Trading process, risk, options and markets, explained

Trading process

• Weekly trading review: a routine for reviewing trades

  A trade review turns journal records into decisions. Learn a repeatable weekly and monthly routine: grade each trade's process apart from its result, check the statistics that matter, find patterns and choose one change.

• How to keep a trading journal: what to record and how to review it

  A trading journal records the plan, the execution and the result of every trade so that decisions can be measured. This guide gives a field-by-field template, shows how to compare plan with actual, and sets a review rhythm.

• How to write a trading plan: what each section covers

  A trading plan is the written document that governs how, when and how much to trade. This guide covers each section, from goals and schedule to risk limits and drawdown rules, with a template and a worked example.

• Trading psychology: common biases and how to build discipline

  Most trading mistakes repeat the same few biases: holding losers, cutting winners, trading bigger after a loss. Learn where they come from, how to turn discipline into rules and limits rather than willpower, and how to measure it in a journal.

• How to build a trading system: its parts and how to test them

  A trading system is a complete set of written rules for one way of trading. Learn the six parts every system needs, how to backtest and forward-test it, how many trades a test needs, and how to measure the result in R.

Risk management

• ATR stop: setting stop-losses by volatility

  An ATR stop adapts the stop distance to how much a stock normally moves. Learn how true range and ATR are calculated, how to choose a multiple, and how ATR stops feed position sizing.

• Max drawdown: what it means, how to calculate it and how recovery works

  Maximum drawdown measures the deepest fall an account has suffered from a peak. Learn to calculate it from an equity curve, why losses need larger gains to recover, how risk per trade drives drawdowns, and what risk of ruin means.

• Position sizing methods: fixed amount, fixed fractional, volatility and Kelly

  The same trade can be sized in very different ways. Compare fixed-amount, fixed-fractional, volatility-based and Kelly sizing on one account, see why full Kelly is too aggressive, and which limits keep any method in check.

• Profit factor: the formula, what a good value is, and its limits

  Profit factor compares what a set of trades won with what it lost. Learn the formula, how it follows from win rate and payoff, how to judge a value, and why sample size, outliers and costs can make it misleading.

• Risk-reward ratio: weighing the target against the stop

  The risk-reward ratio compares the distance to a trade's target with the distance to its stop. Learn how to calculate it, the win rate each ratio needs to break even, and why a high ratio alone does not make a good trade.

• Stop-loss and position sizing: risk per trade and R multiples

  A stop-loss defines where a trade is wrong; position sizing decides how much that costs. Learn the sizing formula, how R multiples and expectancy work, and the mistakes that turn small losses into large ones.

• Stop-loss placement: where to put a stop and how the methods compare

  A stop belongs where the trade idea is wrong, not where the loss feels comfortable. Compare structure, volatility, percentage and time stops, see why the size follows the stop, and how gaps and order types change the exit.

• Stop order vs stop-limit order: how each works and when each fails

  Both orders wait for a trigger price, but they behave differently once it is hit. Learn what happens in an orderly decline, an overnight gap and a brief intraday drop, and how to choose between a guaranteed exit and a guaranteed price.

• Trading expectancy: the formula, win rate vs payoff, and sample size

  Expectancy combines win rate, average win and average loss into one number: what a set of rules has made or lost per trade. Learn the formula in dollars and R, read the win rate vs payoff table, and see why small samples mislead.

• Trailing stop: how it works and how to set the distance

  A trailing stop protects part of an open gain while letting a winning trade run. See how broker trailing stop orders and chart-based trails differ, how to choose the distance and when to start trailing, and what the giveback costs.

Options

• Dealer hedging: how market makers can pin or push price

  Market makers offset their options risk by trading shares. Depending on their gamma, that hedging can hold a stock near a strike or reinforce a move already under way.

• Gamma exposure (GEX): what dealer gamma tells you

  GEX estimates whether options dealers' hedging is likely to dampen price moves or amplify them. Here is how it is calculated, which assumptions it rests on, and how to read it.

• Gamma flip: where dealer hedging changes direction

  Above the gamma flip, dealer hedging tends to calm price; below it, hedging tends to amplify moves. Learn how the level is estimated and how much weight it can bear.

• Max pain: how it is calculated and what it can and cannot tell you

  Max pain is the strike at which an expiry's open options would be worth the least in total. Learn how it is calculated, why price sometimes drifts toward it, and why it is not a forecast.

