Mathematicians need their calculators. Lifeguards need slow-panning cameras. Professor Plum needed the candlestick in the conservatory (spoilers).
Every practice needs its tools, and options trading is no different. To make the most out of your portfolio, you need the right data and market analysis. Sure that’s technically possible to get by hand, but why not make life easier (not to mention potentially more profitable)?
Give a few of these tools a try the next time you open up the portfolio:
The Internet is rife with opportunities to watch traders do their thing, and when you can find traders who know what they’re doing, the value is immediate; it’s a chance to get an actual demonstration.
See, while a lot of effort is put into unpacking a pretty technical field on this site, options trading still has a lot of twists and turns. Getting something right, whether it’s structuring your execution dates or pulling off spreads like the iron condor, can take finesse.
So do yourself a favor and approach your money the same way you would laying down new tiles in the bathroom. Pull up a trading room series and watch professionals a couple of times before you start sinking the college fund into this form of investment.
No one prefers watching to doing, but your money is worth a little bit of patience.
Technical indicators are a tool that traders use to track the market. They are data sets built by applying mathematical formula to stock prices and associated data. Essentially, they help traders figure out where the market will go based on where it is today.
There are a wide variety of technical indicators, all of which pull different conclusions using different calculations, such as averages over time, magnitudes of change, rates of change, and more.
You want momentum indicators.
The thing about options trading is that so much of it depends on two things: first, the volume of change in stock price and, second, how that change will trend within the relatively short term. So while it’s useful to know about long term trends, the really valuable information will tell you where the stock is headed soon.
In other words, the data that you’ll find most useful are technical indicators on issues like momentum and rate of change. You want to know where the stock is going and how long it’s been heading there.
This one is the most complex of the three.
The Relative Strength Index (sometimes known as Relative Strength Indicator) is a form of momentum indicator. On a rating from zero to 100, the RSI evaluates whether a stock is considered “overbought” or “oversold.”
It does so by measuring how much a stock price has moved and how quickly it did so (magnitude and velocity) and producing a chart that shows the average strength of those gains and losses over time.
The higher an RSI rating, the more a stock is considered “overbought.” Essentially the formula says that the asset is overheating and, by around an RSI of 70, due for a correction. The lower the RSI, the more a stock is considered “oversold,” and similarly due for an adjustment upward by around a rating of 30.
Learning to read an RSI chart will put you a few steps ahead on your options game. Backing that up with analytics, and learning how to use them, will put you up by a whole bunch.
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