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Fifty-Two Week Moving Average in Options Trading
Options traders can use the fifty-two week moving average to decide whether puts or calls are a better approach to trading a given stock. The fifty-two week moving average helps spot both support and resistance levels. The fifty-two week moving average or moving averages for longer terms also help you see when a secondary trend is occurring within a primary trend or when a primary trend is occurring within a secular trend. For quick reference here is a breakdown of these trends:
• A secular trend lasts more than five years.
• A primary trend lasts for more than a year but less than five.
• A trend that lasts for a few weeks or months but less than a year is called a secondary trend.
There are various options trading strategies. All of them depend upon successful analysis of the market for their success. One is to use the fifty-two week moving average and here is how it works.
Daily Prices and Market Average
All too often the price action of a stock resembles a set of random numbers. One of the ways to make sense of what can look like gibberish is to use a moving average. A 52 week moving average shows you where a stock is headed despite often confusing fluctuations. The moving average helps define the likely limits to stock price within a given range. Thus an options trader can feel assured than when he buys calls or puts that he is on the track toward profits and not simply giving away the price of the options contract.
Calculating the 52 week moving average of a stock:
Calculate the sum of the middle price for each day of trading for each trading day for the last fifty-two weeks. Divide this number by the number of days of trading. Then calculate this for every day by removing the earliest day and adding the day just past.
Superimpose the moving average for the last 52 weeks on the same chart as daily stock prices. When the current trading range lies above the average, the average line to be a support level below which prices are unlikely to drop. When the current trading range lies below the average, this average to be a resistance level above which the price of the stock is unlikely to rise. This is a technical analysis technique that can be effective even when the trader does not consult the fundamentals that drive prices. This is a method that helps exploit market inefficiencies. Often times the most profitable option trade is simple and based on the perspective that one gains from looking at a moving average.
2. Options traders can use the fifty-
two week moving average to
decide whether puts or calls are a
better approach to trading a given
stock. The fifty-two week moving
average helps spot both support
and resistance levels.
.
By: www.Options-Trading-Education.com
3. The fifty-two week moving average
or moving averages for longer
terms also help you see when a
secondary trend is occurring
within a primary trend or when a
primary trend is occurring within a
secular trend. For quick reference
here is a breakdown of these
trends:.
By: www.Options-Trading-Education.com
4. A secular trend lasts more than
five years.
A primary trend lasts for more
than a year but less than five.
A trend that lasts for a few weeks
or months but less than a year is
called a secondary trend..
By: www.Options-Trading-Education.com
5. There are various options trading
strategies. All of them depend
upon successful analysis of the
market for their success. One is to
use the fifty-two week moving
average and here is how it works.
.
By: www.Options-Trading-Education.com
6. Daily Prices and Market Average
.
By: www.Options-Trading-Education.com
7. All too often the price action of a
stock resembles a set of random
numbers. One of the ways to make
sense of what can look like
gibberish is to use a moving
average.
.
By: www.Options-Trading-Education.com
8. A 52 week moving average shows
you where a stock is headed
despite often confusing
fluctuations. The moving average
helps define the likely limits to
stock price within a given range.
.
By: www.Options-Trading-Education.com
9. Thus an options trader can feel
assured than when he buys calls or
puts that he is on the track toward
profits and not simply giving away
the price of the options contract.
.
By: www.Options-Trading-Education.com
10. Calculating the 52 week moving average
of a stock:
Calculate the sum of the middle price
for each day of trading for each trading
day for the last fifty-two weeks. Divide
this number by the number of days of
trading. Then calculate this for every
day by removing the earliest day and
adding the day just past.
.
By: www.Options-Trading-Education.com
11. Superimpose the moving average
for the last 52 weeks on the same
chart as daily stock prices. When
the current trading range lies
above the average, the average line
to be a support level below which
prices are unlikely to drop.
.
By: www.Options-Trading-Education.com
12. When the current trading range
lies below the average, this average
to be a resistance level above
which the price of the stock is
unlikely to rise. This is a technical
analysis technique that can be
effective even when the trader does
not consult the fundamentals that
drive prices..
By: www.Options-Trading-Education.com
13. This is a method that helps exploit
market inefficiencies. Often times
the most profitable option trade is
simple and based on the
perspective that one gains from
looking at a moving average.
.
By: www.Options-Trading-Education.com
15. Sometimes the market makes more
sense when you think of price
patterns being nested on within
another. Think of the carved
Russian dolls that are nested one
within another. If you are looking
at the third one in you are not
getting the whole picture.
.
By: www.Options-Trading-Education.com
16. If you are looking at a two month
long trend this is a secondary trend
and you will want to look at the
fifty-two week moving average to
see if the current trend runs
counter to the prevailing trend.
.
By: www.Options-Trading-Education.com
17. Also look at the last year or two. If
fundamentals have really changed
then you may really be in a new
trend that will take over. However,
when fundamentals have not
changed you are probably seeing a
short term trend.
.
By: www.Options-Trading-Education.com
18. Then you can often profit by taking
what may seem to be a contrarian
approach and trading against the
current, short trend. This can be
especially effecting when timing
options sales or purchases in an
uncertain market.
.
By: www.Options-Trading-Education.com
