Stress Free Finance

The decision to enter into the universe of Option Trading is an important one: these days, investors have a vast array of information in regards to options available so they can make informed decisions. Indicators, commentaries from Wall Street professionals as well as market indicators are available to the average investor. Still, like the game of Craps, the down-side is that stock options trading can be complex and unpredictable, so investors should tread lightly when considering advice or indicators when investment decisions are made.

To determine whether or not a stock price will travel above or below the strike price for a call or a put in the business of option trading, investors often use technical analysis, which involves not only past performance of the stock but analytical determinations as to what the future performance of the stock will be. While technical analysis and charts may be helpful to investors for many reasons; this type of analysis is often faulty and unreliable.

In accordance with the market’s nature, attempting to nail down stock price moves by technically analyzing averages, volume changes, as well as other standards is, at best, an enormously dubious science. Due to the fact that both current and possible future events are not taken into consideration when it comes to the technical analysis aspect of option trading, in a sense, many of the working characteristics of technical analysis cannot be considered any more than witchery, on account of the fact that the underlying basis of the analysis tend to get quite foggy.

Indicators and indicator-based analysis tools offer investors more accurate ways of predicting future trends in the option market and are useful for making some determinations in investment. These tools analyze the history of the market and use the financial patterns they find to predict the future; because of their analysis of past data in the process of predicting future trends, indicators and indicator-based analysis give investors better ways to choose their investing strategies.

The MACD indicator, which stands for Moving Average Convergence and Divergence, is one of the most used tools in option trading. This indicator compares the 50 day moving average of a business to their 200 day moving average and tells the differences between them. In the past the data this tool provided was relied upon more heavily but now it is used for observation only.

After using it enough it was found that the MACD indicator was actually counterproductive to option trading because it suggested that one buy before prices dropped or selling before they rose. This event is now known as whipsaw and many technically based tools are prone to produce this result. Now this tool is usually just used to gauge how the market is doing and is not used as a hard and fast rule of what action should be taken.

Although stock options trading is complex, beginners have many resources to help them make the best decisions. Investors use technical analysis to predict whether a stock will rise or fall below the strike price by analyzing what has happened in the past. It is not the most reliable method. Option trading can be somewhat of a guessing game because of the volatile market nature. The MACD indicator can analyze the difference between a company’s 50 and 200 day moving average. Its weakness is that it entails buying shares before prices drop, or selling before an increase. Most people use MACD as a mere guideline.

- David Baxwell