live on location.
Phil Newton: Live on location, from Vegas.
Sean Donahoe: There you go.
Phil Newton: What's the word on the streets?
Sean Donahoe: Absolutely. Standing on a roulette table. All good. So, with that being said, rock on.
Phil Newton: That'll get some funny looks.
Sean Donahoe: We'll see you next time.
Phil Newton: That'd be good, if you could do that?
Sean Donahoe: I probably will, but not like ... I'm not wearing one of those skimpy dresses.
Phil Newton: I know, right up to the part where security taps you on the shoulder and says, "You can't do that here Mr. Donahoe."
Sean Donahoe: Exactly. "We've told you before."
Phil Newton: "Put it away."
Sean Donahoe: Awesome, awesome.
Phil Newton: The microphone.
Sean Donahoe: Absolutely, yes indeed. Jesus Christ, there he goes again. Anyway, rock on, we'll see you all next week. Take care for now.
Phil Newton: We'll see you all next week. Bye for now.
Automated: For more cutting edge trading advice, and a free trader workshop to help you build a personalized trading plan, and make smarter trading decisions, go to richardgrannon.wpengine.com now.
Automated: Futures, options on futures, stock and stock options trading involves a substantial degree of risk. It may not be suitable for all investors. Past performance is not necessarily indicative of future results. Trade Canyon Incorporated provides only training and educational information. If you actually understood and listened to this, then that means you are awesome. Congratulations and well done. Notice, this product may contain nuts.

(Click the time stamp to jump directly to that point in the episode.)

[00:00:10] Show Introduction

[02:25] Sean: The reason we're doing this show is I was flicking through some old movies because I was bored. I went back to my infamous collection of touchstones and one of them was The Matrix. I realized this is how I felt. The first movie was released in 1999 and that was when I faced my first trade. It's how I felt looking at the charts.

[02:55] Phil: That's nearly 20 years ago, Sean. I can't believe that.

[03:02] Sean: When I placed my first trade, I already had an interest in the markets, what money was doing, etc. I looked at the charts and I had no idea what I was doing. A lot of people, when they first come to trading, look at the charts and they can so this is a stock chart. We have instant recognition. We see them on TV all the time. But actually understanding what's going on with any stock chart is often, when you first start, a mystery. One of the things I wanted to break down is trying to decipher what you see in front of you and recognize the patterns, shapes, and data helps you with your trading. Looking at these charts, they tell a story about what's happened, what's happening, what could happen. When you start looking at these and getting more involved with reading charts, understanding the patterns, it all becomes clear. It takes that kind of green-streaming data to becoming the world around is very much the same way with stock charts.

[04:29] Phil: There's a learning curve involved.

[04:33] Sean: One of my favorite quotes... I wanted to take one segment and break down quotes in relation to trading. Here's the first one. Neo asks Morpheus, "why do my eyes hurt?" And Morpheus replies, "You've never used them before."

[05:01] Phil: Or maybe you've been looking at too many charts, you idiot.

[05:06] Sean: That could be. This is one thing Phil and I were discussing yesterday. What we do, our entire ethos, is that we teach professional-level trading for busy people. We don't want to be stuck in front of charts every day, glued to the screens, because we have busy lives.

[05:38] Phil: Me, personally, I'm not a busy person. I want more free time.

[05:52] Sean: I've said many times, I run multiple businesses. One of my priorities is trading is not an extra business, it's a way to make my money grow and I can get on with my business. Although, I treat trading like a business, but I don't want to dedicate 12 hours a day. To be quite honest, a lot of my work days are 16-hour days. That is how intense my life is. I have to make sure I'm not glued to the screens and tied down. I can create my own work hours but I choose to work that way because that's my life and I enjoy it. I am a true workaholic, but I don't want trading to be detrimental to my other income streams.

[06:50] Phil: Another full-time job. You don't want that.

[06:53] Sean: And it's not something I can or want to outsource to someone else, i.e. brokers, fund managers, etc, because it's my bloody money and I have the full interest and control of what I do and how that money grows, because I have an awareness within this matrix.

