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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
New traders often make things too complicated.
They get hung up on too many technical indicators…
And by the time they make sense of all the contradictory signals, most good trades have already passed.
I prefer to keep things simple.
That’s why I stick to two technical indicators: the basic moving averages (MA) to help identify the trend and the Relative Strength Index (RSI) to help gauge momentum.
Today, I’m going to show how I used these indicators in 2021 on microchip manufacturer, Advanced Micro Devices Inc (AMD) for my trading service, The Opportunistic Trader.
In the AMD chart below, you can see the setup that led to the trade.
The 10-day MA (red line) broke higher above the long-term 50-day MA (blue line), as the uptrend gained traction through October…
Advanced Micro Devices Inc (AMD)
Source: eSignal
That higher move coincided with the RSI breaking above the green line at 50% and staying there – typically a bullish signal.
But even before the rally gained traction, the RSI was indicating overbought territory… AMD was trading above the upper grey line.
This move alone wasn’t enough to place a short trade. However, it did make me wary of going long.
Instead, I watched AMD’s share price and the RSI as they continued to move higher. But in early November, they started to separate.
AMD’s share price continued to climb to all-time highs. Meanwhile, the RSI started to decline… showing that buying momentum was drying up.
This divergence, shown by the orange lines, is often the precursor to a change in direction.
Meaning, a continual decline in momentum will eventually cause the share price to fall.
Based on this growing divergence, we bought an AMD put option on November 30 in anticipation of a potential fall. Remember that a put option typically increases in value when a share price falls.
So, let’s take another look at the chart to see how we did…
Advanced Micro Devices Inc (AMD)
Source: eSignal
We were right… After entering the trade, AMD shares began to fall.
Then, with the RSI about to test support (green line) – and being up on the trade quickly – we closed out our trade on December 6 for a 67% gain.
By using options, our returns were much higher than if we had shorted shares instead.
Remember, options have an expiry date, so you have a limited time for your trade to work.
But by simply sticking with just a couple of proven indicators, we were able to generate a profitable trade in just one week.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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