Don’t rely on timing when entering (or exit) a trade, because it’s a matter of luck. The better strategy is to place trades based on price action.
If you’re an options trader who is sidelined by a volatile market, you’re probably on the lookout for the right entry point. In fact, you might be laser focused on timing your trades just right to catch the trend.
However, you might have noticed that the market has a way of zigging when it is supposed to zag.
We have seen this play out over and over since the Iran War started 60+ days ago. New headlines – sometimes several times a day – is causing whiplash from trying to keep up with the trend. It swings from bullish to bearish and back to bullish, and it’s very hard to manage.
Make trades based on price action, not timing
Here’s my advice: focus less on timing and instead make trades based on price action.
Buying dips and selling tops is all about timing, and getting the timing just right is lucky. No one rings the bell to announce when a high is being made. Could it go higher? Sure. But you don’t know that in the moment. Instead, you only know you’re making a profit. When it turns out you sold at a top, well, you were lucky and found yourself in the right place at the right time.
By contrast, price action is not based on luck. You can use two indicators to guide your trading decisions and keep you on the right side of the trade.
Use the money flow index to guide your trading
The money flow index (money flow for short) analyzes price and volume to measure the flow of money into and out of a stock. It’s measured on a scale of 0 to 100. If a reading is at an extreme (above 80, indicating an overbought condition, or below 20, indicating an oversold condition), it’s a signal a trend could be about to reverse.
And use options flow
Whereas money flow measures the flow of money into and out of a stock, option flow measures that flow of money into and out of options by the big money (institutions).
When a lot of money is flowing into a security or option, that typically means institutions feel really good about it. Note I said “typically”. Always following the big money could certainly lead you astray. I do not rely on it 100% of the time, but I have found success about 70% of the time – pretty good odds.
Don’t forget that price is king for a reason. The entire stock market is based on price. And when you examine price action over a period of weeks and months, you will see patterns that you can use to understand future price action.
Timing is good, but price action is great.