[07:12] Phil: As we've established, I'm the exact opposite. I've been there. Trading has been my full-time gig most of my working life. I don't want to be glued to the computer either, but that aside, another reason it might be a bad thing to be flicking through chart after chart, even if you've got the time, the means, and the capability to do that, is as a brand new trader, it's easy to push the buttons and put unnecessary trades on. It can be an easy trap to fall into because you're looking at the charts. Just simply because you're looking at it, you click send on an order. It's not the right time. This falls in line with there is no spoon. You find trades that aren't really there.

[08:13] Sean: That's a very good point. One of the things with reading charts, it doesn't have to be difficult. You can have the fundamentals and the basics, but as you get more experience and more layers to your skills, other things become apparent. The analogy we use in our free on-demand training is a Picasso painting. It's kind of like looking at stock charts. As you look at Guernica, a painting about the Spanish Civil War, just that information alone allows you to start picking out little pieces, nuances, because you now have that insight. Then you start to develop context in this piece of art. Reading a chart is exactly like that. You start developing more skill. Now, here's another quote. Morpheus is leading Neo, educating him. In this crowd, a woman walks towards him in a red dress. Morpheus says, hey, did you notice the woman in the red dress. They turn around and the woman has turned into one of these agents and has a gun pointed at his head. But while you're looking at the charts, you might see something that catches your eye, that stands out from the crowd. This is the whole point of this exercise. It's like, what is going on here. Phil really drums this into our students. Look left, what happened? This is one of the best insights you can have into the charts. Phil, tell them why.

[10:40] Phil: I was trying to think of the comparison to the woman in the red dress. I would say the current live price is the woman in the red dress because everyone's attracted to drawn to her. That is the live price on the charts. Everyone's looking at it dancing up and down. The reality is, they need to be looking at taking the full appreciation of the rest of the charts. This is what we mean by look left. You're able to navigate through the crowd rather than focus on that woman, you want to be looking left to navigate through the crowd and figure out where are the obstacles, where are the stopping points, can I get to my destination and plan a suitable route? Looking left allows us to see what obstacles are there that may help support a trading decision.

[11:48] Sean: An analogy just popped in my head - seeing the forest for the trees. Instead of looking at the tree, you can take a 30,000 ft view and look at the entire forest. Rather than being obsessed with the woman in the red dress, you can take a step back. Now you can see overall what's going on, why it's happening, and navigate accordingly.

[12:25] Phil: Most of the time, I tell people to ignore the live price. For what we're doing and my style of trading, I don't need to worry about it. Until today's live price has completed, I'm only going to evaluate it tomorrow, because it's constantly in flux. That woman is moving around. I can only make an evaluation of a completed piece of information, which is why I'm always looking left. Most new traders are fixated on the live price, whereas we want to be making all our decisions off the completed information. That's, from a daily chart point of view, from yesterday backwards. Most of the time, today doesn't matter, unless something crazy happens. Price will be moving steadily and I'll make an evaluation tomorrow on what happened today.

[13:36] Sean: Absolutely. One of the things we're looking left for are logical stopping points. But we also want to know if we're in an uptrend, a downtrend, consolidation, are we going up, down, or sideways. Then we can start making evaluations of where we are right now with are we in a correction in an uptrend, are we in a rally in downtrend, or are we looking at a slowdown of an extreme, a turnaround? We can't do that without the context of the wider view.

[14:17] Phil: Looking at the picture, you're evaluating that piece of art. If you were just to look at one small part, you're not going to have as great of appreciation as looking at the full picture. Look at the landscape and the view rather than the signature and who it was painted by. You're not looking at the live price. When we've selected a stock to look at, we're only looking at the stock when it's ready to be viewed. The first thing we do is look at the whole chart and get that appreciation for what is price doing. Is it going up, down, or sideways. That can give us the context. With the Civil War painting, it gives me context for why they're wearing certain clothing or why they're holding weapons. You've got details. With the charts, that helps us if we know which way is point first. What's the environment? It's in an uptrend? That's going to provide context for what I'm now looking at and how I can potentially find that opportunity to trade that particular chart or stock.

[16:11] Sean: Now the other side of this, is we also use filters to cut through the noise, to cut through the crowd to focus on the woman in the red dress. We use scans and tools to find, filter, and sort stocks. We talk a lot about this in on-demand training. We're focusing on those opportunities that are going to present us with the highest probability of success. Then we can further refine and filter, without having to look at 27,000 US equities or flipping through chart after chart. We cut out a lot of the noise in the matrix to focus on the ones that are gonna give us the best chance of preceding.

