You don’t need a degree in finance to trade options. Anyone can do this.
All that you really need to know is when to jump in and when to get out.
And it’s shockingly easy to do.
The key to making money trading options is timing. Otherwise, you might as well be gambling with your money.
Last week, I showed you how to identify the direction a stock is turning and when it will turn.
Today, I’m going to show you when to enter and exit your options trades.
As you’ll see, there are just six signals you’ll need.
Note that the most aggressive of the signals is trading the %K line crossing above or below the %D line. This will happen prior to the %K or %D crossing above or below the 20 or 80 line
Don’t Make the Same Mistake as Other Traders: Avoid a Double Loss
As I mentioned above and in last week’s lesson, stocks can stay overbought, or in this case, oversold for longer than you’d expect.
It is also possible for this to happen more than once if you are trading this signal crossover. Fluctuating in an oversold zone can cause you to get, what I like to call, whipsawed in and out of trades.
This just means that it’s possible for you to be subjected to a double loss if trying to prematurely recoup a loss through a subsequent short sale of the same security.
So be mindful of this if you would like to use this signal as your trigger for initiating and closing trades.
The %K line crossing above or below the %D line can happen anywhere in the 0 to 100 range. To me, this signal is best used when it happens in an oversold or overbought zone.
This is because a stock has a better chance of moving out of either of these than when the signal occurs in middle of the trading range (where there may be more of an equal balance of bullish and bearish price movements).
Now there may or may not be software programs or other tools are out there that let you scan for these signals. But, as you can see below in the blue square, I have my own proprietary tools that give me the ability to scan for these signals.
Let’s take a look at stochastics and the chart below for Teva Pharmaceutical Industries Ltd (NASDAQ:TEVA). These images show the top range in stochastics getting lower while the stock price holds steady at about the same price.
This may be a warning that there the stock price is declining.
One last thing before I go…
Stochastics will signal when a stock is considered oversold and overbought.
Just remember that stocks can stay oversold and overbought.
So to counter this, I advise using stochastics in addition to other strategies.
But get familiar with stochastics by choosing the signal you want to use and look at stock charts over a historical period of time.
See how well the signals worked for a group of stocks.
Here’s Your Trading Lesson Summary:
|Last week, I showed you how to use stochastics and pivot points to tell you which direction a stock will turn and when. Now, I’m going to tell you how to use this information to identify the six signals you need to enter and exit your trades perfectly:
- %K crossing above the 20 line
- %K crossing below the 80 line
- %D crossing above the 20 line
And don’t forget to post any questions you may have to the comment board. Later this week, I’ll share these with you.