5 Ways To Time Your Options Trade Entries
How often does this happen to you? You have been waiting to place an options trade in a stock for a week, but every day you look at the market and evaluate whether today is the day to trade it, rather than execute the trade, you choose to wait. Whether it is something in the options chain, or something in the charts, you wait another day or another hour to enter the trade only to be disappointed because you were one hour too late. You inevitably end up missing the move, as the stock took off without you. Instead of entering a trade which would have produced profit, you are left second guessing yourself and frustrated that you missed a good trade, and most importantly feel like you missed making money.
Here are ways to avoid missing your entries in options trades:
1. Look for Alignment on the Weekly and Daily Chart
Technical analysis is very important for options trading. Using support and resistance to pick levels to trade can increase the probability of success exponentially. When an option moves back to support on a weekly or daily chart these are generally times I wan to be initiating a trade. At Shecantrade, we will enter an options trade, either by buying calls, call debit spread, or selling a put credit spread when the trend is long over all on a weekly chart, but price has recently pulled back. While this set up won’t appear every week, when price of the underlying does move back, I want to get in this trade. If you can find common levels of support and resistance on charts of different time frames then those levels of support and resistance will generally hold better. For example if you find that $150 is support for AAPL (Apple) on the weekly and daily charts this level will generally hold better than if support was just found on the daily chart. Look for common levels on different timeframes and see if those levels hold better for the stocks and options you are trading.
2. Once the Move has Happened, Don’t Chase the Trade
I know this is hard to do, but if you have missed the move, and the stock has taken off or sold off, this is not the time to enter. Patience becomes very important when there is a lot of momentum behind the move, especially for an options trader. It is hard to be patient at the time but patience pays off, there are very few times in the market when a stock that has popped up or sold off that it won’t retrace and create another entry in the very near future. In fact, if price is moving up rapidly, the implied volatility can increase and actually result in spending more money on the trade than you should, and inevitably, the stock might actually reverse. Wait for your entry and make sure that you are being patient, there are hundreds of options trades that set up each day if you miss one trade another will show up, this is one of the only guarantees in the market, there will always be another trade. One tip that I can give is that if you feel that you are missing too many trades is to journal. Write down the potential entry, and if the trade would have worked out or not. Keep the list, and after a good sample of trades review your data and see if the trades you missed would have been mostly profitable or not. If they would have worked out then take a look at your trading rules and adjust. If not then you can rest assured that missing a few trades is just a part of trading.
3. Don’t buy Tops or Bottoms
Swing trading options means that you can place trades at anytime, and while it may be tempting to place a trade as price of an underlying looks like it might be moving through a previous high, this is often the time when price will actually pull back. This scenario means that what you might think is a missed opportunity, is only a day away from a better trade entry. Don’t be a trader who buys a call when a stock is up at a high thinking that the momentum it has will last for ever. Same is true when a stock is selling off, when it looks the worst it is generally the time that a bottom will form and the stock will move up, creating an opportunity for an entry. Wait patiently for a pull back, and if in doubt read rule #2.
4. Don’t trade after stock has already had a large move
This can be a difficult thing to do, as a trader, you want to trade, you want to be active in the market. Sometimes the hardest thing to do is actually, not trading. If you can identify that the price of a stock has already taken off, when you see higher highs on a 5 mins chart, then be patient. Socks tend to have large fast moves when they become extended to the down side and to the upside. These moves are very alluring to traders calling then to jump in. Typically by the time a traders sees the trend the trend is over and the big traders are taking profits and heading for the exits. Try not to dwell on what might have been, what matters as a trader is what actually happened. This is why having a trading plan is so important, to keep your trading consistent.
5. 5 Minute Chart
The 5 min chart is a great way to find highs and lows and time your entries. Even though I am in trades for a few days to a few weeks, I like to use the 5 min chart to find good zones to enter and exit my trades. By using a short term chart for entries I am able to fine tune my trades and get better fills for my trades.
For example with trade entries, I like to see if we are at a high or low for the day and what the trend is. If I want to buy a call and we are at the high of the day, then I will use the 5 min chart to look for a pull back to support before I will buy the call. If the market is selling off then I will look for a bottom to be formed on the 5 min chart before I will buy the call. If the market is making big moves or stuck in consolidation, then the 5 min chart if also a great way to visualize when the trend stops or the consolidation breaks. Don’t neglect entries and exits as a trader, pick an entry then try our a short term chart to fine tune your options trade.
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