To be proficient in trading options online, you need to master a few things. First you must learn to use a computer. This is the most basic requirement, then learning to use the trading platform.
You then set off to learn about stocks, the fundamentals and the technical. Since you have decided to trade options because it offers more flexibility, you need to learn about options, their strategies and their applications.
As a matter of fact the entry and exit signals are based on technical assessments of the charts. You don’t make the decisions, the stocks do and it is supposed to remove the trading emotions from you when you trade. However there are some advices that I want you to remember as they can interfere and disrupt your trading decisions.
Do not listen to the expertsWhen you trade online, you are bound to surf the internet for information and tips. It is unavoidable to see lots of advertisements or sites that are offering free investing stuff just for signing up. You are going to get quite a bit of email from these sites providing you with their expert recommendations for a small fee or even free. Think! This is their job and they are paid to bring in people to subscribe for their services. They will only show you the impressive winning trades just to get you to sign up. Some may claim to have “hot tips” or “insiders’ information” and that they have a way to detect it before it move big time.
Subscribe to their services will probability get you some winners and some losers and you will be happy if your portfolio remain positive at the end of the month.
These experts probably know as little as you do about the markets and if they have known more, they would be making a lot more money trading on their own rather than to give recommendations services. It is all base on randomness and I recommend you to read “Fooled by Randomness” by Nassim Nicholas Taleb. It is about the hidden role of chance in life and in the markets. A must read book for those who are determined to be a successful trader.
Signing up for these services are going to make you lazy because you do not have to do your own research and finding them yourself. They will provide you with the recommendations and all you have to do is to follow their instructions. That it, so simple but it is going to hinder your growth from progressing as a trader.
Trading options can be more complex and thus requires more attentions as compare to trading stocks. If you can understand and master the knowledge of options, you would have acquired the unfair advantage as to how you can create profits on a consistent basis.
“I have probably purchased fifty ‘hot tips’ in my career, maybe even more. When I put them all together, I know I am a net loser” - Charles M. Schwab
Do not trade the newsMany options traders like to trade the news for quick profits. Can news releases be dependable to trade? First, let’s take a look at the significance of the news being released.
Major news report like GDP, CPI, Interest rates or Unemployment can absolutely cause a stir in the markets. The question is that you have no idea whether it is going to go up or down. Trading the news is the same as playing earnings gapping, you are guessing and that is gambling.
I would like to emphasize this again, as an options trader, it is crucial to understand about volatility. Any news that can cause the market to move will cause the markets volatility to increase at the same time. An increase in volatility means increase in fear which in turn means an increase in options premium.
The markets volatility would be so crazy that it would be dangerous to trade options. What has been affecting the market lately? Almost every major news or events has an effect on it and the market reactions are purely based on the masses psychology.
Very often, when we listen to the news, there are given by these so called ‘experts’ with questionable credentials, or limited resources. It could be that an inexperienced junior staff who is providing the piece of information.
Communications between news sources and brokerage houses are completely unregulated and unsupervised, therefore allowing the possibility of the news being diluted or altered and usually released to the public later in time.
However there are many who are willing to pay top dollars to get access to the news first. Use your intelligence, if the big boys would want to sell, they will tell you to buy and vice versa.
“The greater the uncertainty, the more people are influenced by the market trends; and the greater the influence of trend following speculation, the more uncertain the situation becomes” – George Soros
Do not tell others about what you tradeIf you are trading on your own research and selections derived from facts and market data, be it on technical or fundamentals, then you are on the right track in becoming a better trader.
You are making trading decisions based on the data and information that you have gather from the markets. There is no right or wrong about the stock or market that you are going to trade, it is the actions that you take in making that profit or cutting those losses that matters.
Different people have different opinion, we all see things as things that we want to see, we have already form a mental perception about those things that we are about to see. Do not let others distract you from their opinions base on their perceptions. This will affect your judgments on the decision that you have already made earlier.
Many novices will join discussion forum on trading hoping to learn from the more experience traders. Their intentions are good but they did not know about the dangers that it can bring about.
