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Candlesticks and Derivative trades

 
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abbo



Joined: 12 Sep 2004
Posts: 148
Location: australia

PostPosted: Tue Sep 14, 2004 8:57 pm    Post subject: Candlesticks and Derivative trades Reply with quote

Many sources (notably NISON et al) say that in many instances candlestick signals that are often classed as “reversal” indicators may in fact only show a halt to the current trend rather than a full-blown trend reversal. I have observed this to be the case on many occasions and also observe that even when there is a trend reversal there may be several days’ delay from when the signal is observed until a significant price move is recorded.
With trading derivatives (stock options) from the long side, price movement, or lack there of , in the underlying stock is critical to profits and losses and problems with candlestick analysis such as mentioned above can quickly destroy ones capital. What I would like is feedback about other swing traders’ experiences in using derivatives with particular interest in the relative merits of going short (writing or selling to open) as opposed to going long (buying to open) a stock option.
I would also be interested in stop loss considerations given that the stops used for stock trading can often place too much capital at risk when using derivative plays.
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candlestick1
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Joined: 27 Jun 2004
Posts: 503
Location: Houston, Texas

PostPosted: Wed Sep 15, 2004 8:59 am    Post subject: options Reply with quote

The signals do represent a reversal in a trend, however they also will indicate whether that reversal is a quick blip or a full scale reversal by revealing a weak signals either inn the next day or so or after a major move. The signals illustrate a change in investor sentiment, other indicators can then be added to the analysis to detect whether the reversal signals were a bounce in a downtrend or a true full scale reversal. Looking at trend lines, Fib numbers, moving averages all can be incorporated into whether the reversal is occuring at a major support or resistance level.

A benefit for being able to project whether a signal is about to occur also gives the candlestick investor the opportunity to buy options when the least amount of premium is built into the price of the option, buying when a set up illustrates that the panic selling or the exuberant buying has come into the price of the underlying stock.
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abbo



Joined: 12 Sep 2004
Posts: 148
Location: australia

PostPosted: Wed Sep 15, 2004 11:07 pm    Post subject: derivatives Reply with quote

Thanks for the reply. In your experience have you found it more profitable on average to trade from the long or short side with options ie with a bearish candlestick signal for example would you prefer to buy to open a put or sell to open (go naked) a call.
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candlestick1
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Joined: 27 Jun 2004
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Location: Houston, Texas

PostPosted: Wed Sep 15, 2004 11:20 pm    Post subject: options Reply with quote

That is definitely a function of the time remaining before expiration and the magnitude of the potential move before hitting support or resistance. If the time factor and the resistance are in an area that shows a more than probable potential for exceeding the profitability level, then selling calls naked make a better trade startegy. Conversely, a trend that appears to have a long time/price move capability, buying the calls or puts outright produces the betterrisk/reward. That can all be determined by the strength of the reversal signal and the move potential before hitting a resistance zone.
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