• Open interest vs volume: what each tells you about options

  Volume shows how much traded today; open interest shows how many contracts remain open. Reading the two together separates new positioning from turnover.

• Options Greeks for stock traders: Delta, Gamma, Theta and Vega

  Delta, Gamma, Theta and Vega translate an option position into terms a stock trader already uses: share equivalents, daily cost and sensitivity to volatility.

• Options wall: what call walls and put walls mean

  Call walls and put walls mark the strikes where options open interest is most concentrated. Learn why dealer hedging around them can slow price, and when the reading breaks down.

• Put/call ratio: what it measures and how to read it

  The put/call ratio compares how many puts trade, or are open, against calls. Learn the difference between the volume and open interest versions, why extremes are read as contrarian signals, and where the ratio misleads.

• Unusual options activity: reading volume against open interest

  When a contract trades several times its open interest, new positions are likely being opened. Here is how to measure it, what context to check, and why flow is easy to misread.

Volatility

• Expected move: how options price a stock's range

  Options imply a range for every stock and every expiry. Learn the two standard ways to calculate the expected move, how they relate, and why the stock often moves beyond it.

• Historical vs implied volatility: reading the volatility premium

  Historical volatility looks back at actual moves; implied volatility looks ahead through option prices. Comparing the two shows whether options are rich or cheap relative to the stock's recent behavior.

• Implied volatility (IV): what it is and how to read it

  Implied volatility is the size of future moves the options market is pricing in. Learn how it is derived, how to convert it into an expected range, and how to judge whether it is high or low.

• IV crush: why options lose value after earnings

  IV crush is the sharp fall in implied volatility once a scheduled event has passed. It explains why options bought before earnings can lose value even when the stock moves in the expected direction.

• Implied volatility term structure: contango and backwardation

  The term structure shows implied volatility across expiries for one underlying. An upward slope is normal; an inverted curve signals near-term stress, and a bump at one expiry marks an event priced in.

• VIX: what the volatility index measures and how to read it

  The VIX turns S&P 500 option prices into one number: the volatility the market expects over the next 30 days. Learn how to convert it into an expected move, why it rises in sell-offs, and why it cannot be bought directly.

• Volatility skew: why puts usually cost more than calls

  Volatility skew describes how implied volatility changes from strike to strike within one expiry. Learn why downside puts are usually priced higher, how skew is measured and what a shift in skew can signal.

Option strategies

• Backtesting: how to test a trading system and avoid common biases

  A backtest shows how a set of fixed rules would have traded in the past. Learn what goes into a fair test, how to read expectancy and drawdown, and the biases that make backtests look better than real trading.

• Cash-secured put: how it works, breakeven and risks

  A cash-secured put sells a put and holds enough cash to buy 100 shares at the strike. You are paid to wait for a lower entry price, but you carry almost the full downside of owning the stock below the strike.

• Covered call: how it works, max profit, breakeven and risks

  A covered call pairs 100 shares with a short call above the price. The premium adds income and a small cushion, but the upside is capped at the strike and the downside is still the stock's.

• Credit spreads: bull put and bear call spreads explained

  A credit spread collects premium by selling one option and buying a cheaper one further out. Bull put spreads profit if the stock holds above a level, bear call spreads if it stays below one, and both have a capped loss.

• Iron condor: how it works, max profit, max loss and breakevens

  An iron condor combines a short put spread and a short call spread on the same expiry. It collects a credit and keeps it if the stock stays between the short strikes, with the loss capped by the wings.

• Straddle and strangle: how they work, breakevens and risks

  Straddles and strangles combine a call and a put to trade the size of a move rather than its direction. Learn how long and short versions differ, how to compare their cost with the expected move, and why IV crush matters.

• The wheel strategy: from cash-secured puts to covered calls

  The wheel sells cash-secured puts on a stock you are willing to own and, if assigned, sells covered calls on the shares until they are called away. It collects premium at each step but carries the downside of owning the stock.

Market analysis

• Fear and greed index: what goes in and how to read it

  A fear and greed index condenses several measures of risk appetite into one 0–100 score. Learn what the inputs are, how they are scored, and why the extremes are context rather than signals.

• FOMC meetings and CPI: how macro events move US stocks

  Fed rate decisions and inflation reports reset expectations for interest rates, which flow into yields, the dollar and stock valuations. Learn the schedule, what markets react to, and the traps of trading the first move.

