Strategies for Trading the Australian Options Market
Traders implement trading strategies to implement a high probability approach for the best possible outcome. Trading strategies should be centred on understanding the current market sentiment, determining where you fit into this sentiment and then identifying your trade entries based on these factors. Your entry point is critical because it’s either going to make or break your trades.
The Australian options market has an array of different trading strategies that you can implement. However, you should first identify what trading strategies are available before choosing one to follow. Why not try trading with options through Saxo?
There are five kinds of trading strategies commonly used by traders today: technical analysis, trend analysis, range-bound analysis, fundamental analysis and psychological analysis. The main difference between them is their starting point.
Which Trading Strategy is Best Suited to You?
1. Technical Analysis
This is a top-down approach that focuses on the big picture and aims to identify trends. Technical analysis is based on the simple belief that what has already happened will likely happen again. A helpful way to understand how technical analysis works is by looking at the patterns that develop on charts. These patterns can include trends, flags, pennants and other distinct shapes created from a stock’s price over time.
2. Trend Analysis
This is a bottom-up method where you start with individual stocks and analyse their fluctuations in price to predict their future price movements. To make this strategy effective, you need a large amount of historical data for each stock in your portfolio. When analysing them individually, you will have strong evidence when making your forecasts about what direction they will move next.
3. Range-Bound Analysis
This starts from the assumption that prices will fluctuate within a range rather than keep rising or falling. You use this information to make future predictions. For example, if the price of gold has fluctuated between $500 and $700 for several years, you might assume that it is unlikely for this range to change in either direction. Therefore, you are more likely to look at options that expire within this range when seeking potential trades.
4. Fundamental Analysis
This approach is formulated around the belief that prices are determined by supply and demand. However, some traders may believe that prices are determined based on trends or fluctuations. To effectively use fundamental analysis, you have to be thoroughly familiar with what you invest in because this will help determine whether an asset’s value is likely to increase or decrease over time. This strategy also requires a lot of research to understand any opportunities before making your investment.
5. Psychological Analysis
Emotional impulses in the market usually drive extreme price movements. When using this strategy, the main thing to understand is that most market participants react emotionally to price changes rather than logically, and it’s primarily inaccurate information that drives these emotions. Although prices can rise or fall because of how people feel about them, they do not always reflect an asset’s actual value. Therefore, traders looking to take advantage of psychological analysis need to determine whether there is real opportunity behind what appears to be irrational behaviour.
Conclusion: The Options Market in Australia
It would seem like all you need for success in options trading is knowledge of different strategies available and their strengths and weaknesses, but you still have to make good use of your research. This means you should start with technical analysis to determine whether or not there is a trend in place for the option. This information is helpful to make predictions about movements within that trend and what might happen after it ends.
If you expect the underlying price of an asset to change dramatically, use range-bound analysis; otherwise if you expect prices to fluctuate over time, use fundamental analysis instead. Of course, psychological analysis has its uses as well, but you need to be sure there is something worth investing in before spending your time researching it. Being familiar with any trading strategies available will help make your options market trading more effective.