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4 EASY STOCK OPTION TRADING METHODS FOR TRADING TODAY'S MARKET

By: Billy Williams

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).

I use seasonal factors to watch for potential big runs in stocks, breakdowns in the stock markets, and trading ranges forming in the general market indexes. Near the end of every year, usually starting in September, the big fund managers will begin dumping excess cash in their fund's coffers to improve their annual returns in order to get there bonuses. Once this begins, they begin to gun the market higher which causes 80% or more of stocks to get a lift in price and begin rallying. The strongest stocks in the market will begin to lead the market and rally higher 50% or higher into December and the end of the year. 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.

Explosions in price that cause huge gaps between trading days can also present incredibly profitable trading opportunties. A price gap explosion is when a stock closes down in price one day but the following day gaps in price in the opposite direction often completely out of the price range for the previous day. This occurs because of a unexpected announcement that shifts the dynamic in the price action of the stock. This can signify the beginning of a new trend which I seek to exploit and get in early on a new price trend with stock option plays or investment positions. I have made huge gains in Goldman Sachs, Apple Computer, Chicago Mercantile Exchange, and others using a combination of stock investing and option trading with this technique.

After 17 years as a veteran stock option trader, I have come to the conclusion that while indicators, computer programs, and trading systems have there place in the marketplace I have also come to the conclusion that it does more harm than good for many traders. The reason is that many apiring traders miss the point as to what actually effects trading success in the markets. And, in my opinion, having a strong sense of the markets and stock option trading combined with the disciplined implementation of effective trading techniques will do more to produce successful trading results and consistent profits than the latest fads in the marketplace.

Article Source: http://www.articlesinsight.com

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