Let’s discuss something I talk about every single day in MTM’s group coaching class. To me, it is vitally important as a technical trader. When the market closes, there is never a guarantee it will open higher or lower the next session. That is a major concern if you hold a position overnight, which we typically do as option traders. If we knew how the market would open, trading would be a whole lot easier and less fun, right? OK, I am kidding. But there is something I do constantly that helps me tremendously: I see how the stock closes on the day.
When I am looking for a bullish or bearish directional trade, the way the underlying closes is vitally important. For example, I enter a bullish trade closer to the end of the session if it seems a stock will close toward the high of the day or at least in a bullish manner. In addition, I want the stock to close in positive territory as in the example below.
Looking for a Continuation
You will often see the stock continue to move higher, particularly if it is breaking resistance or triggering a bullish reversal. For a bearish potential trade, look for a bearish close with the stock closing near the low (in a bearish manner) and down on the session. I consider entering a bearish trade toward the close of the session as in the example below.
Many times the stock will continue to move lower especially if support has been broken or that bearish close has triggered a bearish reversal.
Odds on Your Side
Naturally, whether a stock closes bullish or bearish there is no guarantee it will continue in that fashion the next session. Let’s not forget the market might have something to do with that, and market risk can move stocks too. But being patient and waiting to enter a position when there is a confirmation gives you an edge with more odds on your side that can improve your results.
Senior Options Instructor