Amazing Results with
Technical Analysis and
Option Trading
The understanding of how
to trade options
effectively does not
typically include the
subject of technical
analysis. Information
like this could be an
important addition for
the options trader since
different market
conditions warrant
different spreads. In
this essay, I will wade
through the reasons why
a trader would prefer to
incorporate this genre
of support into their
option trading.
More advanced options
traders can use the
options pricing model to
focus on certain
elements of risk. But,
the market's direction
sometimes plays a role
in the risk associated
to trading certain
option spreads. If the
trader employs and
options spread that uses
call options, a bullish
move would cause a delta
of the call to increase.
So, if a trader
understands technical
analysis he can select
the spreads of a perform
best under certain
market conditions.
There are some
advantages that are
usually derived by
looking for chart
patterns when doing the
type of technical
analysis that the trader
needs to perform when
trading options. The
head and shoulders,
wedge and flag patterns
typically fall under
this heading. Patterns
like the Gartley 222 and
Elliott Wave can also
fall under this heading.
This can surely offer an
advantage to those
involved in option
trading. These patterns
are helpful because they
assist the trader in
determining the current
mode of the market.
Once a trader
understands the current
mode or direction of a
market they can choose
the strategy that will
perform best under those
conditions. So, a chart
that is showing a
bullish bias would be
better suited for a bull
call or bear put spread.
However, directionally
based debit spreads can
lose money if the market
does not move much due
to the time decay of the
options used.
Looking at a price chart
in this way can prove
very helpful to traders
because it helps them to
see the area of support
and resistance. From
among the many option
spread candidates that a
trader may consider, he
can include in his
analysis to break even
this of the spreads and
how they correspond to
the areas of support and
resistance on the
securities price chart.
When learning how to
trade options
effectively, traders may
wish to also understand
how they can effectively
combine their new
knowledge with technical
analysis. While this may
add a level of
complexity to the many
topics that traders
already consider for
their trading, they may
find that it helps them
in understanding why
some trades are more
successful than others.
Once the trader has
acquired this
understanding about his
results, he can better
position himself to
trade with more
consistency. Finally,
the trader has an
additional holistic
appraisal which enables
him to associate option
methods with technical
aid for his option
trading.
Sam Perdue has been
actively trading the
markets for over 13
years. He has written a
computer program that
helps traders analyze
the stock, Forex,
commodities and options
markets using Fibonacci
ratios, Elliott Wave,
option pricing and
nonlinear programming
algorithms. For more
information, please see
our option trading
software.
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