Trading stock options can be enticing for those new to the equity markets.
Their relative low cost as compared to the price of the underlying stock is what makes them so appealing since the amount of money laid out can be enormous when purchasing stock rather than stock options.
Some people even refer to the options market as the hidden penny stock market although there is no similarity between the two.
One powerful technique that can be used in tandem for the increased possibility of success is the use of stock options and trading with Japanese candlestick charts.
Stock options lend themselves naturally to the swing trading style of investing.
Swing trading simply means buying a stock or option and holding the position for anywhere from a few days to a couple of weeks or possibly a month or two.
Swing trading options is not a long term investment strategy since options have expiration dates.
Japanese candlestick charts have been used since the eighteenth century by rice traders to predict rice prices with great success.
Candlestick charts have become the most popular type of chart incorporated by traders into the financial markets, used widely in many different trading systems.
Once a trader learns the basics and concepts of candlestick charts, the trader can use them to easily identify possible options trade candidates.
Support and resistance areas are very important to the options trader.
Stocks follow patterns and usually trade within a wide range between established points of both support and resistance.
Because stocks trade within established patterns, options traders have opportunities to capitalize on the movements between these areas of established support and resistance.
Using candlestick charts, a options trader can easily identify these important areas of support and resistance and quickly determine if individual stocks are suitable for an options trade.
For example, if a stock recently fell to a strong support level, this could indicate to the options trader by utilizing the candlestick chart that a winning trade may be a possibility.
However, the possibility of a winning trade is not guaranteed.
A strong support area revealed by the candlestick chart only shows the options trader that the stock has visited this area of support before and has often bounced off the level rather than proceeding downward through the support level.
Although chances are excellent that the stock will bounce and reverse direction at strong support, there is no guarantee that the stock will return to previous levels once the stock touches the strong support level.
Using stock options and trading with Japanese candlestick charts can help the options trader identify possible setups for profitable trades and help improve winning ratios.
Candlestick charts have been used for centuries and are an important part of many trading systems among not only options traders, but day traders and forex traders as well.