But before I get to volatility I want to discuss the indicator I use for my high-probability options strategies. I often asked by readers what indicators I use, so…here you go. They will try to teach you about their long list of indicators to make themselves look impressive, but in reality most are horrible traders over the long term because they overwhelm themselves with the latest and greatest indicators.
I keep it super simple when I trade. I pick one tool and I use it for its specifically intended purpose.
So in order to make options trades, I use a tool that helps me do a few things: 1 It alerts me that a profitable trade may be on the horizon, which gives me time to prepare. As I said before, I keep it very simple.
The Top Technical Indicators for Options Trading
I use a few basic versions of ONE simple tool to take advantage of sentiment and technical extremes on highly liquid ETFs. So with that being said, I would like to share the most powerful technical indicator that I use in my proprietary model — the Relative Strength Index RSI.
- The Only Indicator an Options Trader Needs
- This article focuses on a few important technical indicators popular among options traders.
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The RSI, developed by J. Welles Wilder, Jr.
What is the best indicator to use when trading options? - Quora
Basically, RSI allows me to gauge the probability of a short- to intermediate-term reversal. It does not tell me the exact entry or exit point, but it helps me to be aware that a reversal is on the horizon.
I can put a trade on, and in many cases, close it out within a week. That goes for winners and losers.
Conversely, knowing that a reversal is on the horizon I am able to lock in profits on a trade. I am a contrarian at heart. Fading just means to place a short-term trade in the opposite direction of the current short-term trend.
But I know that in most cases, when an index reaches an extreme state a short-term reversal is imminent.
The time frames are RSI 23 and 5 days. So now that you have the basics of the strategy, let me go over a recent example. When it a situation like this arises a high-probability trade should be taken into consideration.
Why I Started Using This Day Trading Indicator (the best!)
Again, the RSI 2 and 5 readings below the chart clearly show that a short-term overbought extreme had been hit. At that time, I want to make sure my other proprietary indicators line up.
Here’s the Only Indicator an Options Trader Needs
If so, I will fade the move. Remember that fading means placing a trade that opposes the current trend. In this case the move was higher; therefore I bought puts. Remember, you make money buying puts if the underlying asset goes down. Had IWM been at a short-term oversold extreme, I would have bought calls.
The trade: Here is the trade alert I sent out on May Enter this trade as a spread to avoid paying double commissions.
Here are the parameters for buy indicator for an option trade: The Probability of Success — Again, I keep it simple, very simple. Why would I want to use an arsenal of gizmos and widgets, when I can use a simple tool like a hammer to get the job done? Simple equals buy indicator for an option, and often that does not entice traders.
But I am not here for excitement.