I have come across an options trading forum offered by a trainer as a form of a support, but it turn out to be a forum for the students to post their winning trades. It becomes a platform for “showing off” rather than focusing and addressing on the trading and learning issues.
This is going to make you egoistic and this could be a trader’s downfall. Beware of this kind of a forum, stay away if possible as you may get confuse over opinions and facts.
“Wisdom is what’s left after we’ve run out of personal opinions” – Cullen HightowerDo not predict, any thing can happen
Almost all options traders want to identify a trend early and accurately in order to achieve the maximum profit possible. Making prediction on stock price is very difficult and it is almost impossible to pick tops and bottoms. If anyone can tell you what’s going to happen next then he must be GOD.
Even with the most advance technical indicators, it is still difficult to predict future outcome. It is believed that stock price movements are governed by the random walk hypothesis and thus are unpredictable.
Trading by predictions can cause mood swing, often leads to frustrations and disappointments. Traders who trade by intuition, tips or emotions are rarely successful and such methodology is the biggest downfall to trading success.
Trading In The Zone by Mark Douglas offers specific solutions to the “people factor”, it is the culprit for lack of consistency, focus and selfconfidence when it comes to stock picking.
It is important for traders to learn to think in probabilities, and adopt the specific beliefs necessary to developing a winner’s mindset. Along the way, they’ll gain valuable insights into their own entrenched misconceptions about the market.
“The market is like watching a drunk walk a tight rope. You never know what’s going to happen next.” – Arthur Cashin, CNBC Commentary
Be neutral when you are trading
Is there such thing as a bullish or a bearish consensus? It is a personal point of view, depending on what you are looking for. You open an intraday chart of a particular stock and it looks bullish, change it to a daily chart and it becomes bearish, change it to weekly and look at a 5 years time frame and it is bullish again.
It depends on what you want to see, the time frame that you are looking at and which time frame you want to play. Short, mid or longer term and you will find a correct time frame chart to support your thesis be it bullish or bearish.
You will find facts to support that you are right. Your ego can be your greatest enemy. When a trade goes wrong, you know that you should get out immediately without a second thought but your ego tells you to hang on. Many times you suffer even greater losses.
When you enter a trade, you enter with the intention to win and make money. No matter how good you are or how high the probability is, you will get some losers. You know after you have made that trade something is going to happen, either it is going in your direction or against your position.
As long as you understand this, accept the risk and willing to set a certain amount of losses if it moves against you, then you will be able to trade without any internal conflict, hesitation and doubt.
This way you’ll know your limitations and when to cut your losses. Similarly when there are profits on the table you are not driven by greed to hang on for more. It will not create any emotional attachments when you lose money or make too little on a particular trade.
Let the charts tell you what to do
Trading stocks and options in the market and achieving consistent returns can be relatively simple. As a matter of fact, in many other aspects trading can be very difficult as you try to find shortcuts to achieving unrealistic returns.
Many people have been misled into believing that it is possible to become a millionaire by trading options in a very short period of time. There are many unethical gurus out there who are only interested in making money by teaching and they’ll try to impress you with their or their student’s best trade which is probably a one in a life time thing. They will eventually turn you into gamblers.
It might be helpful to view options trading as a game where there are no rules, some certainties and probably works on randomness with repetitive frequencies. One of the most common situations when trading options is the necessity to make decisions despite of overwhelming ambiguity.
It is never an easy tusk, even the most experienced options traders will find difficulties and it can only become less difficult when you become a more experience trader. The key to successful options trading is the technical analysis know-how in reading and interpreting stock charts. Most of the time the charts will give signals to buy or to sell and all you need to do is just to act on the signals.
When you are starting out, a stock chart probably don’t mean much to you. However, as you progress, you will discover that you can spot and determine in just a couple of seconds whether there are any opportunities in that particular stock just by looking at the chart.
Mastering the art of chart reading can help you to achieve handsome profits in your trading provided you are willing to put in the time and effort to learn the basics of charting. This ability will takes time to develop and is invaluable, but it doesn’t happen overnight.
