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Technical analysis of stocks and stock options trading are both distinct terms and used separately in the stock market. Technical analysis of stocks aids in stock analysation through price movements, historical data, and trends. On the other hand, options trading involves buying and selling of stocks at a specific date and price. Mastery in both of these techniques will lead to incredible profit maximisation by applying them in day-to-day trading.
In this article, we will give you an overview of technical analysis and options trading. Moreover, we will also suggest you the best Certification in Online Technical Analysis and Certification in Online Options Strategies Combo course that will aid you in upscaling your skills and learn advance techniques to give an edge to your trading style.
Technical Analysis: An Overview
Technical analysis is cited as the study of past price and volume action as a guide in predicting future price movements. Using insights from behavioural economics, quantitative analysis, and market psychology, analysts aim to forecast future market behaviour by using past performance. The two most popular forms of technical analysis involve technical indicators and chart patterns. A fundamental assumption of technical analysis is that the stock market has absorbed all the available information, as reflected in the price chart.
Technical analysis is a cover term for a myriad of strategies that depend on interpreting price action in a stock. It is mostly focused on the determination of whether or not a present trend will continue and, if not when the trend will reverse. Some technical analysts use trendlines, others prefer candlesticks, and some prefer boxes and bands created through mathematical visualizations. Most of them use a combination of strategies and tools for recognizing probable entry and exit points for trades. For example, a trader will look at chart formation indicating an entry point for a short seller, but for confirming that a breakdown is likely, he will look at moving averages for different time periods.
- Chart Patterns
The technical analysis of chart patterns is a subjective method of identifying areas of resistance and support on a chart by focusing at specific patterns. Underpinned by psychological factors, chart patterns are designed for predicting where the prices are headed, following a breakdown or breakout from a particular price point and time. An ascending triangle chart pattern denotes a bullish chart pattern showing key areas of resistance. A breakout from this type of resistance could significantly lead to a high-volume move higher.
- Technical Indicators
These are statistical forms where analysts apply varied mathematical formulae to volume and price. Moving averages is the most common type of technical indicators that smooth price data, helping it to make spot trends easier. More complex indicators include Moving Average Convergence Divergence (MACD).
- Candlesticks
Candlestick charts are used by technical traders for determining price movement built on past patterns. Trading decisions are made using candlesticks, which help predict the short-term price direction based on regularly occurring patterns. Candlesticks show four price points namely, open, close, low, and high, throughout the time period the trader specifies.
Options Trading: An Overview
Options are basically contracts that provide the bearer the right to either purchase or sell an amount of underlying asset at a pre-established price before or when the contract expires. Options are powerful as they are capable of enhancing an individual’s portfolio. They do this through leverage, added income, and protection. Options can be used as a constructive hedge against a decreasing stock market for limiting downside losses.
Moreover, options are also capable of generating recurring income. Additionally, also used for speculative purposes, for example, wagering on the stock’s direction. Options are derivatives which are a large group of securities. Options are basically derivates of financial securities, their value depending on the price of another asset.
A holder gains a right to buy stock in the call option, whereas in the put option, a right to sell a stock is gained by the holder. A call option can be thought of as a down payment on a future purchase.
Why use options?
- Speculation
This is a wager on future price direction. A speculator might assume that the price will go up, based on fundamental or online technical analysis. A speculator might purchase a call option on the stock or buy the stock. Speculating with a call option, rather than buying the stocks outright, is alluring to some traders as options provide leverage.
- Hedging
Options are originally invented for hedging purposes. Options hedging is meant for reducing risk at a reasonable cost. Therefore, options can be assumed as insurance policy. For example, a trader wants to purchase technology stocks but wants to limit losses as well. Therefore, by using put options, the trader can limit downside risk and enjoy upside in an economical way. For a short seller, call option can be used for limiting losses if the underlying price of an asset moves against their trade, especially during a short squeeze.
Most commonly, traders opt for options trading without a clear understanding of options trading strategies. There are various option strategies that both maximize return and limit risk. With minimal effort, traders can learn options trading strategies and take advantage of the power and flexibility that stock options provide. Bullish and bearish strategies are the most common options strategies. Other types of trading strategies are: Covered Call, Married Put, Protective Collar, Long Strangle, Long Straddle, Iron Condor, Long Call Butterfly Spread, and Iron Butterfly. An online options trading course will allow traders to gain advanced knowledge in options trading and its strategies.
Technical Analysis and Options Trading Combo Course
Elearnmarkets, a financial e-learning platform, presents to you “Advanced Technicals & Options Trading Strategies”, a Certification in Online Technical Analysis and Certification in Online Options Strategies Combo course, allowing traders to gain an understanding and insight of trading psychology, trading patterns, money-making techniques, and trading strategies for generating consistent returns and use of options trading as a hedging instrument. Practical knowledge in various options trading strategies allows gaining of expertise in the art of trading.
This combo course is curated with sophisticated approaches to technical patterns and strategies. This course offers holistic learning of options trading and use of technical analysis for market analysis and profit maximisation. Topics covered in this course are Basics of markets and price action, Max pain theory, Options Strategies, Candlestick Patterns & Heiken Ashi, Set-up Trading Strategies, Understanding of Technical analysis, Indicators and Oscillators, and more.
Bottom Line
A fundamental understanding of options trading and technical analysis will allow traders to take full advantage of the stock market and gain higher returns. Understanding the market dynamics is essential for predicting future price movements and effective stock trading.
