When a Stock Reaches a Target Area, Do Something

I have several sayings I like to drill into my students’ minds. To me, the more you hear them, the more you will think about them and eventually put them into action. As we move closer to the end of 2020 (and that cannot come soon enough for many), I will continue to introduce you to them, although many of you know them already. For today, let’s look at “when the stock comes into a target area, you need to do something.”

What I mean is when stocks trade into support (for bearish trades) and resistance (for bullish trades) areas, you need to take action. When I look at a chart, I see several potential areas for the underlying to face some adversity. For me, these areas are usually support for bearish trades and resistance for bullish trades. Knowing that support and resistance have a better chance to hold than not (70% to 80%, in my estimation), the stock might have trouble continuing to move in the same direction or possibly reverse. I want traders to consider taking some profit (a.k.a. removing risk) at those levels if applicable, or at least moving up their mental or hard stops.

It is really knowing whether the underlying has a better chance of breaking support or resistance or of not doing so. If you know it does not, take appropriate action and try to remove risk by exiting some or all of the position or moving up potential stop losses. An easy way to do this is to set an alert on your platform. For example, if you are in a bullish position and you see potential resistance at $60, maybe set an alert if the underlying moves over $59.50. Then you can decide whether or not to take action.

Learning good habits is essential for success in whatever you do, including option trading. Repeat phrases and practice good habits as often as possible. You will thank yourself later.

John Kmiecik, Market Taker Mentoring

Trader Education