Option trading using technical analysis

Stocks, currencies, cryptocurrencies, commodities, indices and ETFs can all be subject to technical analysis. More than that, all assets can be analyzed using the same tools indicators. Moreover, there are several assumptions that have to be fulfilled in order for technical analysis instruments to work properly. High liquidity. The underlying asset has to be traded in sufficient volumes.

Low-liquidity assets are easier to manipulate and harder to trade in general.

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Factors associated with low-liquidity trading make it unsuitable for technical analysis. No artificial price changes.

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A stock split, being an artificial price change, does not affect the intrinsic value of the company at hand, yet it dramatically changes the stock price. Suchlike events cannot be addressed by technical analysis. No extreme news. Price discount everything. Technical analysts believe that the price action fully reflects all publicly available information.

In other words, all past events and announcements about the future ones have already been reflected by the asset price.

Using Technical Indicators...

The price, therefore, reflects the fair value of the underlying asset. This information is then used to predict the future. Price movements are not totally random. There are periods when prices trend and periods of non-trending prices. Technical analysts believe that it is possible to identify both short and long-term trends with the help of indicators.

While fundamental analysis is concerned with the reason behind price fluctuations, technicians are not. A lot of technical analysis specialists apply top-down approach, first evaluating broad indices, then separate industries, and only then moving to individual stocks. No matter what asset and on what timeframe you analyze, the steps you take will be approximately the same.

First, you might want to identify the trend e. Moving Average or Alligator. Then you might want to identify support and resistance levels , upper and lower boundaries than the price action cannot leave on a certain time frame here a horizontal line can be of great help.

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Next you might want to identify the momentum e. As a final step, you might want to compile all of the above-mentioned data and use it to make a prediction. NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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Then at the YUM trading volumes increase dramatically for 15 minutes. This is when the stock option has a 0. Chart patterns are crucial for the technical analysis of stock options. Chart patterns are technical figures created by the price action on the graph. These figures illustrate potential price moves that can be traded. Above you see six of the most traded continuation chart patterns for stock options. The upper three patterns respond to bullish trend continuation. They are mirror image of the lower three patterns, which refer to bearish trend continuation.

We have a trigger line of each pattern. This is the line which gets broken by the price when the pattern is confirmed. In this manner, when the price breaks the trigger, this is a signal to enter the market. So, the upper three patterns should be traded with a call option. Opposite of that, the lower three patterns should be traded with a put option. When each of these patterns are confirmed, we expect a price move equal to at least the size of the actual pattern.

Applying Technical Analysis On Option Charts – The Mistakes & Method

These are the six most commonly traded reversal chart patterns for stock options. Notice that the upper group a mirror the images from the lower group. Every chart pattern has a trigger line. After all, it is below the head and shoulders, right? When the price breaks the trigger line of each pattern, we expect a price move in the direction of the pattern.

Also, the expected move size is likely to be at least as big as the pattern itself. Notice that the rising and the falling wedge play the role of a trend continuation and trend reversal pattern. I will tell you a simple rule to remember: The rising wedge always has bearish potential and the falling wedge always has bullish potential.

In the first case the falling wedge comes after a bullish trend. Since the falling wedge has bullish potential, it plays a continuation role in this case. Want to practice the information from this article? Your email address will not be published. This site uses Akismet to reduce spam.

Trading Options: Using Technical Analysis to Design Winning Trades, + Website

Learn how your comment data is processed. Best Moving Average for Day Trading. Start Trial Log In. Interested in Trading Risk-Free? Explore TradingSim For Free ». Develop Your Trading 6th Sense. Learn About TradingSim. Trend Lines — Options. Stop Looking for a Quick Fix. Learn to Trade the Right Way. Volume and Options. Continuation Chart Patterns. Triggers on Chart Patterns. Visit TradingSim.

Author Details. Al Hill Administrator. Co-Founder Tradingsim. Al Hill is one of the co-founders of Tradingsim. By using technical indicators. Charting data is relatively easy to read as long as you have some experience and knowledge of how these charts work. By reading the data provided by candlesticks, you can easily predict the future price movement of a specific asset.

Candlesticks are the number one helper of every trader, because they can form patters and give you valuable information about past, present and future trends. There are also some less reliable candlesticks which are usually used in combination with technical indicators in order to provide a more accurate prediction. This will help you get a better understanding of the way these patterns work, and help you become a more successful trader. The accuracy of technical analysis can be improved by taking advantage of price action analysis. By using price action, you can see the trading volume which a specific asset generates.

For example, if many people sell the same asset at the same time, then its price will most probably start going down.