[17:17] Phil: Specifically, we're looking for what would make me place the trade today? It's not just has a particular situation or set of circumstances. We're calling this the woman in the red dress. It's not just a condition. There's lots of conditions we could look for that might make us look for a trading set-up or opportunity, but will I be trading it today? That's really the secret sauce that prevents us from unnecessarily looking through chart after chart. It's that qualifier of it's not just a mechanical condition. That's the secret ingredient. Whatever you're looking for that would cause you to place that trade today, how can you mechanize that evaluation so that you can just be given a list of stocks? These are the ten stocks you need to look at today. Double check. The other thing you'd look for... We've got the woman in the red dress. That's the mechanical condition. It's the one thing that's constant. What other conditions would cause me to place that trade. If they're not there, then we still don't need to look at that chart. It's that additional qualifier of would I trade this today? That's as specific as we need to be with this type of scanning and sorting and filtering. We can do this with any tool, any methodology. We've got our own preferences with the types of things we're looking for. But mechanize would I be trading this today methodology? So then you can go look at the five stocks, and go and check all the other things. If they're there, you can go and place the trade. That's what makes it time efficient. If you're a busy person, you're not wasting time doing things you don't need to.

[19:42] Sean: Love it. Here's the next one. When Neo asks a question of Morpheus, "What are you trying to tell me, that I can dodge bullets?" And Morpheus, in his authoritative tone, says "No, Neo. I'm trying to tell you that when you are ready, you don't have to." If you imagine this in the environment we're in right now, we've had major stock rallies, setting records it seems day after day. I think it's the S&P 500 that's up 44% since this current administration took office. 401Ks skyrocketing. It's happy, happy days. Warren Buffett said, when everyone's cautious, be greedy. In a market like this, I'm always a little more defensive. I'm always getting prepared, raising the awareness, that if there's any weaknesses in my portfolio, I don't want to be caught with my pants down, because that's not cool. Our style of portfolio trading allows us to have many positions, many insights with an awareness that if a situation's changed, our asses are covered or we can pivot or change in a heartbeat to adapt to the environment we're in. What's your opinion on that?

[21:27] Phil: You're absolutely right, Sean. The markets only seem to be going up, which makes everyone happy and complacent. What we do know is it won't continue on forever. When everybody is biased in one way, the Warren Buffet quote is when everyone else is doing one thing, we want to be thinking and preparing for the opposite. We've talked about it in the past. When the crowd is bullish, I want to be prepared for the downside movements because it will happen. It's not if, it's when. To tie into your Matrix quote, if you've got this awareness, you won't have to stop bullets, you'll be prepared. The bullets coming at you would be a quick change in the markets, maybe another crash or a bear market. You won't have to start panic-selling along with the herd. You'll be prepared for that and you won't have to dodge the bullets. You'll be hopefully biased with your portfolio some in the opposite direction. You probably would have started loading up in the opposite direction. The writing is usually on the wall when something major happens. Everyone's happy and everyone's a winner - that's an alarm bell. We've been talking about this a long time, and it's not the first time it's happened. You've only got to look through history, the dot com bubble, the 2007 housing crash... History repeats itself. It happened in 1929, 1934, the 1950s. When the taxi driver and the barber start asking me about investment advice, that's when I know that the market's about to turn. The general public are typically the last to know. So, some portion of my portfolio is bearish because hey, that's the nature of the beast. There are setups that will develop and you should be on the right side of the market when it turns.

[25:06] Sean: Absolutely. Moving on! Here's the scene. Neo's just found out the reality around him is not real, it's all some sort of AI construct.

[25:23] Phil: It's that red pill, blue pill scene.

[25:26] Sean: I love that scene. He says, "Unfortunately, no one can be told what the Matrix is, you have to see it for yourself." Now here's the thing. You're seeing all these charts trending up, down, going sideways, or a combination thereof.

[25:50] Phil: Like a spider on acid, as I like to say.

[25:55] Sean: Well there's a mental image for everyone there. They've actually put spiders on ecstasy and you can see the webs they create, and they're all over the place. I think that's hilarious that someone came up with that. What are we going to do today? Oh, let's give that tarantula some crack.

[26:44] Phil: Do you think we can get some funding for this?

