lystn

Hey everyone, Kirk here again and welcome back to the daily call. Today, we are going to talk about trading options with technical analysis. This is probably a huge topic that a lot of people have questions about and in fact, I think technical analysis is a great engagement tool for getting people interested in the markets. In fact, I think it’s probably one of the best things that got me engaged in the markets early on, is really trying to understand technicals. We naturally I think as humans and most of the time, investors, we try to derive some sort of meaning from something that more or less is meaningless. I mean, the markets are what they are. We can’t change them. We can’t direct them as much as we try to maybe impart some sort of like Jedi mind trick on the market. We’ve all been there. Like “Come on! Please stock. Move higher. Move lower.” But we know it’s never going to happen although we try. But we’ve always found or we've always been interested in just as humans, in understanding things that are hard to understand or it seemed impossible to understand. And so, technical analysis for me and probably for most people initially on was something that gives meaning to a market that is more or less random or meaningless. If we can see some indicator that says that a stock is going higher or an indicator that says a stock might be going lower or in a range, that helps us give some sort of familiarity or comfort with trading that we may not have otherwise had. The problem with technical analysis on the outside is that we lean on it way too much. This is something I think I did very early on, is I really leaned on technical analysis indicators without actually having an understanding of which ones work and which ones don't and I think that people often do this when they see something that seems like it brings a lot of clarity to the markets, is they then put all of their emphasis and all of their trust in that one thing. As options traders, we have to find some sort of balance between using technical analysis indicators appropriately, but also not at the risk of causing harm to our portfolio, meaning we have to be aware of them and I think they’re a great engagement tool. I think they do help for sure, but they are not the only thing we should be focusing on and in fact, probably is not one of the first five things that we should be focusing on. When I think about trading options with technical analysis, I think about using technicals and often check technicals on stocks to get a sense of where the market might be going for that security. Now, you heard me say “might be going” because the vast majority of the time, technicals are not as accurate. Even the best indicators that we researched and did back testing on in our signals research are not as accurate as just flat out using the probabilities that we can use with options trading. If we want to use technicals, we have to first understand that technicals by default are going to be flawed to some degree, that the best indicators out there of which we only found a few that really, really work well, even those indicators are not as good as if you would just straight up use options trading probabilities. Now again, this isn't to say then that we don't use technicals. They absolutely can help and they have absolutely helped us in the last two years. The trades that we've made where we make more of a decision based on technicals have been generally very, very good, have helped us in sometimes sticky situations where we don't have a clear path out and we look at the technicals and that helps us formulate a decision. But again, it's not at the expense of everything else. The big thing that I think about with technicals is really, portfolio balance. I oftentimes and oftentimes on this podcast and videos talk about how important portfolio balance is, that we should have a generally balanced portfolio and always be working to rebalance at all times, meaning as the market moves higher, our positions should be generally moving higher, meaning our center of our portfolio should be moving with the market. That’s how you generate above-average returns with low volatility over time in any market, is that you’re always neutral to the market, meaning the market can move within a defined range every single month and you’re constantly moving those boundaries to play in the sandbox with the market. And so, I never use technical analysis or would make a trade using technical analysis if it came at the expense of the portfolio. Here's an example just to help drive home this point. If our portfolio right now was a little bit bearish, meaning that the center of our portfolio where we make the most amount of money would be if the market goes down, then I don't want to add to that portfolio with another bearish trade. My portfolio was already bearish. I have enough positions on where if I do nothing right now and the market goes down, I actually make the most amount of money possible. If I’m going to use technical analysis and I'm going to use it in the context of helping or enhancing my current portfolio, I don't need to add another technical trade where I see maybe a technical sell signal and the stock is going down. I don’t need to add another bearish position to my portfolio. My portfolio is already bearish. I don’t need another one. But what I could do is I could use technical analysis to go out and find something that maybe has had a little bit of a selloff and is showing some technical buy signals, so we’re getting some oversold signals, suggesting that the stock could bounce or rally or stabilized and I could take a long position in that underlying security or a bullish position in that underlying security. That might help my overall portfolio. It might give me more balance. I’ve already got enough bearish positions. Maybe I could use a bullish position in something. And so, technical analysis could be something that we use to then find maybe a better opportunity than something else. Again, it’s not about finding an opportunity that’s going to work 90% of the time or 85% of the time. You’re going to use technical analysis and find something that has maybe a 68%, 70% chance of moving from this level and going higher based on back testing and research that we've done. I would get into that position and maybe still make an options trade where I’m giving myself a margin of error. Even though I think that the technicals are showing a buy signal, I’m not going to go super, super aggressive. I’m still going to give myself a margin of error. Maybe I sell a put spread, maybe I sell a naked put. I do something where even if I’m wrong on the technicals, I still have an opportunity to make money on that position with options. I think that combination is really, really powerful in the market, is using technicals to give ourselves maybe a slight edge, maybe a slight edge in some markets that the stock may stabilize or turn around or stop falling or stop rising. Using those technicals in conjunction with how we trade options with a wide margin of error, selling options far out of the money, using those two to piggyback off of one another I think is actually very powerful. Again, what I do with technical analysis is use it as a formula or basis for making decisions about what indicator, what stocks or what ETFs I’m going to get into when my portfolio needs a little bit of balance. Now, the other area that I use this on too is when I’m making adjustments or when I’m possibly considering an adjustment. I’ll oftentimes look at the technicals to see if that stock has had an oversold reading, an overbought reading. If that stock has had a huge rally and that’s challenging a position, maybe I hold through that rally because the technicals are suggesting – “Hey. This rally that the stock has had recently maybe overdone and it may pull back.” And so, for that reason, we’ll use and look at the technicals even during the process of a trade versus just during the execution of a new position. But look at the technicals during the process of a trade to see if it's really worth making an adjustment or maybe this is just white noise that we need to wait out. In fact, I think last year, November, October ish, something like that, SMH had a huge run higher and we talked about this on the weekly podcast on the strategy calls with elite members too, but we had looked at the technicals during that huge rally higher and although it was challenging our position and we are holding at the time a big paper loss, we knew that the technicals on this were really, really showing, that it was overdone and was due to turn over. Now, we just didn’t know when it was going to turn over and thank God that we held through it and we were patient enough because when it did, we didn’t adjust ourselves into a bad situation, we didn’t use a stop to get out of it. But in that case, the technicals really helped turn that position around because it gave us a lot of confidence to say, “Look. Maybe this is a little bit overdone, maybe it's rallied just a little bit too high and it could come back down, so we want to be patient, hold the position, make a small tweak adjustment, but not this super, super aggressive adjustment.” That’s I think where technicals can also help out, is just monitoring current and active positions in your portfolio to help you just make better decisions. Is this move overdone or is it just starting? Understanding that concept alone using technicals can help framework or help you navigate whether you should make an adjustment to that position or not. Hopefully this has all helped out. As always, if you guys want to learn more about all of the back testing research that we did on technical analysis because we did a ton of research in our signals report research where we back tested hundreds of stocks, thousands of indicator variations, all of your popular ones, you can head on over to optionalpha.com/signals and again, get a look at that research. It is a paid research report, but I think it’s insanely valuable. It pays for itself in literally probably one or two trades and just the idea or framework of understanding which indicators actually work and actually should be relied upon for making decisions I think is invaluable. And so, again, you can head on over to optionalpha.com/signals to take a look at that or just search the website, head on over to our research center. You can take a look at the videos and examples and the outline of the reporting, download a nice little sample as well, so you get an idea of what's in there before you purchase it. As always, hopefully you guys enjoy these. If you have any comments or questions, let me know. Until next time, happy trading!