Indicators are key to trade options using technicalanalysis. They let you look at the activity in price more objectively. Theindicator is plotted using a mathematical formula and this lets youknow where the prices are as compared to where it was historically. If the price is cheap relative to what it was in the past then it is likely that the pricewill start to rise soon. Similarly, if the price of an asset is expensive as compared to its historicalaverage then the price is more likely to fall from here. This is what the options trader analyses to establish a callor a put position in themarket.
A number of technical indicatorsare used to determine what the price could do next. Everyindicator is read ina different way and thus to avoidconfusion it is recommendedthat you do not use more than two to threeindicators.Some common indicators that are used by the options trader are:
- Moving Average Convergence Divergence (MACD)
- Relative Strength Index (RSI)
- The Momentum Indicator
- Average True Range
A chart pattern refers to a specialformation in price that lets the options trader forecast where the prices could travel in the future. Eachandeverypatternthat gets formed has some logic behind it andthis is also been tested to be accurate at forecasting what the price may do next. Anumberoftradingsoftware will identifythesepatternswhen they get formed. It can also be done yourself if you know how to spot them.
The chart pattern lets the traderdetermine if there is alikelihood of anew trend or if theold trend could endnow. Somecommon chart patternsthatare used are:
- Head and Shoulders / Reverse Head and Shoulders
- Triangles (Ascending, Descending, Symmetrical)
- Double Top / Double Bottom
- Triple Top / Triple Bottom
The study of technical analysis is broad andthere are also may chart patterns andindicators that reused to determine trading opportunities. The main idea that technical analysts follow is that the price activity that happens in the past gives a clue as to what couldhappen in the future. This lets the trader generate some new positions and lets them form a view of the market. Theoptions trading strategies are then based on these views in the market. This website guides you on how to take options trade using technical analysis.