[26:47] Sean: The same's with the markets. Look at the markets for the patterns that emerge. Build that level of awareness, you start experiencing more and more, head and shoulder patterns. Usually you know what the pattern is after it's formed, which means it's too late. There are things you can see that will help you develop that great insight. We're talking trendlines, consolidations, extremes, recognize, practice, and learn. Phil was telling me about a strategy he's testing that's producing really fantastic results. Do you want to give it an overview?

[28:16] Phil: I think to firm up what we're talking about, when you say The Matrix, to use the movie example, everyone experiences it differently, so you can't be told what it is. It can be described to you. We try to give you our insights every week. But until you've experienced it for yourself, you're not gonna have exactly the same experience, even if we sat side by side because we bring different viewpoints. For example, you've got a programming background. We'll end up with the same conclusions because we have similar methods, but we'll get there differently. It's about observation. The new trader is gonna have a very limited experience, if any at all, of assessing and evaluating trading opportunities. This is why we're always hammering home the need of having a systematic approach to find, filter, and sort stocks. The lack of experience you might have means you're more heavily reliant on that systematic approach. When you start to look at the markets, you will build up experience. You can start to add your own flavor, layer that on top of the foundation stone everyone starts with. It's that experience that means you can experiment. It's a constant, evolving process. Just recently, I was able to firm up a strategy. It was something I was already doing. It's not new. But having enough occurrences where this setup develops has allowed me to firm up what, how, and what is now a standalone strategy. Because of that, I can simplify it down into its component parts. When you know more of what you're doing, you can start to boil it down and make it into a strategy you can then explain to someone else so they can replicate it for themselves and add their own flavor onto your understanding of a particular setup. Does that make sense?

[31:23] Sean: Yes.

[31:25] Phil: So recent strategy. We're in the midst of earning season. It's timely to have a news-type strategy. There's lots of ways to trade the news, certainly with stock options. One way I like is to trade is directionally. The other side of the coin is to not trade directionally and to be a seller of options. But to trade directionally, you need to be a buyer of options. I like doing that. That's my cup of tea. How can I buy options that's not too expensive. As we approach news events, then the implied volatility, which has an impact on the price, starts to increase. If it does, the price of the option will increase in anticipation of something explosive happening. But sometimes, that doesn't get factored in straight away. There's the opportunity #1. A mechanical way to find an opportunity to find an opportunity about to explode on the horizon. The mechanical scan is to look for stocks that have low implied volatility rank. The ranking is if the implied volatility is as low as it's been in the last 12 months, we might have reading of zero. If it's near the low in the last 12 months, it might have a reading of 1, 2, 3%. On a sliding scale of 0 to 100, we're trying to rank where the current implied volatility is compared to where it has been. We're comparing implied volatility to itself and trying to rank the current reading over the last 12 months. What I'm looking for is a mechanical way to find stocks that have low implied volatility, less than 15%. That's gonna take a big list of stocks down to a small list of stocks. That's mechanical filtering #1, ranking the stocks relative to implied volatility.

[34:19] Sean: You can do this on your watch list. Add your indicator to that watch list. Click a button to sort. You're done.

[34:27] Phil: Perfect. That is exactly it. Like you'd do on spreadsheets, click the column header, it ranks and sorts the stocks relative to implied volatility. Then I filter that short list of stocks and filter again because I need an event that might cause price to pop, like an earnings report. We know when these happen. In the next 45 days, I'd like to see a stock with an earnings announcement with that low implied volatility. So I have two mechanical ways to filter stocks. I've got inexpensive stocks because of the low implied volatility. Why's that important? After earnings announcement, implied volatility usually contracts. I'm buying options when the implied volatility is at 12-month and historical lows. That contraction should be theoretically minimal. When the oomph goes out of those options, it's not going to be that much. I've got two mechanical ways of filtering stocks. I've got low pricing and the potential for the price to pop on the back of news events. At this point, I would not have looked at any of the charts. I'm doing all of this in the watch list.

[36:49] Sean: One of the things we were talking about, if it's sooner than 6 days, meh, you're not giving it time to do it's thing.

