Option Investor
Trader's Corner

Having a Backup Plan

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One day not so long ago, contractors arrived in the alley behind a neighbor's house, their truck loaded with fencing supplies. Within a couple of hours, one of their new post holes had severed the neighborhood's cable line. Out went my broadband connection. I had no charts and no connection to my online broker or to OptionInvestor's Market Monitor. A trek down the alley to talk to the said contractors turned up the information that the severed cable would not be replaced until the next morning.

Not so long before that, a spring thunderstorm rolled through the area, knocking out power. Although my laptop had plenty of battery power, out went my desktop computer, my cable modem and my wireless router.

Shortly after these occurrences, my charting service went on the blink. Blank charts greeted me, even after multiple attempts to change servers. Subscribers writing on the charting service's message board complained of similar difficulties, so I knew the problem rested with the charting service and not with my equipment. Still, I had no charts.

Am I particularly unlucky? Not particularly. I was unlucky only in the sense that these three occurrences happened in rather short succession. Each of them or some version of them is likely to occur to you at some point in your trading careers. Each required a backup plan for monitoring open trades, a topic I've skirted in other Trader's Corner articles. It deserves attention again.

Your backup plan requires three steps. The first and most important backup plan concerns setting stops on any open play. These days, I mostly trade credit spreads, and my brokerage allows me to set stops contingent on the price of the underlying. If I have an SPX bull put credit spread, for example, I can set a stop that would be triggered if the SPX's last price dropped below a level I had pre-determined to be my "get out" level.

If you're trading stocks or single options positions, you may have even more choices when setting a stop, including a "one cancels other" order that allows you to set the protective stop you want if the play goes bad and the order that will take you out with your desired profit if the play goes right. If one is triggered, the other is cancelled. Especially in today's more volatile market climate, it's important to take profits on pure directional plays when offered, because the once-profitable play can reverse, resulting in a loss on the position instead. You might choose a trailing order if your broker allows such orders.

It's important, of course, to educate yourself about the types of orders available on your broker's site and the way those orders are handled. It's particularly important to understand the risks of setting a regular stop or a stop limit order. If you set a stop order, that order becomes a market order once your stop is hit and triggered. If markets are moving fast or bid/ask spreads are widening, that may mean that you get a worse fill than you anticipated.

However, if you set a stop limit order for the purposes of loss control, a limit order rather than a market order is triggered when the stop price is hit, with you presetting that limit. If the market moves so quickly through your stop level that it skips your limit price or trades there only once, your order won't be filled. If you're trading options and you've guessed wrong what the option's price or bid/ask spread will be when the stop is hit, your order won't be filled. You won't be protected from further losses.

Your broker's site should be your first resource for information on setting stops. If you broker's site doesn't offer information, a good resource book such as Lawrence G. McMillan's OPTIONS AS A STRATEGIC INVESTMENT offers explanations and examples.

You may plan to watch the market each day, and may know yourself well enough to be certain you'll be disciplined enough to exit a position when a mental stop is hit. However, when a contractor pulls up in the alleyway behind your neighbor's fence and subsequently severs the cable line, all the discipline in the world isn't going to help you if markets make a big move while you're sorting out what happened with your charts. Those stops will protect you and give you peace of mind while you pull together the other parts of your backup plan.

The second step involves setting up an alternative Internet link to your brokerage. That can come in the form of a handheld, a telephone connection or a dial-up connection. If you're not a chart technician, a telephone connection to your broker might allow you to check prices on your portfolio. Keep that number posted somewhere near your computer because you're not going to be able to look it up if your connection is down.

A third backup step concerns charting services. Those charting services struggle to provide reliable and steady service, but not all succeed, particularly during heavy-volume periods. Sometimes the feed they receive is at fault, as happened for a period a year or two ago when quotes on the OEX were sometimes not available and as is currently apparently happening with the SOX. According to some charting services, the Philadelphia Board of Trade (PBOT) voted to charge a subscription fee for feeds and inaugurated that change rather suddenly, with some charting services claiming that they didn't receive adequate notice. Some quote services never blinked in their service, some scrambled to get those quotes to their subscribers as quickly as possible, and some still haven't. Mine hasn't.

If the source feed is at fault, then any charting service using that same feed source will suffer from the same problem. However, traders will benefit from having an alternative charting service from those times when the issue is with the charting service itself, and they may be surprised that even when the problem is supposedly with the feed, with some quote services having few problems providing them.

Several free charting or quote services exist, but many employ delayed quotes. The CBOE's site at www.cboe.com provides delayed quotes, for example, with the site also listing a free streamer service that requires registration. My choice and that of many others looking for a free alternative charting source is QuoteTracker (www.quotetracker.com). This service requires downloading, but includes streaming real-time quotes, 50 technical indicators and many other services, including integrated trading through many online brokers. This service will not work for all traders, because QuoteTracker doesn't actually provide the quotes. Those come from your own broker, if that broker is supported on Quote Tracker, or from a feed source for which you will be charged, if you choose that route. Interactive Brokers, OptionsXpress and BrokersXpress are all supported on QuoteTracker, with many OptionInvestor subscribers using one of those three brokers.

After downloading QuoteTracker, sign on through your broker's password. Other participating brokers or feed sources are eSignal and StockWatch. My online broker is brokersXpress, but my feed is provided through the affiliated optionsXpress. Unfortunately, my broker does not provide backfill, so my intraday charts include information garnered only from the time I'm actually signed on. It is my understanding that Interactive Brokers does provide backfill, but it will still be several days before you have the full component of 10 days worth of data.

Partial Screenshot of Streaming Quotes Page on QuoteTracker:


Sample Historical Chart with Candlesticks, SMA's, Regression Channel and Trendline:

A message board is available to peruse, with comments and new threads available only to those who register, with such registration also free. A quick search of the comments board turns up raves for QuoteTracker's service, however, and many more positives exist for this free charting service than I've noted here. For a small fee, you can subscribe to the paid version of this charting service, with that service offering a few more amenities and getting rid of the ads.

Other services such as www.bigcharts.com, often available on your broker's website, exist.

Big Charts Intraday Chart for the Dow:

Some of you may know of other services. While it's always a clunky practice to switch suddenly to an alternative chart service, it certainly beats guessing whether that trendline or Bollinger band has been touched when your primary charting service won't tell you. Slow market days would be good times to try out some of these services, running them and getting acquainted with their peculiarities.

The day the neighbor's contractor severed my cable modem, I might have muttered under my breath, but I was able to use my alternative dial-up connection to pull up my broker's page and my charting service, although it ran slow. The day a storm knocked out the electricity, the same dial-up connection kept me connected on my laptop long enough to make sure that all "t's" were cross and "i's" dotted on my open plays, the stops just where I wanted them. When my charting service is not available, I might chafe at the unfamiliarity of the alternative charting service's setup, but I'm glad it's available. While I won't say that employing these backup measures was always easy, they certainly served to keep me calmer and help me protect my trading account. Employing them will do the same for you.

I will not be posting Trader's Corner articles for the next two weeks, but will return after that. Look for Leigh's articles on Wednesday for tips on technical analysis.
 

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