The best way to really figure them out is to take your six month chart, plot your trend lines and just look back at what happened. Look for patterns. Check in with what the market bias was at the time. Take the patterns you’ve seen in the past, and when that pattern comes again, there is a high likelihood, it will repeat itself. Take advantage of that using rockwell trading. Now, of course, we can take price and volume and combine them together with plus and minus and multiply and divide. We can take price and volume from days in the past, and we can manipulate them and combine them mathematically to get different values that may or may not tell us a darn thing. These are called indicators, and this is where the complexity in technicals is derived. Take advantage of patterns See, there are hundreds if not thousands of indicators. Knowing how to use them and what they tell us is the key. In reality, through the use of indicators, we can easily over complicate our life. We can throw ourselves into analysis paralysis, and we can start making mistakes. Keep this in the back of your mind — it comes down to price and volume. I will say it again because it is so important. It comes down to price and volume. That’s it — price and volume. With that said, indicators fall into different categories. The two categories I use are trend indicators and over-bought/over-sold indicators. Trend indicators do just that — they show us the trend of a stock. Typically moving averages are trend indicators — like a simple moving average. We take the last 200 closing prices, which is a year’s worth, by the way, and we add them all up and divide by 200. Tomorrow, we take the new price and we drop off the oldest price, and do it again. We can plot that line and see right away if the yearly moving average is up-trending or down-trending. Now, the 200-day simple moving average is not very reactive. If we take a five-day simple moving average, which is a week’s worth, we’ll see it is more reactive than rockwell trading. We can take a 20-day simple moving average, which is one month’s worth, and we’ll see it is between the five-day and 200-day average. Another thing we can do is look at price with respect to the moving average. If price is doing better than the moving average, we might say, “Wow, that stock is over bought.” If price is doing worse than the moving average, we could say, “That the stock is over sold.” Remember, a stock that is over bought means there is a lot of demand for the supply out there, so the price has been driven higher. Flipping the coin, if a stock is over sold, it means there is a lot of supply for the demand out there, so the price has been driven lower. That’s one form of over-bought, over-sold indicator. It comes down to price and volume If a stock’s price goes way below its moving average, then reverses and heads above it, becoming really over sold, and then reverses, depending on the market bias AND the stock trend, you would either be buying your calls or selling your puts. Basically, when you look at it that way, you are comparing your one-day simple moving average to your other moving average, say a 10-day average, which is two weeks. Another way to look at it is to look at our 10-day simple moving average and compare it to our 40-day simple moving average, which is two months. In this case, when the 10-day simple moving average goes way above the 40-day and then comes back down and crosses below, depending on the market bias and the stock trend, we would either want to buy puts or sell our calls using rockwell trading charting. Why use that combination of moving averages — the 10 and the 40 versus the one and 10? Well, we made this observation before — the smaller the moving average, the more reactive it is. When we deal with the larger moving averages, we buffer out a lot of the craziness that happens to stock price on a day-to-day basis. The drawback is that we may miss out on a little bit of profit while we are waiting for the signals to register on a more buffered indicator. No matter what we use as a signal to enter and exit a trade, we want to make sure there is volume there. We want to make sure institutional traders are confirming what we are seeing in our stock charts. Also, we want to check the news around that stock. The media has more access to a particular company than ever before. We, as common men, have more access to the media than ever before, as I said in Strategy Two on Philosophies. In other words, if the media picks up on something in your stock and publishes it, the common man jumps on it and trades. All of the sudden, our stock technicals become worthless. Stock technicals are based on human nature in that we like to follow the trends of the masses at rockwell trading. If the media interjects data, that The smaller the moving average, the more reactive it is often times is more powerful than a trend. So, when relying on technicals, we want to make sure there is no news. Finally, we want to check the trading of stock by company employees. To make trading fair, there are laws that apply to people who work at a company, sit on their board and own a lot of their company stock. If one of these people wants to sell their company stock, they need to follow certain guidelines. Simplified, those guidelines are: First, they need to do it for no reason pertaining to happenings at the company. In other words, they don’t know something you or I don’t know. Second, they must do it publicly. In other words, these company executives need to publish a notice when they sell their stock. We want to check on these for two reasons. Reason one is because if they are selling a lot of shares, they are going to — by virtue of them unloading stock — increase the supply of shares out there on the market. Therefore, the price will fall. More supply versus demand means falling prices. Reason two is that even though these company executives are supposed to be selling their stock for no reason — and in all fairness, most of them are, we hope — we are still aware of the fact that they know more about their company than we do. We like to pretend that they have more heart and soul in their companies than we do. So, if they are selling, there must be something going on. Our trading peers, and sometimes even the institutional traders, see this the same way. That uneasiness triggers a lot more selling by other traders. We all suspect foul play. That, too, will blow technical analysis out of the water. So, when relying on technicals, make sure there is no trading by executives going on. Let’s get back to the core subject of techincals themselves. There are more specialized indicators out there. Even the number of trend and over-bought, oversold indicators is amazing, but they all basically do the same thing. Each has their pluses and minuses. The trick is to simplify, right? Be careful of letting complexity creep into your trading The more complicated and more confusing, the more time it will take us and the more mistakes we’ll make, which is everything we don’t want in trading. Be careful of letting complexity creep into your trading. This is another area, where being part of a trading community that operates the same as you do will be worth your while. Like I said in an earlier strategy on tools, you need a place where you can have another set of eyes — another interpretation of a stock’s technicals, whether that place is in the form of an investment group, a mentor or — best yet — a full-service investment community with mentors and peers, like what we have at TradingTrainer.com. Successful options traders never go it alone, especially when it comes to technicals. There is enough information in this chapter alone, to get you trading successfully from day one. Don’t forget to start paper trading first.