Option Volatility – How To Trade Options Video 42 part 1


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Hello, and welcome to the one trading secret that can make you rich, Inside Days. What Inside Days are, how to identify them, the setup, how they work, entrance criteria, management, exit criteria for maximum profits, and much more.

I want to thank you for purchasing this video, and joining me today. My name is David Vallieres, and I am the founder of Tradingology.com. I’m going to take you through the setup for this video, and the trading strategy that I think is probably one of the most dynamic trading strategy around.

There are lots of different kinds of setups that you can get into in the market, but this one is a particularly active form of trading. Some of the benefits of this particular setup are that it’s low-risk, it has specific entry and exit criteria, the setup is easy to identify, and I think it’s going to be a lot of fun.

Stick with me, as we go through it. Some of the material may be absolutely brand-new to you. Some of it may be a review, for some of you. Please stick with me, because I think you’re going to find this incredibly rewarding. I really do, sincerely mean that this could be the one strategy that could make you rich. If you’re interested in actively trading, there are lots of opportunities to do these types of trades, in just about every single market for securities out there.

I think you’re going to find that once you learn how to identify them, you’re going to be seeing quite a few of these opportunities available to you, that you can trade on a regular basis. There is absolutely no limit to the number that you can trade, of course.

Let’s get into exactly what Inside Days are. If you’re not familiar with what an Inside Day is, an Inside Day is a day that has a lower high, or a higher low, than the previous day. For example, we’re taking a look at a chart of American Express. I’ve come back to a particular trade that we’re going to be setting up here, as our example trade. We count it as Day 1. In other words, the day in which we identify the Inside Day is considered Day 1.

This happens to be on February 11, 2008. As you can see – let me just draw a little circle around these days, so that you can get a better sense of what I’m talking about. This is a daily chart, again. The first bar is a fairly wide-ranging bar. In other words, the low and the high encompass a couple of points on American Express. The day that follows that is a relatively short bar. In other words, the high and the low fall within the range of the previous bar. In fact, it’s probably less than 50% of the previous bar’s range.

That is ideal, for the setup that we’re looking for. This is called an Inside Day. Most of the time, Inside Days are also narrow-range bars, which this is. It’s a fairly narrow bar, inside of a larger bar. We call those Narrow Inside Bars, or NIBs. It’s really amazing. Once you learn how to identify an inside bar, you begin to see these quite frequently in your charts.

It doesn’t matter what stock you’re looking at. This happens to be American Express. Of course, this is not a recommendation of American Express, to buy or sell their securities. I’m using this only as an example. There are many stocks out there. In fact, there are probably hundreds or even thousands of stocks, that display this type of inside bar, on a regular basis, on their daily charts.

Once we have the inside bar, and we understand what the definition of an inside bar is, you can begin looking through your charts, to see where you can find an inside bar. The objective of the strategy is really to accumulate short-term profits, on a consistent basis, using objective entry and exit criteria.

It really can be used on any liquid stock, on a daily time frame. We’re not looking at weekly charts. We’re not looking at monthly charts. We’re not looking at intra-day charts. We’re looking at daily charts, only for this particular strategy.

The strategy itself, over the time period that we’ve measured it, has an 84% chance of hitting our profit target #1, a 16% change of hitting our profit target #2, and a 9% chance of hitting our profit target #3. I will go through the criteria and the calculations for each one of our profit targets.

There is a high probability of profit in this trade, but there is also a risk of loss, if the trade doesn’t work as planned. The maximum risk is really greater than or equal to the range of the Inside Day. Risk is managed using stop-loss limit orders. There are additional risks, of course, to holding stock, besides stop limit orders, which you should be aware of. If you’re not an experienced trader, then you should understand what those risks are.

One of those risks, I’ll just mention briefly, is the fact that even if you do put a trade on for a stock, it could gap much higher or much lower than your entry, creating losses greater than we’ve mentioned here.

Let’s identify Inside Days, or NIBs. Basically, in any stock, you have bars. We use exclusively, in Tradingology, the Japanese candlestick charts. We think it’s easier to identify Inside Days, using Japanese candlestick charts.

The only real definition of an Inside Day, is that you have a lower high – which this does. This particular bar has a high that is at 45.74. The bar that follows it has a high of 44.57. It definitely has a lower high. In order to meet our definition, it also has to have a higher low.

The low of this particular bar is 43.54. The low of this bar is 43.71. It does have a higher low, as well.

Let’s zoom in just a little bit here, and we can get a better sense of what an Inside Day looks like. In addition to being a lower high, and a higher low, we would also like to see this Inside Day, about half the size of the bar that precedes it. In this case, you can see that it’s probably a little bit less than half of the size of the previous bar. That provides us with a lower-risk opportunity to enter a position, in which this trade hopes to capitalize on.

If the Inside Day is even a little bit larger than this, if it’s even 50% or 60%, maybe even 70% – sometimes, that has the potential to work. We would like to see this particular Inside Day as small as possible. It does not necessarily have to have a small real body like this particular candlestick has, or what is called a spinning top. If you’re not familiar with candlestick terminology, it’s not required to utilize this strategy.

What I want to take a look at is the particular Inside Day, in relation to the bar prior to it. You want it to have a relatively small body, a relatively small and narrow range, compared to the day before it.

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