How do we time options trades? Entry and exit may be wise based on circumstances, but timing is the key to making smart moves well-timed moves as well.
I have found myself focusing on the importance of confirmation before makes any options trades, either entry or exit, even on strong reversal signals. Of course I depend on the Greeks to measure volatility, but in addition I find many sources for reversal as well as confirmation among the technical side of things, including:
1. Candlestick indicators that hint at a coming reversal. Many of these are very reliable. For example, the two-session engulfing pattern leads to reversal nearly 80% of the time.
2. Volume spikes reveal great interest in the current price, and appear often right at the top of an uptrend or at the bottom of a downtrend. These spikes are exceptionally good confirmation.
3. Western indicators including price gaps, head and shoulders, double tops and bottoms, and wedges, among others, all help you to time entry and exit with expertise.
4. Moving averages and how they interact with price, specifically crossing over to continue above or below current price levels, help to bring order to the chaotic nature of short-term price, and may confirm other signals.
5. Momentum oscillators measure the speed of price trends, and help identify when those trends begin to slow down, showing often subtle changes into overbought or oversold conditions, making these valuable signals.
6. Proximity of all of these types of reversal signals, meaning specifically that when you see reversal indicators at or close to resistance or support, pay close attention. At these edges of the trading range, reversal is more likely than anywhere else.
Technical analysis is both science and art. When used to augment volatility analysis and fundamental analysis, it helps you to better time entry and exit. But this area of analysis is at least as complex as other timing tools for options trading, so it deserves careful study. If you e-mail me, I will send you the link for a free introductory explanation of technical; analysis from the international education company, Ethan Hathaway.