Here’s a fact that most trading gurus won’t tell you: More indicators don’t mean better trading. In fact, traders who clutter their charts with dozens of overlapping signals are often the ones who get stuck—or worse, pull the trigger at the wrong moment.
Options trading is particularly forgiving here. Unlike buying and holding stocks, options are time-sensitive instruments. Timing is just as important as movement and direction, if not more. And if your chart is a mess of conflicting signals, you’ll be second-guessing every entry and exit.
So what is the solution? Focus on a small, complementary set of technical tools and learn to use them well. Below are four that Rick Orford – veteran trader and Barchart contributor – covers in his latest video, and exactly how options traders implement each one.
If you are new to technical analysis, start here. Moving averages remove the noise in stock price history, giving you a clear reading of the underlying trend.
A simple moving average (SMA) takes the average closing price over a certain period of time – say, the last 50 days. The Exponential Moving Average (EMA) does something similar but weighs recent prices more heavily, so it reacts faster to new market data.
The most common periods are 20-day (short-term), 50-day (intermediate), and 100-/200-day (long-term).
For options traders, moving averages answer a basic question before entering any trade: Am I trading with the trend or against it? If a stock is consistently trading above its 50-day SMA, bullish call setups have better odds. If this is the case, premium selling strategies may make more sense.
See also for crossover. When the 50-day SMA falls below the 200-day – called a “death cross” – this is a classic bearish signal. Conversely, the “golden cross”, when the 50-day crosses above the 200-day, indicates a potential bullish reversal. These events frequently create tradeable options arrangements.
The Relative Strength Index (RSI) is a momentum oscillator that tells you how fast and how hard a stock is moving over a given period. It is arranged on a scale of 0-100.
Key levels: Below 30 suggests an oversold condition (potential pullback), and above 70 suggests overbought (potential reversal).
For option traders, RSI is valuable for timing. Seeing an oversold RSI reading on a stock that is already at support? This is a potentially long-term arrangement. Seeing stocks in overbought territory after a strong run? That’s when buying premiums — like covered phones or cash safes — often becomes more attractive.
The RSI doesn’t predict direction with certainty, but it flags when a move may be overextended — giving options traders an edge in entry and exit.
The Moving Average Divergence (MACD) indicator combines trend following with momentum. It shows the relationship between two moving averages and signals when that relationship changes.
MACD has two lines: the MACD line (the difference between the short-term and long-term EMA) and the signal line (a smooth average of the MACD line). When the MACD line crosses above the signal line, it is a bullish signal. When it goes down, it’s urgent.
Options traders use the MACD to confirm directional bias and time entries. This is particularly useful for catching momentum changes before they become apparent in price – useful for placing calls or initiating trades, or for deciding when to close an existing position before it reverses.
Bollinger bands consist of three lines: an average 20-day SMA, bounded by an upper and lower band two standard deviations apart. As volatility increases, bands widen. As it shrinks, they contract.
For options traders, Bollinger Bands offer a double benefit. First, when price touches or breaks through the upper or lower band, it often signals an overbought or oversold condition – similar to the RSI, but represented visually on the price chart itself. Second, the width of the bands tells you what the downside volatility is – which directly affects options prices.
Narrow bands (a “choke”) often precede sharp price movements. Wider bands reflect higher volatility. Knowing where you are in this cycle helps you decide whether buying options (when volatility is low and expected to rise) or selling options (when volatility is high and expected to normalize) is the smart play.
The real power comes from combining indicators – but only if they confirm each other. Rick’s video goes through several practical combinations:
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Trend + Momentum: Use moving averages to create a trend, then RSI to time your entry when the momentum is in your favor but not too much.
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Trend + Confirmation: Use moving averages to determine direction, then MACD to confirm a reversal before pulling the trigger.
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Volatility + Momentum: Use Bollinger Bands to identify squeeze setups or overextensions, along with RSI to confirm overbought or oversold conditions.
The goal is not to use all four indicators in every trade. It’s best to pick two or three that complement each other for the particular arrangement you’re looking at.
Manually scanning hundreds of charts to find stocks that meet these technical criteria is not realistic. This is where Barchart Stocks and Options screeners come in.
Barchart Screener allows you to filter through thousands of stocks simultaneously to find stocks trading above key moving averages, showing RSI at specific ranges, creating MACD crossovers, or emerging from Bollinger Band squeezes. Instead of hunting through the chart, the layouts that match your criteria come to you.
This is the difference between searching for a business and finding a business.
Rick covers all four indicators – plus combinations and risk management – in a complete barchart video. If you want to see charts in action and understand how to apply these tools to real trades, watch this quick clip below.
→ Watch the full video on YouTube
→ Try the Barchart Stocks and Options Screener
→ Learn more about technical analysis tools on Barchart
As of the date of publication, Barchart Insights has no position (either directly or indirectly) on any of the warranties mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com