• Market breadth: how many stocks are taking part

  Breadth shows whether a market move is carried by most stocks or by a handful of large ones. Learn the main measures, how to spot divergences, and where breadth misleads.

• Moving averages: SMA, EMA and how traders read them

  A moving average turns noisy daily prices into a trend line. Learn how simple and exponential averages are calculated, what slope, stacking and crossovers say, and why every average lags.

• How to read a pre-market analysis

  A pre-market analysis turns overnight information into a plan before the opening bell. Learn what each section tells you, how to convert levels into if-then scenarios, and the traps of thin pre-market trading.

• Profit turnaround: when quarterly net income turns positive

  A first profitable quarter can mark a business reaching scale, or a one-off gain. Learn how to verify a turnaround in SEC filings, how XBRL data is structured, and which items to check before trusting the headline.

• Relative strength: how a stock performs against the market

  Relative strength shows whether a stock is outperforming its benchmark or its peers. Learn how the RS line and percentile ratings are built, why RS is not the RSI, and why relative strength is not absolute strength.

• RSI: how the Relative Strength Index works

  The Relative Strength Index compares a stock's recent gains with its recent losses. Learn Wilder's calculation, how to read 70, 30 and 50, why RSI can stay overbought in a trend, and how short RSI lengths are used.

• Sector rotation: tracking where money is moving

  Sector rotation shows which parts of the market are leading and which are lagging beneath the headline index. Learn how to measure it with relative strength and why the textbook cycle model is only a rough guide.

• Support and resistance: how key levels form and fail

  Support and resistance mark price areas where supply and demand have changed hands before. Learn where levels come from, how to judge their strength, and how breakouts succeed or fail.

• Unusual volume: what a volume spike does and doesn't mean

  Unusual volume shows that participation in a stock has changed. Learn how relative volume is measured, how to read it together with price, and why heavy volume alone is not a buy or sell signal.

Crypto

• Funding rate and open interest in perpetual futures

  Funding keeps a perpetual future close to the spot price, and open interest shows how much money is at stake. Learn how both are calculated, how to annualize funding, and how to read them together.

Free calculators

• Position size calculator

  Shares, dollar risk and position value from the account size, the risk % and the distance to the stop.

• Risk/reward and R-multiple calculator

  The R:R ratio, the break-even win rate and an exit’s R multiple, from the entry, stop and target.

• Trading expectancy calculator

  Expectancy per trade, profit factor and break-even win rate from the win rate, the average win and the average loss.

• ATR stop-loss calculator

  A volatility-based stop and its distance from the entry, from the ATR or from recent daily ranges.

• Drawdown recovery calculator

  The gain needed to recover a loss, and how many losing trades in a row produce that drawdown at a given risk per trade.

• Kelly criterion calculator

  Full and fractional Kelly risk per trade from the win rate and the payoff ratio, with the edge and the break-even win rate.

• Trading cost calculator

  The round-trip cost of commissions, spread and slippage, in dollars, in R, against the target and per year.

• Losing streak calculator

  The chance of a losing streak of a given length over a number of trades, and the longest streak to expect, at your win rate.

Browse the trading glossary

Free templates

• Trading journal template for Excel and Google Sheets

  A free .xlsx and .csv journal with formulas for risk %, R:R, R multiple and P&L, and a summary of win rate and expectancy.

• Trading plan template with risk limits and a checklist

  A free .xlsx plan: ten sections of questions, risk limits and position sizing with formulas, and a pre-trade checklist.

Trading strategies with exact rules

• Leader Trend Filter: the Minervini trend template

  Flags a stock on the day it first passes all eight trend template criteria; a trailing stop or any failed check ends the trade.

• 20-Day Breakout: Donchian channel and Turtle rules

  Buys a close above the prior 20-session high with a fixed 2-ATR stop, then holds until a close below the prior 10-session low.

• 52-Week High Breakout: buying new highs on volume

  Buys the first close above the 52-week high on at least 1.5× average volume, with a close stop and a trailing exit.

• Volume Base Breakout: the flat base buy point

  Buys a close just above a 5- to 13-week flat base on at least 1.4× average volume, with an 8% stop and a +20% target.

• Trend Pullback: buying the dip to the 21 EMA

  Waits for a dip to a rising 21-day EMA in an uptrend and buys the close above the dip day's high, with a 2R target.

Trading strategies