This, however, is easier said than done! When entering a trade if you get in too early you may lose some time value of your option. If you get in too late you may miss out on a move in the stock you are trading the options on. The best way to time your entry point is to use good technical analysis. Technical analysis is the technique of reading and analyzing stock charts. Institutional investors are investing millions and millions of dollars in the stock market every day. However they are still human and because it takes a long time for them move that much money predictable patterns emerge in the stock charts. From those patterns future price moves in the stock can be predicted.
Technical analysis is a mix between an art and a science and can be quite complicated. Although the patterns are predictable, of course the stock does not always follow the pattern it should so it is important to use other indicators in conjunction with technical analysis, such as fundamental analysis (discussed in the last article), company news and political and economic events. Because of the complexity of technical analysis I will not go into the how it is performed, there are several good books that I would recommend you read that do that:
"Technical Analysis and the Financial Markets" by John Murphy.
"Getting Started in Technical analysis" by Jack Schwager.
"Technical Analysis: The Complete Resource for Financial Market Technicians" by Charles Kirkpatrick II.
Some of the main technical indicators in charts to watch for are the support and resistance levels, breakouts on volume, moving average crossovers and oversold/overbought conditions. Using and understanding technical analysis is a key component to entering the trade. Next week I will discuss the next step which is, quite aptly, how to decide when to exit the trade.
US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).
