Thursday, January 10, 2008

The Vat Setup For Stock And Option Trading

By Billy Williams

The VAT setup was designed to take advantage of explosive moves that change and/or accelerate the trend in a stock's price action that can be exploited with online stock trading and stock option trading. This technique was inspired by a similar method detailed in Victor Sperandeo's work as written in his book, "Trader Vic II: Principles of Professional Speculation". The VAT setup can be implemented with either the stock itself or stock options depending on your preference. To use the setup for stock trading or stock option trading you will need to be able to determine whether the market is in a confirmed rally, to select the stocks with strong fundamentals and price action, have access to stock charts, know how to draw a trendline, utilize Bollinger Bands, spot gaps or laps in a stock's price action, and have a trading plan once a trade is entered.

To confirm a rally in the general market I use a method developed by William O'Neil, author of the book "How to Make Money in Stocks". When the market shows a rally equal or greater than one percent of that particular index with greater volume than the previous trading day then that marks Point 1 or Ground Zero as I call it. Once that occurs then ideally you want to see the same type of rally again at one percent or greater on higher volume than the previous day within 4 trading days. This day is the Follow Thru Day or FTD, and confirms the market is set to rally.

You must then have a list of stocks that are high in price volatility as well as possess strong earnings along with low debt. For online stock and option trading, you will watch these stocks daily on your stock charts to review their performance while watching for certain types of price patterns which I will detail later. On your charts, you must have a technical indicator called Bollinger Bands on the screen. These bands measure the fluctuation of volatility in a stock's price action. If the bands are expanding then that shows that price is accelerating in a particular direction. If the bands are constricting or the ends of the bands are turning outward then it indicates low volatility as price action becomes constricted.

Once you have a strong list of potential momentum stocks you can watch for a gap in price or a lap in price. A gap results when a stock opens higher than the previous day's high but still within the previous day's high of that day while a lap results in a opening above the previous day's high of the day and never comes down within that previous day's price action. A gap or a lap is a signal that a trade may be triggered. To confirm a trade, it must break an established downward or flat trendline on the stock as well as reach the upper Bollinger Band. This tells us that price has had an explosive reversal in the trend and is gaining momentum.

The VAT setup presents the opportunity for stock and option traders to make explosive gains several times a year. I recently made portfolio adjusted gain of 75% off of Apple Computer and a 100% plus gain on Blue Nile in 2007 using this trade setup. In past years, Google, Goldman Sachs, Chicago Mercantile Exchange, and many others have resulted in huge gains for myself and other online stock and option traders. Spend some time mastering the fundamentals in this article and you can reap huge rewards with trading with this powerful method.

This is a powerful trading method of getting in early on stocks that are fixing to make huge gains in price which can be exploited with either the stock or, for greater leverage, with stock option trading. These stock moves are explosive and make accelerated gains very quickly. Take the time to build a "hit list" of high performing stocks and watch for these types of trades and you will be rewarded handsomely.

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