Technical Analysis and the Iron Condor Strategy

As one step of the trading process, some traders will take a meticulous deep dive into chart patterns (and accompanying technical indicators) before opening any new positions. Others dismiss all technical analysis as irrelevant or even nonexistent. What makes one intangible “line” (a moving average, for example) any more important than another?

Regardless of your opinion on moving averages, RSI, MACD, oscillators, or other technically-based indicators, it's never a bad idea to look at a price chart or two when planning your next trade. Price charts can offer a helpful frame of reference for your stock or option trading. When looking at a stock chart as part of your trading strategy, some initial questions to ask may include:

Is the stock at or near an annual high?
Is the stock trading at or near an annual low?
If your strategy requires the stock hold above a certain price, has the stock fallen below that price within the last year?
If so, how many times?
If the shares have been consolidating sideways, what is the time frame and breadth of its trading range?

While past performance isn't necessarily indicative of future results, a peek at historical trends can potentially benefit your trading. Analysis of the past can offer insight into what is within the realm of possibility for future stock behavior.

Even seasoned option experts trading complex strategies may skim past technical analysis and it can impact even the most conservative strategies. For example, the iron condor is a trading approach neutral investors typically employ on a stock that trades within a range for a finite period of time.

As long as the stock stays between the two break-even points— the higher short strike plus the credit and the lower sold strike minus the credit—the trade will be profitable. Below breakeven, the trader risks losing the difference in put or call strikes (whichever is greater) less the total credit collected.

Iron Condor Example:

One confident but short-sighted trader was analyzing XYZ stock, which he thought had fairly neutral prospects. And he was right. With the stock trading around $85, the trader sold an iron condor with break-even points of $78 and $92.

What he didn't know (because he was averse to technical analysis and didn't look carefully enough at the price charts) is that over the past five months, the stock had traded below $78 or above $92 a total of eight times. XYZ was trading in a range, yes, but that range was a tenuous one.

If he'd studied the stock chart as part of his trading plan, he may have opted for the iron condor – just one with wider strike prices – and had a winner. Instead, he plowed uninformed into a disappointing trading battle, resulting in a losing trade.

Remember all OptionsHouse customers have access to Streaming Charts and News. This tool is a quick and effective way to gauge a security's technical picture before executing any new trades.

Photo Credit: hardeep.singh

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