[36:52] Phil: Exactly. So we want the trifecta, three things. This is when I'm gonna look at the charts. I'm not worried about the overall direction. What I want to see is, in the last couple of days, weeks, or months, price having contracted. It's just paused and stagnated. If price is in an uptrend on the charts, it might be that the overall chart is in an overall consolidation. I'm looking for the typical things. It's doing something recognizable. If it's in consolidation over the last 12 months, it needs to be at the upper and lower boundaries. If we're in an uptrend, I want to see price having contracted. It might be there's some pattern that you recognize that's suggesting a trading opportunity. Usually though price has contracted like a coiled spring. It might just suggest price is pausing, and the news event might just mean price can pop out. So we've got #1 low implied volatility under 15% on the ranking, #2 a news event on the horizon, #3 price is like a coiled spring tightening up more than usual ahead of this news event. Then I wouldn't worry about the direction of the expected movement, I can buy a long strangle in a very unique way to us and take advantage of gamma. To be a little nerdy, we're going to skip the nerdy whys and hows. I'm gonna go straight to I want to be buying a put and a call at the thirty delta level, or slightly further away. That takes advantage of the way gamma impacts delta, just to give you back of the envelope version. That's the strategy and it's working very well.

[40:21] Sean: Very good. You just got one on a silver platter, there.

[40:24] Phil: Yeah, how do we get paid to round it off? A couple of ways. Firstly, while it's not primarily a way I'm planning on getting paid, there could be on a run up to the earnings, an expansion in implied volatility. The anticipation that something funky could happen because of the news, starts to get factored in. It might mean the options start to do be more expensively priced without the stock moving. It's not what I'm hoping for, but it's the cherry on top if it happens. On the news event itself, either in anticipation of the news, the stock might start moving quite sharply away from that contraction, or in the news event itself, it would pop. Quite often, I can be out of the trade for a nice return on capital, a nice profit prior to any news event. But because of the news, could then produce the profits and I don't need to worry so much about the implied volatility contraction because I'm already buying at historical lows. There will be some contraction. Two ways to get paid - the stock moving, or the implied volatility increasing. Occasionally, it will be both.

[41:58] Sean: Perfect. Like it. So, there you go. This is no turning back. It's an insight into the matrix. You take the blue pill, the story ends, you wake up in your bed and believe whatever you want to believe, or you take the red pill, you stay in wonderland, and we show you just how deep this rabbit hole goes. That's what we do every single day here at Trade Canyon with the Rebel Trader methodology. We actually do this. We walk the walk, we talk the talk and we show people how to do like we've described here. This is one strategy out of many.

[42:47] Phil: A very detailed step-by-step of where the trade is.

[42:51] Sean: With that being said, let's move on.

[00:42:54] Rebel Trader Tip of the Week

[43:11] Sean: In keeping with the theme of the show, this one is from The Matrix is when, when Neo has a cable in the back of his head and they're force uploading information - every martial art, every fighting style, weapons training

[43:30] Phil: Can I say it, Sean? I just learned kung fu.

[43:36] Sean: That's it. I know kung fu. And then Morpheus leans over and says

[43:42] Phil: Show me.

[43:45] Sean: Show me. I love that line. It's one of the great scenes and the greatest fight scene in the movie. I wish this technology existed. I'm a futurist. I believe we can get there, a few decades away, either supplemental or... I would have that in a heartbeat.

[44:20] Phil: Random sidebar. I was talking to a mother earlier today and she said I wonder what the future holds. And I said maybe a contact lens over the eye that augments the virtual world with the real world. Imagine walking down the street and a little name pops over a head and says this is Bob, he's got two kids. Hey Bob, how's the kids? And you just get information overlaid. It's so futuristic but we're very close to it.

[44:58] Sean: They're actually developing a contact lens that does have a display purpose on there. Right now they've only got a few pixels, only 16 bit. They were using it to help blind people. Probably a couple decades away. I'm a futurist. I would become a complete cyborg if I had the opportunity to.

[45:30] Phil: With your dodgy knees you're gonna need it.

[45:34] Sean: This is true actually.

[45:51] Phil: So Neo's just said I know kung fu and that's where we are. Tip of the Week.

[45:55] Sean: We started off with a basic foundation. We all start somewhere. We learn to crawl. We learn to walk. We learn to run. You have to lay a foundation of success. This is something I talk to entrepreneurs about a lot. Once you've created that foundation, you can then build on that continuously. Even though this movie came out in 1999 and that was when I put on my first trade, I wanted to learn and know everything, it's become a 20-year journey and for Phil it's been a little bit longer. But at the end of the day, I want to learn something every day.

