Here are my top 10 tips for option trading success.
1. Plan Your Trade
Getting in to the trade is the easy part, it’s what comes next that’s hard. Have a plan in advance for where you will get stopped out, where and how you will adjust and where you will take profits. Mechanical decision making is much better than emotional decision making
2. How To Monitor P&L When Scaling Up
As you start trading bigger, track your P&L based on a 1 lot size. Much easier to make decision when you are looking at a $100 loss compared to a $10,000 loss.
3. Become Ruthless At Cutting Losing Trades
Losing trades tie up both your financial capital and your mental capital meaning you may miss other opportunities while your focus is taken up by losing trades. Close those losers quickly.
Where I see most option traders go wrong is wanting every trade to be a winner and holding on too long or trying to find some magic adjustment strategy that will save a trade.
If a trade isn’t working, don’t fight it, just get out. It’s ok to be wrong, just don’t stay wrong.
4. Don’t Follow Other Traders
Every trader is different with varying risk tolerance and style. When I was starting out, I followed “Trade Alterts”, but the problem is, by the time the “guru” has decided what to do and sent out an email, the market has moved and the adjustment is no longer valid.
You don’t want to be in a situation where you are sitting there hitting refresh on your email waiting for the guru to tell you what to do. By all means follows someone’s trades on paper and learn the process, but the most important thing is to be responsible for your own trades and know exactly how to handle any situation.
5. Keep Things Simple
I see people all the time coming up with these crazy and complex strategies. Sometimes simple is best and you can develop a really nice business just trading vertical spreads with a few simple parameters.
6. Understand That Everyone Has Losing Weeks, Months and Even Years
If you ever hear someone tell you that never lose, run as fast as you can. Even the best traders have lean patches and that can mean losing months or even years. It’s all part of the business.
7. Take Breaks
One of my rules is that if my account drops 10%, I close everything out and take a two week break from trading, no matter what. This helps prevent me from taking a big hit to my account. A 10% loss is much, much easier to recover from than a 50% loss.
8. Keep Your Ego In Check
Any time you start thinking to yourself “Geez, this trading thing is pretty easy”, start to lighten up on positions and risk. Most of my biggest losses have come after a really good run. The markets have a way of humbling you, so remember that no matter how well you are going, your next big loss is just around the corner.
9. Ride The Bullish Trend
It’s amazing how long bull markets can last and riding that bullish trend is much easier than trying to short and overbought market. Follow the trend and keep an eye on the key moving averages as your warning sign.
10. When Starting Out, Don’t Have More Than 8 open Positions
Don’t have too many open positions until you have at leas 12 months of experience. This is because it becomes harder to manage and monitor and you might miss something important. Another reason is that in a market crash, correlation goes to 1 and all stocks will move in the same direction. You don’t want to be scrambling around trying to close 20-30 positions when that’s happening.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
