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I have studied the markets and participated as a stock and option trader for more than 17 years now and, recently, have begun to think hard on what really consitutes for successful trading. Each year, I see thousands upon thousands of would be millionaire traders come into the stock market aspiring to make there fortune trading options yet often end up broke and bitter a short time afterward. Success in stock and option markets doesn't come in a seminar or latest trading system but instead by the disciplined use of effective trading techniques that have proved there worth over the test of time while using effective risk control at all times. For example, for spotting trend reversals, I'll look at a stock that has been moving in a given direction, let's say upwards, and graph that stock's price action with a 2 period Relative Strength Index Indicator also called an RSI. I'll draw an upward trendline on the stock and watch for distribution on higher volume in the general market. If distribution days begin to add up to more than 4 or 5 then I'll watch the RSI on this stock for divergence and once spotted will watch for a break of that upward trendline. As soon as I have my trigger I use my method of entering the position for a short. Downward moves are twice as fast to the downside as they are to the upside so when the market sells off I am in a position to catch a rapid decline in price with a put position while limiting my risk. I also look for pullbacks in stocks that have strong fundamental and technical factors that suggest they are going to have a rapid move to the upside or downside. For upward moves, I'll watch for stocks that are above their 200 day simple moving average that have a Relative Strength rating of 90 or higher. I also watch to see if they have been in a flat based trading range for two months or so. If they make a move to an all time high out of a two month price base I'll watch the stock's price action compared to its 10 day and 20 day simple moving average and wait for a pullback. If the stock's price begins to pull back evenly to its 10 day simple moving average without violating its 20 day simple moving average(which acts as a stop for a position once entered) I wait for price to trade over the high of the previous day's price high to enter. This allows me to play momentum stocks at the beginning of a possible big run with options while always controlling my risk with a dynamic stop in place (the 20 day simple moving average). Using seasonal trends in the general market helps me to determine my trading strategy at various times of the year. During the summer many traders at the exchanges go on vacation so trading is flat and volume is thin so I use credit option spreads for income. When they return from vacation trading begins to pick up going into the end of the year and I keep a close eye on the strongest stocks to ride them up on rallies with stock option trading or investing in the stock itself. I have caught incredible runs in stocks like HANS and others by taking advantage of this seasonal tendency. If you use stock option trading in taking advantage a stocks like this you could very easily capture 500% or higher returns using stock option strategies. Gap explosions in either direction are also very powerful moves to take advantage of with a combination of call or put option strategies. A gap explosion is where a given stock is trending in a given direction or is range bound but then suddenly the stock gaps significantly higher than the previous day's closing price in the opposite direction. You can measure the reaction by using a variety of indicators like moving averages, price channels, or my preferred method which is to use Bollinger Bands. When using this method you can catch incredible moves as you are getting in on the beginning of a new trend. I have made incredible gains on Goldman Sachs, Apple Computer, Chicago Mercantile Exchange, and others using a combination of stock investing and option trading with this trading technique. I have been in this game a long time and as I take my steps into the new century of trading observing all of the tremendous advances presented to aspiring traders I wonder if this does more harm than good. Fancy indicators, trading systems, complicated economic theories, ad nausea do not make for successful trading. Instead, real trading is finding a few trading techniques that stand the test of time and when combined with good trading sense as well as discipline you discover success in the markets as well as consistent results in stock and option trading.
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