SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Great reversal signal – 50 MA with 8 EMA


Options traders continually seek the elusive “sure thing” reversal signal. Of course, there is no such thing. But there are ways to use combined signals to identify likely reversal points. Add in strong confirming signals, and you have a reliable system for entering and exiting options trades.

This assumes your timing is made more reliable by selecting long or short positions in close proximity to resistance and support, and that the moneyness of the option also is considered. For short positions, focus on high volatility and very short time to expiration. For long positions, seek low volatility and a balance between cost and time.


The combined signals recommended for better than average timing are the combined 50-day moving average (MA) and the 8-day exponential moving average (which also is called the t-line). The combination of these two can be used to generate a trade based on crossover, and confirmed with secondary price signals.


For example, the six-month chart of Caterpillar (CAT) reveals two strong examples of crossover between the two priced averages, and confirmation in candlestick reversals.

 

image.png

 

In both instances, the predicted bullish reversal occurred. The initial signal is when the 8-day EMA (t-line) crosses below the 50-day MA. This first occurred in the first week of February. This was confirmed by two bullish reversal candlesticks, a bullish engulfing and a bullish harami. The harami too price to the bottom of the downtrend, closing at about $145 per share. At this point, a bullish options trade would have made sense. If a current long put or short call was already open, this was the place to close. If no options were open at this point, it made sense to open a long call or a short put.


The subsequent bullish reversal too price up to $162.50 in only two weeks. Any open options could be closed after observing the running gaps at the end of this bullish run.


The second occurrence was at the end of April. The same formation of crossover predicted a bullish turn. This was confirmed by an unusually long black candle that formed into a bullish piercing lines signal. This was further confirmed immediately by a bullish meeting lines. This was a mild signal with low daily ranges, but it still worked as confirmation, predicting another bullish run. Opening bullish trades (or closing bearing trades) at this point would be well-timed, as price ran from $142 to $155 in only two weeks.


These short-term signals are exceptionally strong. The combination of a 50-MA simple moving average and an 8-day exponential moving average set up reversals via crossover; and as long as you find confirmation, it becomes a reliable timing signal for options trades.


The combination provides a secondary benefit as well. The 8-day EMA serves as dynamic support as prices rise, and as declining resistance as prices fall. This tends to be more reliable than the traditional straight-line resistance and support trendlines most traders follow.


Another secondary cautionary point: The 8-day trendline tends to give off reversal signals on its own, When this is below price, it indicates a bearish condition, and when above, the signal is bullish. At the conclusion of this chart, the 8-day EMA is below price, predicting a likely retracement to the downside. This is confirmed by another crossover, the move of the 50-day MA below the 8-day EMA. This confirms a likely bearish move to occur next.


Both of these moving averages are lagging indicators, so they have to be accepted with caution. This is why candlestick confirmation adds confidence to any reversal signal. However, even lagging indicators are of value in trading options, when used together as crossover set-up for confirmation, as seen on the CAT chart.


Any help options traders can get from price signals like these, is worth keeping on the chart. Once a position is opened, look for the warning signs that a favorable trend is ab out to level out or reverse. Once an option has been closed, look for potential reversal points to enter a new position and take advantage of a reversal.


There is no such thing as a “perfect” signal, and no one will get 100% perfect timing. But using two or more signals together like these two moving averages, improves your overall timing and profits in entering and exiting options positions.


Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook. 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • McDonald's, Not A Shelter in the Coming Storm

    The amount of time and effort that investors spend assessing the risks versus the potential returns of their portfolio should shift as the economy and markets cycle over time. For example, when an economic recovery finally breaks the grip of a recession, and asset prices and valuations have fallen to average or below-average levels, price and economic risks are greatly diminished.

    By Michael Lebowitz,

    • 0 comments
    • 66 views
  • Risk Depends On Your Time Horizon

    Those who are nearing retirement and those who have recently retired represent the majority of my financial planning and investment advisory client base. One of the most common mistakes I hear from these types of individuals is something similar to “I no longer have enough time for the market to come back.”

    By Jesse,

    • 0 comments
    • 90 views
  • Estimating Gamma for Calls or Puts

    In a recent article, the details for estimate Delta were explained. This article deals with estimates of Gamma, which is denoted with the Greek symbol Γ. This calculation measures the rate of change in Delta and is summarized in percentage form. It is alternatively called the option’s curvature.

     

    By Michael C. Thomsett,

    • 0 comments
    • 341 views
  • Why Options Traders Fail?

    In the last 8 years, I trained thousands of options traders. I have seen many success stories, but also a lot of failures. There are a lot of reasons why many options traders fail. Here are the most common reasons, courtesy of our good friend and veteran options trader Gavin McMaster

    By Kim,

    • 0 comments
    • 768 views
  • Using ORATS Wheel To Test Entries and Exits

    My favorite option strategy backtester is ORATS Wheel, which includes a free trial for those interested. In the Steady Momentum PutWrite Strategy (SMPW), we sell out of the money puts on global equity indexes and ETF’s while holding our collateral in short and intermediate term fixed income ETF’s.

    By Jesse,

    • 0 comments
    • 524 views
  • Estimating Delta for Calls or Puts

    Options trading relies on many estimates of value and volatility. Among these, the most useful estimate is Delta. Even knowledgeable options traders might not fully understand the “Greeks” and how they operate, especially with one another. They are directly related and are useful in making comparisons of market risk and volatility.

    By Michael C. Thomsett,

    • 0 comments
    • 498 views
  • Are Covered Calls a ‘Sure Thing?’

    Most covered call writers enjoy the regularity and reliability of the position. In the majority of cases, the covered call will be profitable, even when underlying shares are called away. This assumes that the strike is higher than the basis in the underlying, and that the call writer understands the real limitations to the strategy.

    By Michael C. Thomsett,

    • 0 comments
    • 852 views
  • Lessons from Bill Ackman's comeback

    Bill Ackman is an American investor, hedge fund manager and philanthropist. He is the founder and CEO of Pershing Square Capital Management, a hedge fund management company. Ackman is considered by some to be a contrarian investor but considers himself an activist investor.

    By Kim,

    • 1 comment
    • 2,006 views
  • Steady Futures 2019 Performance Analysis

    Steady Futures began trading the 50K portfolio in July 2019. It produced a 8.5% return during its 6 months of performance (18.0% annualized). We had three goals when we developed this system. First, we wanted a robust system that benefits from turmoil in the markets.

    By RapperT,

    • 0 comments
    • 536 views
  • SteadyOptions 2019 - Year In Review

    2019 marks our 8th year as a public service. It was a good year overall. We closed 151 winners out of 232 trades. Our model portfolio produced 41.7% compounded gain on the whole account based on 10% allocation per trade. We had only two losing months in 2019. 

    By Kim,

    • 0 comments
    • 858 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs Expertido