The red line indicates the bearish trend of Citigroup. We have four tops on the trend. However, the fourth one indicates the break through the trend, so we disregard it as a potential trade opportunity.

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In an ideal world we will know where the market is going at any time. In this manner, all three swing highs could be traded with a put option as shown in the image above. As I said, we need to identify three tops lying on the same line in order to confirm a bearish trend. Therefore, we rule out the first two bearish moves, because these lack confirmations.

Then the price creates the third top on the line, which is our requirement for a bearish trend line. After the stock begins to rollover, this would have been a great opportunity to purchase a put option. The problem is that options have a wide spread at times between the bid and the ask. Therefore, while you may have a winning trade in the stock, a.

Look again at the bearish trend on the image above. Notice the green and the black arrows. The green arrows indicate the trend moves — the impulses. The black arrows indicate corrective moves against the trend, which lead the price to new interactions with that trend. The thing is that volume will often times have a direct correlation to volatility, which is the cornerstone of options.

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When volumes are high, volatility is also high and the stock is trending. When volumes are low, volatility is low and the stock is in a trading range. Have a look at the image below, so you will see what I am referring to:. This is the 1-minute chart of Yum Brands from Mar 23, At the bottom of the graph we see the volumes indicator. At the beginning of the chart you see that YUM stock option is ranging on very low trading volumes. Then at the YUM trading volumes increase dramatically for 15 minutes.

This is when the stock option has a 0.

Understanding Options with Technical Analysis

Chart patterns are crucial for the technical analysis of stock options. Chart patterns are technical figures created by the price action on the graph. These figures illustrate potential price moves that can be traded.

Above you see six of the most traded continuation chart patterns for stock options. The upper three patterns respond to bullish trend continuation. They are mirror image of the lower three patterns, which refer to bearish trend continuation. We have a trigger line of each pattern. This is the line which gets broken by the price when the pattern is confirmed. In this manner, when the price breaks the trigger, this is a signal to enter the market.

So, the upper three patterns should be traded with a call option. Opposite of that, the lower three patterns should be traded with a put option. When each of these patterns are confirmed, we expect a price move equal to at least the size of the actual pattern. These are the six most commonly traded reversal chart patterns for stock options.

Notice that the upper group a mirror the images from the lower group. Every chart pattern has a trigger line.

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After all, it is below the head and shoulders, right? When the price breaks the trigger line of each pattern, we expect a price move in the direction of the pattern. Also, the expected move size is likely to be at least as big as the pattern itself. Notice that the rising and the falling wedge play the role of a trend continuation and trend reversal pattern. I will tell you a simple rule to remember: The rising wedge always has bearish potential and the falling wedge always has bullish potential.

In the first case the falling wedge comes after a bullish trend. Trading Options: Using Technical Analysis to Design Winning Trades takes the standard technical analysis approach and applies it to the options market. Author Greg Harmon combines technical analysis with a deep understanding of the options market to explain how to design technically created trades that lead to outsized gains with low costs of entry and managed risk.

Applying Technical Analysis On Option Charts – The Mistakes & Method

The book covers trend determination, security identification and selection, tools and trade design, and executing, hedging, and adjusting trades. Prior to that, he spent time trading in the Securities markets beginning in Permissions Request permission to reuse content from this site.

Undetected location. In fact, it is one of the best way to enter market and make money. You know in advance, what you stand to lose and what you stand to gain. To me, options is one of the best financial instrument to make consistent money. The possibilities are many. One of the great options trader - Dan from traderji forum put across beautiful article on options trading.