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You don't need a degree in finance to trade options. Anyone can do this.
All that you really need to know is when to jump in and when to get out.
And it's shockingly easy to do.
The key to making money trading options is timing. Otherwise, you might as well be gambling with your money.
Last week, I showed you how to identify the direction a stock is turning and when it will turn.
Today, I'm going to show you when to enter and exit your options trades.
As you'll see, there are just six signals you'll need.
The Six "Signals" That Can Make You Rich
Before I begin, I want to make things a little easier for you. So below is a refresher.
There are two ways to calculate stochastics:
- The following formula: %K = 100[C-L of N / H of N – L of N]
%K: (stock's current closing price – its lowest low) ÷ (stock's highest high – its lowest low) x 100
N: the stock
C: the most recent closing price of the stock's previous trading sessions. (Remember, a trading session can be a week, a day, or an hour, but the default number of trading sessions is 14.)
L of N: the lowest price of the stock's previous trading sessions
H of N: the highest price of the stock's previous trading sessions
- %D: a three-session moving average of %K
Now let's jump into the signals.
- The %K crossing above the 20 line: This is a trading signal from the bottomof a stock's trading range.
- The %D crossing above the 20 line:This is a trading signal from the bottom of a stock's trading range.
Both of these signals indicate that a stock is potentially moving upward in price due to the momentum of the stock coming out of an oversold zone.
A stock is deemed oversold when the stochastic lines are found in the 20 to 0 range.
- The %K crossing below the 80 line:This is a trading signal from the top of a stock's trading range. It tells you when a stock price is moving down.
- The %D crossing below the 80 line:This is a trading signal from the top of a stock's trading range. It tells you when a stock price is moving down.
Both of these signals indicate that a stock is potentially moving downward in price due to the momentum of the stock coming out of an overbought zone.
A stock is deemed overbought when the stochastic lines are found in the 80 to 100 range.
- %K crossing the %D line: This is the more aggressive of the two signals and crosses either the 20 or 80 lines. This typically happens before the before the %D line does so.
- %K crossing below the %D line:This is the more conservative of the two signals, as this means that both lines have to exit from either of the extreme zones. This results in a stock that potentially has both lines working for it.
Now keep in mind that if you use the more conservative option of the two signals, you may lose some of the price move while waiting for both to confirm.
Note that the most aggressive of the signals is trading the %K line crossing above or below the %D line. This will happen prior to the %K or %D crossing above or below the 20 or 80 lines.
Don't Make the Same Mistake as Other Traders: Avoid a Double Loss
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.