Option Trading, Maximizing Candlestick Signals
How do you take advantage of the psychology incorporated into the development of a Candlestick signal? If you realize that every time you place a trade using a Candlestick formation, you’ll realize that the probabilities of being in a correct trade is greatly in your favor. When that becomes apparent, the next step is to figure out how to leverage that information into bigger profits. The most common method is to use margin. The next choice would be to use option trading.
Candlestick's signals, combined with option trading, become a very powerful format. If you factor in that an option trade needs to be correct in direction, time, and magnitude, the fact that the candlestick signals gives you a high probability of which direction of a trend will move, you have eliminated the most important variable in a successful option trade. Knowing the direction of the price move permits a candlestick investor to implement the most profitable option strategy. There are periods in the market trends or stock price trends where options provide a much greater risk/reward factor than buying the stock outright. The basic premise of candlestick signals is it constantly puts the probabilities in the favor of the candlestick analyst. Once you understand candlestick investing, and use it successfully, option trading enhances the leverage capabilities of having the probabilities in your favor.
For those of you that are interested in option trading, there will now be some picks and strategies being posted each week. The candlestick forum option trading e-book is still in the process of being written, but getting closer to completion everyday. It will be available in the next four weeks.
Specific options strategies can be designed to maximize the returns for different market conditions. In keeping with the candlestick analysis benefits, being a very simple visual trading program, the most profitable options strategies are those that are relatively simple. The candlestick forum newsletter will address some of the strategies that utilize the candlestick signals the best. The market conditions at the end of this week are setting up for some low risk put trades.
Market Direction – As discussed in our last newsletter, the strong bottom signals, the doji’s, witnessed in both the NASDAQ and the Dow, revealed that the uptrend was in progress and the estimated target was a 50 day moving averages. As we saw on Friday, the Dow closed within a few points of its 50 day moving average and the NASDAQ, as mentioned previously, would likely get to the 50 day moving average first and probably breach it based upon the strength that was showing in the stochastics.
As we saw also on Friday, the NASDAQ gapped up. A gap up in an overbought condition should be your first warning that a top is near. On the other hand, the gap up
occurred through the 50 day moving average. What does this do for analyzing market direction from here? Friday’s close on the NASDAQ was at its high, a shaven head. This should be another alert though we may be near the top for this round. Where is the market going to go from here? That we do not know today. But knowing what the candlesticks are telling us, gives us a game plan for how the market reacts on Monday.
There are very few stocks in the oversold condition. There are 10 times the number of stocks in the overbought condition as there are in the oversold condition. Logic tells us, as already seen in the stochastics, that the markets are in an extremely overbought condition. Being predominantly long over the last two weeks has produced some extremely good profits.
The strategy at this point is to remain long but with an extremely nimble finger on the trigger. If this market continues to go higher, fine. However, with the shaven head
on the NASDAQ after the gap up and the Dow close the right at the 50 day moving average, with the stochastics in the overbought area, produces the market environment that is ready for a Candlestick sell signal.
Adding a few short positions, one, two, and maybe a third would be a reasonable strategy at this point. Despite the strong market on Friday, there was a good number of sell signals in individual stocks. This becomes an indication also that the sellers are starting to come into the market.