From earning a little extra to making a full-time living, trading options is an excellent way to achieve your financial goals. While trading options can be a lucrative venture for investors, if executed wrongly, it will bare worse than expected results. Therefore, it is crucial that you take your time to learn the market before placing your capital at risk. Minimize risk and achieve success when trading options by following these simple tips.
When trading options, it is crucial to understand that what works for another trader may not always work for you. So forget about the currency pairs, technical analysis indicators, and the markets and take some time to think about yourself. Determine your risk tolerance and preferred modus operandi to know your best trading strategy.
Remember that your goal is not to make one deal close, but rather, to generate stable returns over time. So take the time to set your goals and priorities, what you want to achieve with trading and what you are willing to sacrifice. Visualize these goals and come up with ways to achieve them.
Use Options to Minimize Risk
Options provide a great way for traders to minimize risk. If, for instance, you are not sure about the stability of an instrument, but you do not want to sell it, options allow you to hedge your position. One way you can do this is by buying a put option for the instrument.
This will allow you to get out at a good price even if the instrument nosedives. Option trading offers an array of hedging options, which make a compelling case for traders to try the market. That said, there is no guarantee that any experienced trader will tell you that there is no such thing as eliminating risk completely.
Improve Your Knowledge and Trading Skills in the Field of Option Trading
Trading options do not come free of risk. Although we all hate losing money, very few traders take the time to educate themselves before trading. Understand that options trading is not gambling and traders do not rely on luck. Therefore, as a smart trader, you should always be looking for ways to trade smarter by staying up to date with the news, staying tuned into emerging schools of thought and using trading books to their advantage.
Also, only trade with instruments you know and understand. This market is all about risk management and probabilities. So educate yourself to be able to manage risks involved in each trade as well as increase your chances of trading profitably. Fortunately, most of the relevant information is pretty straightforward to take in.
Avoid Holding Options Too Long
When trading options, it is easy for a trader to fall in love with a profitable option and hold on a little longer with the hopes of making a larger profit. However, this is not a smart move since options are depreciating assets. And, holding them too long, or until expiration arrives can leave you nursing big losses.
Instead, your plan should be to get out of the trade the moment it becomes feasible. This means that sometimes you will earn a profit, whereas other times, you may need to give up on a trade and sell the option while they are still valuable. Therefore, if the stock prices hit your target, or near the target price, consider selling it off to get your gains.
Know Your “Break-Even Point”
Every option you trade has a break-even point. The break-even point is the point where a stock price must reach for you to start making a profit. Knowing these points can help steer you clear of the main mistake most traders fall into, which is failing to stick to your strategy. Ensure your break-even point accounts for both the price you have paid to own the option and the commissions charged on the buy trade and sell trade.
Never Go Against the Market
Just like the old adage says, when trading, the trend is your friend. Or at least until you understand what exactly it is you are doing. Otherwise, you really are just gambling. Most times, those who think they can turn against the market turn out to be wrong and are doomed to lose their working capital. Rather, go with the market. Rely on strong market moves and let trends do their work.
Always Have an Exit Strategy
When trading options, just like trading stocks, it is important that you leave your emotions at the door. Have a plan in place, stick to it, and execute it. In short, this means that you need to have a clearly defined exit strategy. This exit strategy, however, is not only meant for when trades are going south only. You also need to know when to leave, even when your trades are going your way.
Making all the right choices when trading options is important. However, knowing how to avoid mistakes is, maybe, even more important. While a win is an ultimate goal, sometimes, the best you can do is simply not losing.
Harness the Power of Technology
With the thousands of traders out there looking to make a profit, it is crucial that you utilize all the resources at your disposal to stay ahead. For instance, charting platforms offer an array of ways to analyze the markets. You can also backtest your trading strategy against historical data to correct any problem areas.
Mobile apps ensure traders have instant access to the markets, regardless of where in the world they are. Combine this with fast internet speeds and you get a chance to make fast, accurate and informed decisions.
Keep a Trading Journal
Keeping an up to date trading journal is an important tip for options traders. The best part is that the software now lets you to quickly and easily store your trade history from entry to exit.
It is important for traders to realize how easy it is to lose money when trading options. So take advantage of these 9 tips to trade smartly and make more profits.