Technical Analysis - The Shake Out
Be aware of the following when looking at stocks to place options over
A market professional may want to accumulate a large position in a stock that is trending strongly; either for his own account or for a major client. How does he/she do this? If he starts placing buy orders in the pool, he will chase the stock up sky high, without being able to build a big enough line. so what dose he do ?
The professional bides his time, waiting for the stock to consolidate or start a short-term correction. He knows that trading will be quiet during this phase: buyers lose interest for a while and look elsewhere. He also knows where most traders have their stop loss orders.A few well-placed sell orders on a quiet day will drive the stock below its’ support level. Stops are triggered, sending a flood of sell orders into the market. Fear sets in with the sellers and buyers, while our market professional steps forward and scoops the pool; buying in the face of the correction. Selling dries up when the stops are filled and the stock soon recovers back into its normal trading range. Everything returns to normal; except that our market professional now has a sizeable parcel of stock, accumulated at bargain-basement prices; and a group of punters curse their luck while the stock soars off upwards.
What to look for.
A flattening of the chart from an upward trend, followed by a dip below support with only low volume.Then a move above the support line and off we go. When I see this on a chart, I go with a call option at the money or slightly in the money. I might ride this option for one to two weeks until I see volume and momentum indicators dropping away.a;so take into account time decay on your option.
Exact entry is best with low volatility, when call options are cheaper. This occurs at the end of the flattening period and as the stock price dips just below the support level. It will take practice to get the entry to this trade right. Practice it on paper a few times before you try to trade it. Don’t enter on a Friday or at the start of a trading day. Try to pick your entry just after market open about an hour or more into trading. This way you can get extra confirmation before the option price takes off.
Once your in this trade, you can employ a number of further strategies, to enhance and safeguard your position. you can learn more in the options training course.
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