For anyone who may be only a newcomer in option trading and only beginning your education, we’ve got some serious tips here for you. If you accept them, they could mean the difference between substantial and constant profits and cleaning out your whole trading bank.
What I’m about to tell you, comes from a person who has lost his trading bank in days gone by – and I hope to share with you the reasons why such things happen, hoping you can avoid the same mistakes.
The financial markets can be a very rewarding friend when you treat them with respect, but if you imagine it is possible to outsmart them or ignore what they are telling you, they can financially annihilate you. It is huge and there’s plenty of room for everyone, but you must be familiar with the risks and be well prepared for them.
So … let us discuss the most important things a newcomer to option trading ought to know.
It’s All About You
You need to have the right mindset to tackle trading the markets. Since option trading is a heavily leveraged instrument, the astounding profits you could potentially realize are offset by significant losses if you choose to disregard it when things go bad. Things will invariably go wrong. You’ll never get every trade correct. It’s no different in any other type of traditional business – some sales are profitable, others are not.
If you can see it this way, that you are in a business (as opposed to a part time hobby) and therefore all transactions you execute conform to an overall strategic plan, you have a much better chance of succeeding. Most businesses fail during the first year of operation, mainly because they neglect to plan carefully and know how they’re going to use their resources to produce a profit. Your resources are your trading capital. You’re investing to make money. If you neglect your business (forget about your trades with the hope they might fix themselves) it is like disregarding your customers and expecting they will serve themselves.
Experienced traders invariably tell the beginner in option trading, that 90 percent of trading success is all about psychology. How you handle the decision to enter a trade and the way you choose to get out are critical elements for success. Do you hesitate to "pull the trigger" when you see a good setup, then regret it later when you see the spectacular results you missed out on? Are you finding it difficult to accept that you have been mistaken about a trade and can’t come to grips with taking a minor loss?
You need to be capable of being honest with yourself about these things. Know who you are and what trading style you’re better suited to. Are you a day-trader? Can you cope with the pressure? Maybe you are better off being a short term trader? Or if your every day life is otherwise demanding, perhaps a longer term investment strategy might better fit your style?
Different Strokes for Different Folks
There are different trading styles you can use with option contracts. Some are high risk, high reward, while others low risk but lower returns. Are you looking for 50 percent yield on your trading bank per month, or would you be content with just 10 percent? Whatever your answer, how does that fit with the amount of capital you have to trade with and will that be enough for you to live on?
$100,000 on low risk positions bringing an average 5 to 15 percent monthly is much easier and more manageable than $10,000 on high risk trades after a minimum 50 percent each month.
Educate Yourself
Maybe when just beginning in option trading, you’ve read a few books about technical analysis of stock charts and feel assured you’ll be able to predict the short term direction of stocks. You’ve heard that with options you can make money whether or not the underlying is rising or falling – call options profit when it’s rising and put options increase in value when the stock is falling. Too easy!
But are you aware there are some much more sophisticated option trading strategies to choose from, which enable you to generate a good return from stocks provided that they remain within certain price boundaries until expiration date … and even if they don’t, you can simply adjust your positions to make a profit anyway? The Iron Condor is one such strategy – two credit spreads facing opposite directions with a price gap in the middle. Beautiful for producing a nice gain within a $10 to $15 trading range over one to two months.
The novice in option trading will likely be excited about future prospects. I recall I was. You’re going to be financially free, earning as good as your old job. You’ve seen the light. You can fire your employer and work just one hour each day instead of slaving away for 40 hours a week. You’ve probably heard the "sell". Sounds so good doesn’t it.
And indeed, all the above can be real . . . IF you take it seriously, develop a passion for it, consider it a business rather than a distraction, educate yourself properly and understand how and when to adapt each strategy to market conditions in a way that minimizes risk and maximises profit.
Plenty of option traders are making a very good living. Others have rapidly eliminated their financial capital so are very disillusioned. Like anything worthwhile, it doesn’t come easily – but once it does, the benefits are worth it. If you’re a beginner in option trading, jump on board for the interesting journey ahead.