[46:44] Phil: Are you trying to say that mine's a little bit longer than yours, Sean?

[46:47] Sean: Keep dreaming on, son. Why do you think he's got a squeaky voice? But anyway as I was talking about here, laying a foundation for success. I'm on a continuous journey to learn more information, to always supplement and get more insights. I make it my missions to discover and investigate. But I always like to develop those skills to create nuance and understanding so that I have the opportunity to do more in the markets. I encourage every person, if you're on this journey to become a better trader, a superior trader, make sure you have a solid foundation, strategies and understanding that you're continuously applying in the markets. You can master the basics. And then once you have that, you can start layering on and investigating what's relevant to you. What's relevant to me may not be relevant to you. I lean more towards the AI, the high frequency trading, the pattern recognition from the computer side, whereas

[48:33] Phil: I'm more visual.

[48:37] Sean: Again we have different mindsets, and although we have a very similar outlook, we're approaching it from different angles. As you get more experience, things are gonna appear to you, or be presented to you. You're gonna have the red Mustang syndrome. If you start thinking about red Mustangs, you're going to start seeing them everywhere. I encourage you to develop that awareness in yourself so you can go from Mr. Anderson to a full-on Neo. It takes time, effort, and commitment, but I do encourage it because it will make you a far superior and confident trader.

[49:39] Phil: Not to be put off by the amount of information and trading styles that are out there, go deep rather than wide on the knowledge. You don't need to know everything, just find what you're interested in, as Sean said. Go deep on that and get to know that area of your trading interest. Over the last 17, 18 years of coaching people, the one thing that's constant of why people are confused and don't make success of this is primarily because they're trying to learn a little bit of everything. If they went deep on just one or two things, they'd become the expert in that style of trading. It's quite an eye-opening experience when you can just look at the charts and spot the trade relative to the lens you're viewing the charts through.

[51:23] Sean: Perfect. With that being said, let's move onto the Quickfire Round.

[00:51:30] Quick Fire Round

[51:38] Sean: Okay so, a couple of interesting ones. A little bit of volatility in the markets over the last couple of weeks, certainly leading up to the State of the Union address which was last night and some other news events driving the markets a bit, this first question came right out of that. The recent decline in the markets suddenly hurt my portfolio. What do I do? I want to qualify this. It's a pause in the market, a quick clench of the cheeks. With that being said, Mr. Phil Newton, what do I do?

[52:36] Phil: To quote an old TV show in the UK, don't panic! Take a step back and look at the context, relative to the things you're trading. If they've been adversely affected in the last few days or weeks because of some market situation, look at the context that's in. Predominantly, when that was done in this situation, it was the opportunities that are open here. They're all bullish. It's long-term, multi-year uptrend, within that context, this is a hiccup, a retracing. It's not even a major sell-off. Just look at the indexes. It's doesn't even qualify as a correction. A couple of days downward is literally nothing. Perception is everything. There is no spoon, there is no panic. It's just a short-term pause. Post-State of the Union, the markets are heading right back up. The philosophy we've always advocated with technical analysis is until something new happens, the same thing's probably going to continue. The market's going up. Nothing new has happened. Everyone just got a little bit shirty and panicky ahead of State of the Union but normal service has resumed so back up it goes. Whatever was going on previously is probably going to continue.

[54:44] Sean: Absolutely.

[54:49] Phil: So don't panic. What should I do? We've got a 3-5% retracement. The other end of the spectrum is what do I do when a stock that I own falls in excess of 30%?

[55:07] Sean: That is an interesting scenario because at the end of the day, find out what moved that needle. A 30% decline is something has moved the needle.

[55:20] Phil: It could be a fat finger trade for that matter.

[55:22] Sean: It could be any number of things. It could be a big fund dumping. You've got to understand what is driving that momentum and is it likely just a temporary blip, or is this a major reset? 30% is a big number. One thing I'm always advocating for is I stay in a trade as long as I believe that trade, that what I believed in is going to keep happening. Now in a 30% position shift like that, as option traders, we don't worry about that. We've got other diverse items in our portfolio and we don't have stop losses because we don't need them without our style of trading. What is happening? Is it likely to come back? Is it a temporary blip? Is it a temporary news item that the news cycle then shifts to something else and then all the confidence comes back in an uptrend. Is it a very steep decline in an uptrend? Okay, is that going to continue? Look on the different timelines. Is there sentiment shift?

