As a day trader, I have been using a pretty simple strategy to day trade or scalp options. Mostly big names in tech like Apple, Amazon, Microsoft, etc. This strategy requires 2 existing indicators that you can find inside ThinkorSwim. No need to import or create your own code.
The two indicators are Money Flow Index (MFI) and Directional Movement Index (DMI).
A Quick Breakdown
- Money Flow Index which is often known as MFI will show me when a stock is oversold or overbought.
- Directional Movement Index (DMI) is a momentum indicator which will show which direction of the stock is stronger. Is it the downside or upside?
How to Day Trade Options Profitably using MFI and DMI
First thing you want to do is add the two indicators. As mentioned earlier, they can be found within the Studies section in ThinkorSwim. For my personal use, I like to tweak the Directional Movement Index a bit.
My Modification of DMI:
Change DI+ to green
Change DI- to red
An additional step that I would take is changing the candles from regular to Heiken Ashi. Also, switch to the 3 minute (3m) timeframe.
You'll have something like this.
When to Buy and Sell?
There are 2 conditions you have to always keep in mind.
- When MFI is below 20 = oversold
- When MFI is above 80 = overbought
When either condition is met, there is a potential short/long in place. You can choose to short when a stock is overbought or buy calls when a stock is oversold.
What's DMI For?
If MFI is so good at showing overbought or oversold, then why do we need DMI for? Well, you can choose to use just the Money Flow Index indicator alone, but sometimes, it could be misleading. This is when DMI will come up and help.
When DMI create a huge gap between the DI+ (green) or DI- (red), then we know it's ready to reverse.
When the DMI lines are super close to each other, it means we have a sideways action going on.
Here is a great example of how DMI can be extremely helpful.
From the image above, MFI showing Apple was overbought. Furthermore, DMI also show that there is a huge gap between red and green DMI. This confirms that a reversal is going to happen. You don't want to trade when DMI is close to each other. Again, that indicates the stock is going to go sideways.
Which option should I buy?
With this day trading strategy, I usually buy weekly in the money (ITM) option.
Give it a spin and let me know how it goes.