Most options trader won’t be bothered; they only trade the news and wait for earnings announcements hopping to catch a wind fall. The road to success in options trading is not easy and there are no shortcuts, but it can be very rewarding for those who are determine to learn and put in the necessary effort to become a better options trader.
“The person that turns over the most rocks wins the game” – Peter LynchBe truthful to yourself
The main reason why so many options traders lose money is that they do not realize that their problems are internal. Trading is more psychology rather then methodology. The way you trade reflects on your personality and your beliefs which can surface to become your trading problem.
Making money is the main objective and reason for you to trade options, but when you become too obsessed in making money alone, the emotional implications and pressures from the money making part can very often will lead to losses.
All of us want to win and refuse to accept losses, avoiding the emotional pain if possible. As an options trader, you are constantly confronting with losing trades which creates an internal challenge of self esteem because it feels good when you are right.
When you are on a losing streak, you are putting yourself under pressure and you are psychologically in pain and the only way to remove it is to stop trading. Some may sabotage yourself by blowing out your trading account intentionally without even knowing it because when there is no more money in your trading account you will be forced to seize trading.
The quest in becoming a successful options trader requires you to know and understand the method of trading options that are being taught to you. Its strengths and weaknesses, what are the limitations and if it is really so easy to get rich by trading options then every trader can be as rich as Warren Buffett or George Soros. Statistics have shown that 90% of options traders lose money. Why? They probably share the same thoughts, same misconceptions or even make the same mistakes. Logically speaking, we all must aim to be the 10% traders who make money consistently in trading.
These 10% winners don’t compete with the markets, whether they win or lose money, they are honest and truthful to themselves and accepting all the responsibilities of their actions. They know that losing is part of the process in the course of doing business and they do not make it personal.
They are not controlled by the money emotions and they only respond and react to the market conditions as it is. They do not predict the future and will not try to beat the markets, accepting the fact that anything can happen.
You are fully responsible for all your actions as no one force you into it and all the trades are entered by you. You must understand that only when you are truthful to yourself and accept the responsibility of all your losses then you are ready to learn from your mistakes.
“Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed. It isn’t the head but the stomach that determines the fate of the stock-picker” – Peter Lynch You don’t need to prove that you are right
Traders who think that they have developed outstanding abilities, knowledge, and skill in options trading are often egoistic in their personality. They usually brag about their superficial abilities in trading options and they will display their best winnings to boast about how great they are.
It is sad to say that they have been misled by many of the so called “Gurus” out there claiming that they have the abilities or secrets in doing so. Don’t fall into this trap for it can turn out to be a financial disaster that can ruin your life. It is just too painful for one to bear.
The problem with most of us is that at the very first glimpse of what we see or hear, we often find reasons to substantiate the information that we want to believe. We tend to be bias and become one sided thus anchoring our subsequent thoughts.
Trader wannabes must learn to seek and develop the ability to analyze information given to them even though they have paid for it. One way is to seek information from a few more sources so that you’ll have a clearer perspective before making any major decisions.
The only way is to paper trade and test it out first to see whether what have been taught is credible. You must stay within your level of competence and be questionable of everything you see or learn. It is your money that is at risk not the person who is teaching you to trade. It is better to be safe than sorry.
Your ego can be your greatest enemy. Over confidence in your ability to make forecast and profit from it can be a setup for your downfall as an options trader. This can cause you to be irrational when your emotions take custody over your thinking and you’ll lose your ability to trade properly. You begin to make stupid mistakes and lose badly. To break the spell, you’ll have to take a break to detach and unlearn of what that have been taught to you.
Many times you know that when a trade goes wrong, you should get out immediately without having any second thought but your ego tell you to hang on. Maybe you are able to recover your losing trades and turn it into winners most of the time. You average down and buy more to support your theory of being right, it is only going to heat up your over confidence level and one day the market is going to break you for that.
Respect your trading rules, admit your mistakes, learn from them and you can be sure that you are on the right track in becoming a better options trader.
“The market does not beat them. They beat themselves, because though they have brains they cannot sit tight” – Jesse Livermore