[56:52] Phil: I think not just context, timing is also relevant here as well. If you'd entered this position last week at the peak of the movement and then it falls 30%, that's a very different situation than if you'd invested two years ago and the stock has already tripled in price. A 30% decline within that context is a retracement, but a big one. Your perception based on the timing is going to be very different as well. I think it always comes back to what's your objective? Yes, there's been a 30% decline, but if nothing fundamentally has changed, then perhaps, it's difficult but you've got to sit through it. Arguably, if you've got that opportunity and you've got an investor mindset or it's going up, you have this slight correction, has something changed? Define what you're gonna do when an event happens. We trade stock options. That's kind of built into the price of the option. Is doesn't matter if we see a 5, 15, or 50% decline in the stock if we're bullish, we're never going to be on the wrong side of that move from a major drawdown in our account because we've got a fixed risk. What's the worst that could happen? I'm gonna lose the price of the option. Whereas if you're buying stock, it's gonna be a very different experience. In that situation I would probably close out, stop the pain, and re-evaluate. Yes, it's a painful situation. My reaction to those two situations is going to be very different based on those two situations. The price in my option is minimal, a penny or two at that point. But with stock I need to stop the pain, get out of that position and look for another opportunity.

[59:22] Sean: Absolutely. It depends on your intent, what your strategy is? One of my philosophies is would I still be in this trade today if that awareness has changed or the opinion of the trade has changed based on new information? Stop the pain, move on. If I've been in it for two years and it's tripled and it's now come down 30%, fine. I'll cap my profits. It's all context. Moving onto the next question, because this one is kind of a new trader in the markets question, is I want to practice trading with paper trading, but does that actually mean I need to do this on paper? This is one I want to throw to Phil because both Phil and I started off with pens and paper, but thankfully, you don't need to do that now.

[1:00:15] Phil: That's where the name comes from. Today you can do it in a virtual demo account. Most brokers provide some form of virtual money in a virtual trading account. That's usually described as paper trading. Back in the day, AKA the 90s, when I was placing my trades, we had to write it down on paper. You would keep a note or track of your trade ideas to see if they worked out.

[1:01:46] Sean: Or a spreadsheet.

[1:01:50] Phil: I've got stacks of notepads. I've only recently upgraded to spreadsheets and put everything in the cloud. I would write it down on a notepad even up to a few years ago because that was the system I had become accustomed to over the years. Even my live trades. My idea there was if my computer ever blew up, I had something written down and I could phone my broker and say I need to do this and this. I only had to do it a few times. Now technology is a little more reliable, I've got a little more faith in it. If you want to practice the art of trading, and on that note, this is one of the only businesses in the world you get to practice with virtual money. Just imagine if you could start a real-world business, that shoe shop on the high street.

[1:03:31] Sean: He wants his Jimmy Choos and his Steve Maddens.

[1:03:33] Phil: Exactly. In a real-world example, if you could have a business on the high street and someone else takes care of the finance, the hiring, the firing, the stock taking, and explain to you how to operate a successful business, from start to seeing profits, and then you only take over that business when that is showing a consistent profit. You say I'll take control of this business now. Then you get handed the keys and it's your responsibility to continue to maintain an already successful business. You've had a couple of months or years of practice without any financial risk. You would do that in a heartbeat. We get to do that in trading. We get to practice to see if we can consistently perform an test our ideas out, before we even place any money. When you move from a demo account to a live account there's gonna be a very high impact of the emotional side of trading, the emotional impact of having real money invested. From the technical, the foundational viewpoint we've been talking about. It's a good place to practice the skill, the art of trading before you place real money, and you would do that in the paper trading or virtual account. I think we covered every possible facet there.

[1:05:15] Sean: I think we have, and with that being said, ladies and gentlemen, let's move on.

