Outside the Box: Some Success Tips for New Option Traders
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March 12, 2008
If you’re new to the options trading business, you’ll need to master a variety of skills before being able to be consistently profitable over the long term. In this article we will discuss some basic guidelines that can help start you on the path to success. When starting out, it is important to develop the mindset that this is an exciting endeavor for the long haul so that you can create a clear plan of action, while at the same time delineating how to handle losses as well as profits.
First, you’ll need to know how to manage emotions. Emotions can often be very detrimental to the trading process because they can lead you to making an incorrect decision at a very critical moment. To effectively manage emotions, you must learn to be both brave and disciplined in the markets. At the same time you need to avoid the very destructive emotions of fear and greed.
As a trader, you must not be scared to make money, otherwise you will feel that you have made the wrong decision—which quite frequently will lead to poor results. You must understand losses are inevitable in this business, but understand that the winners will more than take care of you over the long run. Even though mistakes will certainly be made, make sure to always learn from them and do not repeat them.
Discipline in option trading involves primarily two things. First, you must allocate time to track your option positions. Second, it is absolutely essential that you adhere to your option trading plan and overall approach. Checking prices and how it relates to your current trading plan should become automatic.
Just as fear is a dangerous emotion in trading, so, too, is greed. Greed can cause an options trader to stay in a position a few days more in an effort to squeeze out additional profits or to buy even more options, hoping to generate extra trading revenues. Develop a comprehensive trading plan for what action to take if the stock moves against you. That way, there are no surprises.
Learn to trust your trading system—rendering what are usually very emotional decisions and breaking them down to very black and white decision points. The less emotion you insert into your trading decisions, the easier it will be to apply your defined approach to effectively manage virtually any situation that might arise.
This brings us to the very important concept of money management. You must develop a money management plan as well. By adhering to a well defined money management plan, you can help make sure you are still around for the next opportunity that is presented versus having your trading account totally blown out of the water. When it comes to a money management plan, you can expect the best but must always plan for and take into account the worst possible scenario.
It is important to allocate money for options trading as money that can you can afford to lose. Also, when first starting out, you should allocate the same amount of risk capital to each option opportunity presented. If that amount is $600 for the first option trade, then it is best to allocate $600 to each option trade thereafter versus changing the amounts on each trade. By virtue of keeping the amount at risk each time about the same, you almost ensure that your wins will outweigh your losses.
If you are a new trader, following these tips and guidelines will help you manage your new options trading business much more efficiently. They will also avoid the major pitfalls that so often can sabotage a trading account.
Happy Trading.
Jeff Neal
Senior Writer, Options Strategist & Profit Strategies Radio Show Market Correspondent
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Listen to Jeff at www.ProfitStrategiesRadio.com
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