Joe Duarte

Trading options is a bit different from trading stocks, but they both require research and study. If you’re going to trade options, make sure you know what the different order types are, how to read changes in the market with charts, how to recognize how stock changes affect indexes and options, and how indexes are built.

Trading in options and futures is risky business, and regulations governing those trades are stringent, even with regard to allowing you to open an account. Before opening an account for you, a broker must provide you with a disclosure document that describes the risks involved in trading futures and options contracts.

To help you get a feel for entering and exiting positions, take a look at a sample trade made by a hypothetical position trader. The idea is to help you understand the rationale and the timing. You can also use this example to practice picking entry and exit points based on historical pricing.As a position trader, your week begins during the weekend.

Trend following is favored by many technicians for one simple reason: Trends offer excellent trading opportunities for profit. Unfortunately, the popularity of the trend‐­following approach is one of its greatest weaknesses. Too many of these systems generate very similar buy and sell signals, which, in turn, makes outperforming the average trader difficult for any individual trend‐following trader.

For many traders, the quest to find a profitable countertrend trading system is all consuming. Countertrend systems appear desirable because their goal is to buy low and sell high. These systems try to identify inflection points, or the moments when stocks change direction, so traders can take positions close to when they occur.

A mechanical trading system addresses some of the problems that arise when using discretionary systems. Mechanical systems usually are computer‐based programs that automatically generate buy and sell signals based on technical and/or fundamental data. You’re expected to blindly follow the resulting trading signals.

Traders sometimes need strategies for getting out of an option. After you buy an option, you have to decide how you want to opt out of that position. You can choose one of the following three alternatives: Offset the option. Continue holding the option. Exercise the option. Offsetting the option You offset an option by liquidating your option position, usually in the same marketplace that you bought the option.

Similar to moving average–based systems, a breakout trading system can take many forms. To test a different approach, you can define a breakout system as follows: Buying at tomorrow’s opening price when today’s closing price is above the highest high price that occurred during the last 20 days Selling at tomorrow’s opening price when today’s closing price is below the lowest low that occurred over the last 20 days These trading rules are loosely based on the rules for Donchian channels (sometimes called price channels), which comprise a breakout system developed by Richard Donchian in the 1950s.