[01:05:18] Bulls**t of the Week

[1:05:44] Sean: This week's Bullshit of the Week is a doozie. In fact, this is one of those that does exactly what it says on the tin. There was a cryptocurrency launched called PonziCoin. This is another cryptocurrency bullshit. This was created as another joke coin, but it got out of hand. The clue is in the name. Here's the tagline from the site - the world's first legitimate Ponzi scheme, because money doesn't grow on trees unless you're Bitfinex, which is a scam exchange. We've included this whitepaper on the show notes. It's basically every ICO or currency has a white paper describing what they do, the technicals, the reason, the mission, the actual elements of the code and all the details. This one is just the top of the triangle (me), the bottom of the triangle (you), and the extrapolation, your friend's college fund and that's it. A pyramid scheme. Is this a scam? Yes. It's as much as a scam as 99% of ICOs out there but we're more transparent about it.

[1:07:32] Phil: We're saying that we're a scam.

[1:07:39] Sean: This seems too good to be true. The answer is it's a literal pyramid scheme. You are fairly likely to be one of the last people to PonziCoins, so another 100 tokens probably will not be sold and the price may not even double again, which is the case with about 75% of your investments. Also there's a chance the contract runs out of money or gets hacked in which case you could lose all of your investment. This is seriously a tongue in cheek coin. But it got out of hand because people bought it. He had to shut it down and sell no more. It started selling like hotcakes even though it was blatantly tongue in cheek. Take the piss. This entire industry is so screwed up and just absolute bullshit. I've included the link so you can go check it out. Please for the love of god do not try to buy it.

[1:08:53] Phil: People were buying it. They were loving it.

[1:08:57] Sean: It's really indicative of this industry, even to the point where Facebook is now banning all cryptocurrency ads, anything related to ICOs, binary options, anything that's detrimental to the customers.

[1:09:17] Phil: That should be telling in itself. The advertising companies are getting onto the face that anything in relation to this industry is now been deemed as not a good user experience. That's a bad thing. The future of a digital currency in some form will happen, it's just that right now it's the Wild West. Any Tom, Dick, or Harry can develop a Ponzi Coin. But the advertising companies are trying to provide a safe environment for their users so they can make money from them for advertising. This has been deemed not applicable for kids or adults or anything, because it's turned out most of it's nonsense. Surprise, surprise.

[1:10:20] Sean: Absolutely. Google's going to be doing the same, I've heard.

[1:10:28] Phil: Most ad platforms will I would imagine.

[1:10:36] Sean: It's coming, so that means your Facebook feed is going to have a lot less crypto BS in it. We'll have to look elsewhere for the BS of the Week. With that being said, that is the end of the show. Thank you for listening. It will cost you a five-star review. Just go to http://Tradecanyon.com/rebeltraders. You can subscribe and review us on your favorite way to hear the show. This helps us reach more traders just like you.

[1:11:35] Phil: You can also connect with us on Facebook or the Twitter machine. You can go to the same link, http://Tradecanyon.com/rebeltraders. If you'd like to get in touch with us or send us some fan mail. Have you been getting fan mail? I have.

[1:11:44] Sean: People are loving the show. We're still in the top ten of business on iTunes. We're in top three on the investor side, so thank you to everyone who has made that possible. We've had hundreds and hundreds of reviews and we like to hear what you think of the show or if you have ideas or suggestions. If you want to just chat with us about your trading, again.

[1:12:22] Phil: We've got a lot of time for serious traders. We're quite open. If you want to send us a message, we'll try to answer your questions.

[1:12:33] Sean: Absolutely.

[1:12:38] Phil: I can't believe it's the end already. It's been another great show. It's been a little bit bizarre because was it there, was it not there? Are we in the Matrix, are we not? Is there a spoon involved? I don't know. I am a little hungry now. I want some pudding. What do we have coming up next week?

[1:12:58] Sean: Next week I'm going to be in Las Vegas. I'm gonna be broadcasting from my suite in the Bellagio. I'm there speaking at a conference and a private mastermind with some of the top people in the industry. I'm gonna be broadcasting from there. There are gonna be many analogies I'm sure. With that being said, rock on. We'll see you next time.

[1:14:08] Phil: We'll see you all next week. Bye for now.

Resources & Links Mentioned in This Week's Show

3 Key Takeaways From This Show

  • Study charts, start recognizing patterns and what's happening now as well as what happened in the past. It’s all about execution of your strategy consistently over time.
  • Stop pondering, start doing... We all have doubts when we are learning a new skill and are unsure, especially when your money is on the line.
  • Take the step, practice without risking a dime using demo accoubts, prove to yourself you have what it takes.

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