Technical Analysis Indicators Were the Key to My Option Trading Success
By Travis W
When I first learned about technical analysis indicators I couldn't wrap my head around all the terms such as; overbought, oversold, leading, lagging, etc., etc. But the more I studied them the more I began to see how effective they were.
Technical analysis indicators allow me to predict a stock's price movement with a fair amount of accuracy. As an options trader I also use them to produce buy and sell signals.
Nothing is guaranteed though. As I stated above, the indicators allow me to predict a stock's price movement with a "fair amount of accuracy." It's like predicting the weather. The indicators don't guarantee what is "going" to happen; they merely guide me in preparing for what is "likely" to happen.
Pretend that the stock's price movement is the weather and the technical indicator is a weather satellite. A weather satellite (technical indicator) can warn you that a storm is coming (prices are going to fall) so that you can prepare for it accordingly (protect profits or enter a new trade).
So What are Technical Analysis Indicators?
Technical analysis indicators are mathematical representations of market patterns and behavior. They are formed by plugging information, such as price and volume, into a mathematical formula that produces a data point. Several data points are collected over a period of time and are usually connected by a thin line. These are generally the squiggly lines you see on a stock chart.
Two types of technical analysis indicators I use are leading and lagging indicators.
- A leading indicator "generally" precedes price movement and I use it to generate buy and sell signals.
- The lagging indicator is my confirmation tool. After prices have been trending for some time, the lagging indicator will produce a signal that the trend is changing. The signal happens "after the fact." It essentially solidifies any signal that the leading indicator gives me.
There are also two conditions to become familiar with: overbought and oversold.
- Overbought is a condition that occurs when there has been a lot of buying and the price of the stock is considered too high and susceptible to a decline.
- Oversold is a condition that occurs when there has been a lot of selling and the price of the stock is considered too low and a rally in price is anticipated.
Now that we got the technical details out of the way, let's get into the specifics.
As I studied technical analysis indicators, I started noticing a few correlations. I noticed that I produced better trade results when my leading and lagging indicator both gave me the same buy or sell signal.
After realizing this I started using the leading indicator to produce my buy and sell signals, but would wait for confirmation from the lagging indicator. If the lagging indicator produces the same overbought or oversold signal then I'll usually enter the trade.
For example, I often use Williams %R to generate buy signals, and MACD to confirm the buy signal.
The combination of a leading and lagging indicator together has been extremely powerful for me. It's a very straight forward and simple way to trade, but most of all it works. For some reason, new traders often struggle with simplicity.
Here is the pattern I've noticed. They search the internet, read every blog, and buy products from all the gurus in an attempt to find the "best" technical analysis indicators to use. If the system is too easy, like mine, they move on because simple is "boring."
They'd rather have 12 indicators on a chart only to find out that not only do the indicators produce conflicting signals, but now they are more confused than they were before.
Please don't be misguided. More is not better. You don't want two or more indicators on a chart that are essentially the same. For example, don't have two indicators that both measure volume.
Just remember that technical analysis indicators are nothing more than tools used in technical analysis. They've been a great tool for me, and I would not have been able to produce my 100%+ trades without them.
If you're looking for an easy way to learn stock options trading, and/or want to learn more about using technical indicators then visit my site.
I created Learn-Stock-Options-Trading.com to be a web-based home study course for investors who want to learn the basics of stock options trading. I "share" my option trading tips, techniques, and strategies with you instead of "selling" them to you.
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