If you’ve been following me for a while, you’ve heard me mention that I like to look back over my trading notes at the close of each year. This year, I also looked back on the top options trading tips I’ve shared, and I bundled the advice into two blog posts. This first one is solely focused on price action.
Price action is the king of all technicals. Every other sentimental and technical indicator could be pointing in one direction – bullish, let’s say – but if price action doesn’t support a bullish trend, it’s not a good trade. This is actually the top options trading tip of all time!
Sentiment indicators really seem to trip up traders, by the way. Watching sentiment is important, but if you rely on them exclusively, they will quickly get you in trouble. When the crowd is leaning heavily to one side (bullish or bearish), it’s already too late to make money trading from that side. When in doubt, let price action be your guide.
OK, here are my three other top pieces of trading advice around price action:
When price action is rotten, your only strategy is to wait
Without solid price action to confirm a trade, do not make the trade.
I like to call this the joy of missing out. You can be very happy and satisfied sitting on the sidelines, waiting for a better moment to trade.
Imagine the joy of missing out on big moves down and watching your portfolio slide lower in value. Keeping your portfolio safe while maintaining a healthy cash reserve is the ultimate win – even if your account does not go up.
I’ve heard it said that the “return of capital” is often more important than the “return on capital”. When you lose money, you face an uphill climb to recover. The loss may not even be your fault, but a loss is a loss. The joy of missing out ensures you don’t land in that difficult position.
If you look at price action on the S&P 500 across different timeframes, each timeframe will provide a new perspective.
For instance, a 15-minute chart might show a very bullish short-term momentum move underway, while the daily chart does not. If you’re trading over a one to three-day period, the 15-minute chart is a worthwhile signal to follow. But if your timeline is longer – several days or even a couple of weeks – the daily chart is a more valuable tool. (That’s my preferred timeframe.)
… And so does timing
As I’ve said a many times, though, it is impossible to time a trade. But stochastic indicators and the volume weighted average price (VWAP) can help.
Stochastics are the most accurate and reliable technical tools for determining timing. They measure the relationship between a security’s closing price and its price range over a set timeframe. They’re easy to read, as they show when price action hits overbought and oversold levels.
An oversold stock that reads above the 80 levels — time to sell! And undersold stock is below the 20 level — time to buy!
As for the VWAP, it tells you the average price a security has traded at throughout the day. It looks similar to a moving average line on a chart, so it’s a great way to see if a price is hitting/overcoming resistance.
Next week, look for my second post on top options trading tips for the year.