To be a successful options trader you must increase your options trading knowledge, set your trading goals or objectives, select the strategies that best match your objectives, and then develop an options trading system that enables you to perform a repeatable process that earns consistent profits. This will help eliminate emotion from your trading or any other distractions or poor trading habits, and will help simplify your trading while leaving little to chance.
Having a well-constructed options trading system is essentially trading as a business. Any successful business has clear objectives and a quality business plan. Your options trading business should be no different because that is just what it is, a business.
Far too many investors and traders treat their trading as a guessing game with hopes of earning a profit but without any real plan. This is just a recipe for failure. Yes, you may get lucky and make some profitable trades. Or maybe you just happened to catch a trending market and were able to ride the trend picking up gains along the way. However, this success will be short-lived if you do not have a strong trading system in place, your trading “business plan”.
If you are a beginning trader, it is very important to first increase your knowledge of options and how they really work. You need to learn options terms, strategies, and about time decay and how it can be used for you or against you. If you already have a basic knowledge of options trading and maybe even some experience, the next step in learning how to profit from options is to set your trading goals. For example, you may have a goal of earning an average of 5% per month on your total trading capital while using minimal risk. Once you have a trading objective, you can then develop your options trading system.
One key part of a trading system is money management, also known as risk management. It is critical that you never risk too much of your trading capital on any one trade or even a few trades. Even successful traders have losing trades at times, and when this occurs you don’t want to lose half of your capital due to allocating too much money to a single trade position. Just as long-term investors diversify to reduce risk, options traders must also diversify. This can be done by limiting trade size to 10% of your total trading capital.
Diversification can also be achieved by using more than one strategy and not being just one directional. Options traders must be able to recognize the current trend of the market and should adapt their trading strategies accordingly. For example, if the market is trending upward, it is best to use bullish to neutral strategies. If the market is trending downward, it is best to use bearish to neutral strategies. If the market is moving sideways with no significant trend, then a trader can profit by using neutral strategies as well as a combination of bullish strategies on outperforming stocks and bearish strategies on underperforming stocks.
Another major aspect of a trading system is establishing trading rules. This allows a trader to recognize quality trade opportunities and to enter and exit a trade at the best times. An example of a trading rule is to have a profit objective before even entering a trade i.e. to close the position once your target profit of 20% is reached. Another example is to close a position when a pre-determined stop loss is reached or if the market changes direction as detected by a crossover of moving averages.
A trader can develop several trading rules and should adapt them as they see some need to be adjusted, added, or removed. Having a perfect set of trading rules is not something that happens overnight. This will come from learning by experience as well as other successful traders. The goal is to have trading rules that will eliminate emotion and take guessing or hesitation out of the equation. You will know exactly what to do in any given scenario because you will be following the rules of your proven system that works.
Once you have a quality trading system in place, you will be able to profit from options on a consistent basis no matter what the market conditions are.
To learn more about options trading and developing an options trading system that works, go to www.optionstradingresource.com. This will help you increase your options trading knowledge as well as connect you to the best options resources available.