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Options traders have numerous technical indicators from which to select. Traders use the indicators to determine influences on price trends such as range of movement and direction and duration of moves. While stock positions can be held indefinitely, options have time constraints and expiration dates.
For this reason, investors closely examine momentum indicators to ascertain when a particular offering is oversold or overbought. This is determined through Relative Strength Index (RSI) values on a 0 to100 scale.
Values under 30 indicate oversold levels, while those over 70 indicate overbought levels. Recent gain magnitude is compared with recent loss magnitude over a specific period, and the velocity and amount of security price movements are measured. This indicator is most relevant for individual stocks, which are more likely than indexes to be overbought or oversold. RSI-based trading is particularly applicable to highly liquid stocks in short-term holdings.
Another useful indicator is the Bollinger Band, which tends to contract as volatility decreases and expand as it increases. Price movements beyond Bollinger Band ranges often signal that an asset is set to reverse course.
