Hello again and welcome back to part four in my ten part
series on how to trade stock options. This week we will
discuss one of the most important parts of trading not only
options but any financial instrument, and that is getting
into the trade at the right time.
Unfortunately that is easier said than done! If you get in
too early you risk losing some of your option value to time
decay, get in too late and you may miss an important move
in the underlying stock. The best way to time your entry
point is to use good technical analysis. Technical analysis
refers to reading and interpreting stock charts. As I
mentioned in part two of this series, institutional
investors are trading millions, if not billions, of dollars
in the market every day. However they are still human and
because it takes a long time for them move that much money
predictable patterns emerge in the stock charts. From those
patterns future price moves in the stock can be predicted.
Technical analysis is a mix between an art and a science
and can be quite complicated. Although the patterns are
predictable, of course the stock does not always follow the
pattern it should so it is important to use other
indicators in conjunction with technical analysis, such as
fundamental analysis (discussed in the last article),
company news and political and economic events. Because of
the complexity of technical analysis I will not go into the
how it is performed, there are several good books that I
would recommend you read that do that:
"Technical Analysis and the Financial Markets" by John
Murphy.
"Getting Started in Technical analysis" by Jack Schwager.
"Technical Analysis: The Complete Resource for Financial
Market Technicians" by Charles Kirkpatrick II.
Some of the main technical indicators in charts to watch
for are the support and resistance levels, breakouts on
volume, moving average crossovers and oversold/overbought
conditions. Sound technical analysis is a key component to
entering a trade. Next week I will discuss the next step
which is, quite aptly, how to decide when to exit the trade.
US Government required disclaimer: Options involve risk and
are not suitable for all investors. Prior to buying or
selling an option, a person must receive a copy of the
Characteristics and Risks of Standardized Options. Copies
of this document may be obtained from your broker, from any
exchange on which options are traded or by contacting The
Options Clearing Corporation, One North Wacker Dr., Suite
500 Chicago, IL 60606 (1-800-678-4667).
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Roger Cox was born in New Zealand and has lived in Los
Angeles for seven years. He was President of a freight
company at LAX before setting up his own consulting firm.
Roger has successfully traded stock options for over 4
years and teaches other people how to successfully trade at
http://www.prosperitywithoptions.com
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