Important Tips For the Beginner in Option Trading
For those of you who may be only a beginner in option trading and just starting out on your journey of discovery, we have a few important tips here for you. If you take heed, they could mean the difference between substantial and consistent profits and wiping out your entire trading bank.
What I’m about to tell you, comes from someone who has cleaned out his trading bank in days gone by – and I want to share with you the reasons why this happens, in the hope you might avoid the same mistakes.
The markets are a very powerful ally if you treat them with respect, but if you think you can outsmart them or ignore what they are telling you, they can financially destroy you. They are huge and there is plenty of room for all, but you must be aware of the risks and be prepared for them.
So … here are the most important things a beginner in option trading needs to know.
It’s All About You
You must have the right mindset to approach trading the markets. Since option trading is a highly leveraged instrument, the spectacular profits you can achieve are matched by significant losses should you choose to ignore it when things go wrong. Things will ALWAYS go wrong. You will never get every trade right. It’s no different in any other kind of conventional business – some sales are profitable, others are not.
If you can see it this way, that you are in a business (not a part time hobby) and therefore all transactions you undertake conform to an overall business plan, you have a much better chance of succeeding. Most businesses fail during the first year of operation, mainly because they fail to plan carefully and know how they are going to use their resources to produce a profit. The beginning in option trading should think of themselves as running a real business. Your resources are your trading bank. You are buying and selling for profit. If you neglect your business (forget about your trades in the hope they will fix themselves) it is like forgetting your customers and hoping they will serve themselves.
Seasoned traders always tell the beginner in option trading, that 90 percent of trading success is about psychology. How you handle the decision to enter a trade and how you choose to exit are critical components for success. Do you hesitate to “pull the trigger” when you see a good setup, then regret it later as you see the spectacular results you missed out on? Do you find it difficult to accept that you’ve been wrong about a trade and can’t come to grips with taking a small loss?
You need to be able to be honest with yourself about these things. Know who you are and what trading style you’re best suited to. Are you a day-trader? Can you handle the pressure? Maybe you are better off as a short term trader? Or if you life is otherwise busy, perhaps a longer term investment strategy might better suit your style? The beginner in option trading needs to sort all this stuff out first.
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 return on your trading bank per month, or would you be satisfied 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 5 to 15 percent per month is much easier and more manageable than $10,000 on high risk trades looking for a minimum 50 percent per month.
If You’re a Beginner in Option Trading – Educate Yourself
Maybe as a beginner in option trading, you’ve read a few books about technical analysis of stock charts and feel confident you can predict the short term direction of stocks. You’ve heard that with options you can make money whether the stock 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 did you know there are some much more advanced option trading strategies out there, which allow you to make a good income from stocks as long as they remain within certain price boundaries until expiry 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 between. Beautiful for making a profit within a $10 to $15 trading range over one to two months.
The beginner in option trading is usually enthusiastic about future possibilities
I remember I was. You’re going to be financially free, earning better than your old job. You’ve seen the light. You can sack your boss and work just one hour each day instead of slaving away for 40 hours per week. You’ve probably heard the “sell”. Sounds so good doesn’t it. This is “beginner in option trading syndrome”, but it’s not entirely realistic.
And indeed, all the above can be true . . . IF you take it seriously, develop a passion for it, think of it as a business and not 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.
Many option traders are making a very healthy living. Others have quickly destroyed their financial capital and are very disillusioned. Like anything worthwhile, it doesn’t come easily – but when it does, the rewards are worth it. If you are a beginner in option trading, you have an exciting journey ahead.