Options Trading Strategies: Identifying a Retracement or Reversal
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Options Trading Strategies: Identifying a Retracement or Reversal

John Carter 12/11/2013

Hi everybody, this is John. Welcome to the free video. We're going to talk today about retracements. And the question is, is when do you freak out about retracement and bail on a position and when do you stay with your options trading strategy and calmly hold through it? So let's look at the end first. The move here, obviously, is to the downside. We had a weekly squeeze. And we know that it's not going to move down every single day -- though it's nice when it does. So the question becomes when do we freak out on a retracement. Like sometimes a retracement turns into a reversal, right, and all those profits that we had disappear.

Check the EMA

Well, a couple things -- first of all on a really strong trend, on a daily chart, that 8 EMA will hold it down and then from there the 21 EMA. And they're usually not -- they're not going to be violated if it's in fact a really strong trend to the down side. OK. And then it's always good if you want to hedge -- like one thing that I was showing today in the premium video too -- is if you happen to see an hourly squeeze like that, it's OK to hedge though you want to be careful of it.

Hedge Until Momentum Slows

So FXY, I mean this is my position, right. And today I lost $8,000.00 on my position because it bounced. However, I saw that hourly squeeze on the end so I did buy like 20 YEN futures contracts. And well, that already reset but it ended up making like 7K and it just kind of offset that. You know you can kind of hedge and you then can stay in that long until it starts to lose momentum. And now you can see that the YEN is actually rolling over so maybe this thing will continue to stay on trend tomorrow. So that's just kind of a normal kind of a thing.

Spotting a Reversal

And so I would say on a daily chart that 21 EMA -- I mean essentially it made a reversal is two closes above that EMA. OK. That's a reversal. And if we look at like gold, you know gold had a really strong rally today but gold's kind of in the same position as the YEN. It's got a squeeze to the down side, right. And you can see here it just kind of -- and it's been through most of this trend down, it's been stopping through the 8 EMA. OK. The one time it had a momentum reversal here and then it went all the way back to the 34, but you can see at this point here, the momentum hasn't reversed.

At this point, the 8 EMA should hold and on the daily we kind of got through the 21. Now if we get a higher close tomorrow above the 21 that's a red flag. OK. But for now, it's kind of normal yet kind of scary, right. Because if you're short you're like, oh my god is this…is this THE move. But the fact that we got the squeeze going -- remember the odds...all we're doing is playing the odds, continue to favor the down side here...OK, on GLD. All right. Hopefully that helps. You guys have a great night and we'll see you at the next update.