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SIMPLE METHODS FOR STOCK OPTION TRADING SUCCESS

By: Billy Williams

Having been a student of the stock and option markets for 17 years and seeing new traders enter the market each year seeking there fortune only to see them wind up broke and bitter a year later I find myself wondering why this is with all the advances in trading. At the beginning of the 21st century I see more computer models, software programs, news commentary, new trading methods, etc. come into the marketplace than ever before being promoted to helping traders make millions yet aspiring online stock and option traders struggle even more than when I started out. After giving this much thought I believe now more than ever that trading success doesn't come wrapped in a pretty box with bows on it but from implementing effective methods that stand the test of time.

For example, for spotting trend reversals, I'll look at a stock that has been moving in a given direction, let's say upwards, and graph that stock's price action with a 2 period Relative Strength Index Indicator also called an RSI. I'll draw an upward trendline on the stock and watch for distribution on higher volume in the general market. If distribution days begin to add up to more than 4 or 5 then I'll watch the RSI on this stock for divergence and once spotted will watch for a break of that upward trendline. As soon as I have my trigger I use my method of entering the position for a short. Downward moves are twice as fast to the downside as they are to the upside so when the market sells off I am in a position to catch a rapid decline in price with a put position while limiting my risk.

I also look for pullbacks in stocks that have strong fundamental and technical factors that suggest they are going to have a rapid move to the upside or downside. For upward moves, I'll watch for stocks that are above their 200 day simple moving average that have a Relative Strength rating of 90 or higher. I also watch to see if they have been in a flat based trading range for two months or so. If they make a move to an all time high out of a two month price base I'll watch the stock's price action compared to its 10 day and 20 day simple moving average and wait for a pullback. If the stock's price begins to pull back evenly to its 10 day simple moving average without violating its 20 day simple moving average(which acts as a stop for a position once entered) I wait for price to trade over the high of the previous day's price high to enter. This allows me to play momentum stocks at the beginning of a possible big run with options while always controlling my risk with a dynamic stop in place (the 20 day simple moving average).

Using seasonal trends in the general market helps me to determine my trading strategy at various times of the year. During the summer many traders at the exchanges go on vacation so trading is flat and volume is thin so I use credit option spreads for income. When they return from vacation trading begins to pick up going into the end of the year and I keep a close eye on the strongest stocks to ride them up on rallies with stock option trading or investing in the stock itself. I have caught incredible runs in stocks like HANS and others by taking advantage of this seasonal tendency. If you use stock option trading in taking advantage a stocks like this you could very easily capture 500% or higher returns using stock option strategies.

Explosions in price that cause huge gaps between trading days can also present incredibly profitable trading opportunties. A price gap explosion is when a stock closes down in price one day but the following day gaps in price in the opposite direction often completely out of the price range for the previous day. This occurs because of a unexpected announcement that shifts the dynamic in the price action of the stock. This can signify the beginning of a new trend which I seek to exploit and get in early on a new price trend with stock option plays or investment positions. I have made huge gains in Goldman Sachs, Apple Computer, Chicago Mercantile Exchange, and others using a combination of stock investing and option trading with this technique.

I have been in this game a long time and as I take my steps into the new century of trading observing all of the tremendous advances presented to aspiring traders I wonder if this does more harm than good. Fancy indicators, trading systems, complicated economic theories, ad nausea do not make for successful trading. Instead, real trading is finding a few trading techniques that stand the test of time and when combined with good trading sense as well as discipline you discover success in the markets as well as consistent results in stock and option trading.

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