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Options Trading With Candlestick Signals

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Options, the ultimate high risk investment vehicle. So it is thought by the vast majority. Why are options considered high risk? Simple. Most investors lose money in options. Statistics show that over 80% of all option trades lose money.

Why is this so? Because the odds are stacked against winning from the very start. First, as with all investments, but especially with options, the direction of price movement has to be correctly analyzed. This procedure alone is a major hurdle for the vast majority of investors. Next, the magnitude of the price move has to be correctly calculated; another procedure that has not been perfected by the average investor. On top of all that, add being correct as to the time element, the unaccounted aspect of most option analysis.

The combination of these three essential factors makes it extremely difficult to access an option trade correctly. And to add insult to injury, a premium is built into the option price. This premium reflects the speculative fervor of the market participants who think prices will move in their direction. The highly leveraged method of participating in the move creates a parasitic premium that is added to the true value of the option.

How do candlesticks turn un-advantageous probabilities into advantageous option trading profits? The essential factors of the signals can be applied to align the elements of successful option trades; signals, stochastics, market direction, etc. A few simple processes can be employed that will exploit the same factors that make other option investors lose money to put money into your pocket.

Direction - As you study candlestick signals, you will discover the improvement in accuracy will be quite noticeable. Under certain circumstances, the "accuracy" probability becomes extremely high. When all the essential indicators line up for a successful option trade, the signal showing strong buying in a stock, the stochastics below the 20 line, further confirmed by a bounce off a trend-line, and overall market direction, etc., an option trade can be executed. As in all the equations for producing a profit in an option trade, direction is the first consideration. Obviously, a clear and decisive signal is the reason for considering the trade in the first place. Knowledge of the reversal signals creates a huge advantage for exploiting short-term market moves. Especially profitable is the ability to pinpoint absolute bottom signals. Not only is there the benefit of purchasing an option at the ultimate lowest price, the premium or speculative fervor is also at its lowest point. This creates a double upside reward. As the price of the stock goes up, the option price goes up and the speculative enthusiasm expands the premium. Along with direction, the potential magnitude of the move has to be determined.

Magnitude - Analysis of a stock trade incorporates the potential magnitude of the price move. This involves analyzing where the next resistance/support might occur. Speed and magnitude of the previous move that is reversing is one factor. Congestion levels above the reversal area is another. Trend lines and Fibonnacci retracement levels are more considerations. But most importantly, the signal itself will dictate how strong the move could be. A major reversal signal, compounded with a gap up, will substantiate a much stronger advance than a secondary signal. The status of the stochastics should indicate how long the upside move can potentially be maintained. The analysis of the upside is going to dictate the ultimate trade strategy. And this has to incorporate the final element: Time.

Time - The weakest area of analysis for most option traders is the evaluation of time constraints. This is the area that human weakness is most likely to be involved. The direction and the magnitude not only have to be correct, they have to be correct in the proper time frame. For every day the option trade is in existence, time is working against the profits. This is experienced in two ways. First, the potential of the opportunity of a big up move lessens as the time for it to occur lessens. Secondly, as time diminishes, so does the investment fervor. Premiums also diminish as time passes away.

Time also becomes a major determinant in the type of option trade that should be established. Three weeks remaining before expiration will have a different trade strategy than one week remaining. A two-month option will have different strategies than a two-week option. The length of time to expiration dictates how to position the option trade.

Emotion is the major culprit causing option investors to lose money in 80% of option trades. Most "call" option buyers purchase the call due to some reason they think that will make the stock go up big. For example, letís say the time frame is two weeks before expiration date. After the commitment of funds to the trade, the price does move up. Unfortunately, it does not move in the magnitude or speed to offset the diminishing premium built into the option price. Being correct in the direction of the move feeds the ego. The trade was correct. But if the magnitude of the price move was not great enough to offset the cost of the option premium, an emotional dilemma is created. Should the trade be liquidated or will the price move further, significantly more than its norm, between now and the remaining time to expiration? Gone is the original trade expectation and in comes "hope" for a positive resolution to the option trade.

Utilizing candlestick analysis emphasizes the discipline of placing as many controllable probabilities in your favor before a trade is established. Utilizing the steps for putting on a successful stock trade becomes all that much more critical when putting on an option trade. Each step needs to be scrutinized. Especially the final step, watching how a stock price will open. If the other steps have been followed, analyzing market direction, evaluating the sector chart, identifying a strong candlestick reversal signal, and seeing the stochastics in the proper area, then the final evaluation becomes an important element of the whole process - how is the stock price opening? The reason this step is vitally important is due to the time constraint on the option trade.

Implementing candlestick analysis into option trading greatly enhances the ability to make huge profits. Having the advantage of projecting direction makes option strategies simple. Identifying a candlestick "buy" or "sell" signal at the end of a trend allows the option trader to exploit option strategies that best extract consistent profits from the market, profits that take advantage of the 80% loss statistic. When other option traders are trading on less precise technical analysis, candlestick option traders can be executing trades precisely when the signals reveal the change in sentiment. Having the knowledge of spreads, straddles, and premium diminishing, expands the probabilities of creating the right option strategy for the right time and magnitude potential. The candlestick signals act as a guide for the active option trader. Learn the candlestick signals and the ability to extract huge option trade profits becomes a common practice.

Candlestick option trading programs have been developed to make "high" risk trading into a very low risk procedure. You can learn how to maximize the potential of an option move using different trading strategies. Having the foresight of direction the candlestick signals provide, the analysis of time and magnitude becomes simplified. The leverage of options produce inordinate profit potential.


 


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