Here’s a truth most trading educators won’t tell you: more indicators don’t mean better trades. In fact, the traders who clutter their charts with a dozen overlapping signals are often the ones who freeze up — or worse, pull the trigger at exactly the wrong moment.
Options trading is especially unforgiving here. Unlike buying and holding a stock, options are time-sensitive instruments. Timing matters just as much as momentum and direction, if not more so. And if your chart is a mess of conflicting signals, you’ll second-guess every entry and exit.
So what’s the fix? Focus on a small, complementary set of technical tools and learn to use them well. Below are the four that Rick Orford — veteran trader and Barchart contributor — covers in his latest video, plus exactly how options traders apply each one.
If you’re new to technical analysis, start here. Moving averages smooth out the noise in a stock’s price history, giving you a clear read on the underlying trend.
A Simple Moving Average (SMA) takes the average closing price over a set period — say, the last 50 days. The Exponential Moving Average (EMA) does something similar but weights recent prices more heavily, so it reacts faster to new market information.
The most-watched periods are 20-day (short-term), 50-day (medium-term), and 100-/200-day (long-term).
For options traders, moving averages answer a fundamental 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 carry better odds. If it’s below, puts or premium-selling strategies may make more sense.
Watch for crossovers, too. When the 50-day SMA drops below the 200-day — the so-called “death cross” — it’s a classic bearish signal. The opposite “golden cross,” when the 50-day rises above the 200-day, signals a potential bullish shift. These events frequently generate tradeable options setups.
The Relative Strength Index (RSI) is a momentum oscillator that tells you how fast and how hard a stock has been moving over a given period. It’s plotted on a 0–100 scale.
The key levels: below 30 suggests oversold conditions (potential bounce incoming), and above 70 suggests overbought (potential pullback ahead).
For options traders, RSI is invaluable for timing. Seeing an oversold RSI reading on a stock that’s already at support? That’s a potential long call setup. Watching a stock hit overbought territory after a strong run? That’s when selling premium — like covered calls or cash-secured puts — often becomes more attractive.
RSI doesn’t predict direction with certainty, but it flags when a move may be overextended — giving options traders an edge on entries and exits.
The Moving Average Convergence Divergence (MACD) indicator combines trend-following with momentum. It shows the relationship between two exponential moving averages and signals when that relationship is shifting.
MACD consists of two lines: the MACD line (the difference between a short-term and long-term EMA) and the Signal line (a smoothed average of the MACD line). When the MACD line crosses above the signal line, that’s a bullish cue. When it crosses below, that’s bearish.
Options traders use MACD to confirm directional bias and time entries. It’s particularly useful for catching momentum shifts before they show up clearly in price — helpful for getting into a call or put trade early, or for deciding when to close an existing position before it reverses.
Bollinger Bands consist of three lines: a middle 20-day SMA, flanked by an upper and lower band set two standard deviations away. As volatility increases, the bands widen. As it decreases, 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 RSI, but visually represented on the price chart itself. Second, the width of the bands tells you something about implied volatility — which directly affects options pricing.
Narrow bands (a “squeeze”) often precede sharp price moves. Wider bands reflect elevated volatility. Understanding where you are in this cycle helps you decide whether buying options (when volatility is low and expected to rise) or selling options (when it’s high and expected to normalize) is the smarter play.
The real power comes from combining indicators — but only when they confirm each other. Rick’s video walks through several practical combinations:
Trend + Momentum: Use moving averages to establish the trend, then RSI to time your entry when momentum is in your favor but not overextended.
Trend + Confirmation: Use moving averages to set direction, then MACD to confirm the momentum shift before pulling the trigger.
Volatility + Momentum: Use Bollinger Bands to spot squeeze setups or overextension, with RSI to confirm overbought or oversold conditions.
The goal isn’t to use all four indicators on every trade. It’s to pick two or three that complement each other for the specific setup you’re looking at.
Manually scanning hundreds of charts to find stocks meeting these technical criteria isn’t realistic. That’s where Barchart’s stock and options screeners come in.
Barchart’s screeners let you filter across thousands of stocks simultaneously to find stocks trading above key moving averages, showing RSI in a specific range, triggering MACD crossovers, or emerging from Bollinger Band squeezes. Instead of hunting chart-by-chart, the setups that match your criteria come to you.
It’s the difference between searching for a trade and having the trade find you.
Rick covers all four indicators — plus combinations and risk management — in the full Barchart video. If you want to see the charts in action and understand how to apply these tools to real trades, watch this quick clip below.
→ Stream the Full Video on YouTube
→ Try Barchart’s Stock & Options Screeners
→ Learn more about Technical Analysis Tools on Barchart
On the date of publication, Barchart Insights did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
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