Option Trading Principles
Having been trading stocks and options within the capital markets professionally over the years, i’ve got seen many ups and downs. I have seen paupers become millionaires overnight. And I have seen millionaires become paupers overnight.
One story told to me by my mentor remains etched in my mind:
Once, there have been two Wall Street exchange multi-millionaires. Both were extremely successful and decided to share their insights with others by selling their securities market forecasts in newsletters. Each charged US$10,000 for his or her opinions. One trader was so curious to understand their views that he spent all of his $20,000 savings to shop for both their opinions. His friends were naturally excited about what the 2 masters had to mention about the stock market’s direction. after they asked their friend, he was fuming mad. Confused, they asked their friend about his anger. He said, one said BULLISH and therefore the other said BEARISH!
The point of this illustration is that it absolutely was the trader who was wrong. In today’s stock and option market, people can have different opinions of future market direction and still profit. The differences lay within the stock picking or options strategy and within the attitude and discipline one uses in implementing that strategy.
I share here the fundamental stock and option trading principles I follow. By holding these principles firmly in your mind, they’re going to guide you consistently to profitability. These principles will facilitate your decrease your risk and permit you to assess both what you’re doing right and what you will be doing wrong.
You may have read ideas the same as these before. I et al. use them because they work. And if you memorize and reflect on these principles, your mind can use them to guide you in your stock and options trading.
SIMPLICITY IS MASTERY
When you feel that the stock and options trading method that you simply are following is simply too complex even for easy understanding, it’s probably not the simplest.
In all aspects of successful stock and options trading, the only approaches often emerge victorious. within the heat of a trade, it’s easy for our brains to become emotionally overloaded. If we’ve a posh strategy, we cannot carry on with the action. Simpler is best.
NOBODY IS OBJECTIVE ENOUGH
If you’re feeling that you just have absolute control over your emotions and might be objective within the heat of a stock or options trade, you’re a dangerous species otherwise you are an inexperienced trader.
No trader may be absolutely objective, especially when market action is unusual or wildly erratic. rather like the proper storm can still shake the nerves of the foremost seasoned sailors, the proper securities market storm can still unnerve and sink a trader very quickly. Therefore, one must endeavor to automate as many critical aspects of your strategy as possible, especially your profit-taking and stop-loss points.
HOLD ON TO YOUR GAINS AND CUT YOUR LOSSES
This is the foremost important principle.
Most stock and options traders do the other.
They hold on to their losses way too long and watch their equity sink and sink and sink, or they get out of their gains early on only to work out the worth go up and up and up. Over time, their gains never cover their losses.
This principle takes time to master properly. Reflect upon this principle and review your past stock and options trades. If you have got been undisciplined, you’ll see its truth.
BE AFRAID TO LOSE MONEY
Are you prefer most beginners who can’t wait to leap right into the stock and options market along with your money hoping to trade as soon as possible?
On now, I’ve got found that almost all unprincipled traders are more terrified of missing out on the subsequent big trade than they’re frightened of losing money! The key here is continuing your STRATEGY! scrutinize and options trades when your strategy signals to try and do so and avoid taking trades when the conditions don’t seem to be met. Exit trades when your strategy says to try to so and leave them alone when the exit conditions don’t seem to be in situ.
The point here is to be afraid to throw away your money because you traded needlessly and without following your stock and options strategy.
YOUR NEXT TRADE might be A LOSING TRADE
Do you absolutely believe that you just next stock or options trade goes to be such an enormous winner that you break your own money management rules and put in everything you have? does one remember what usually happens after that? It isn’t pretty, is it?
No matter how confident you will be when entering a trade, the stock and options market features a way of doing the unexpected. Therefore, always keep on with your portfolio management system. don’t compound your anticipated wins because you will find yourself compounding your very real losses.
GAUGE YOUR EMOTIONAL CAPACITY BEFORE INCREASING CAPITAL OUTLAY
You know by now how different paper trading and real stock and options trading is, don’t you?
In the exact same way, after you get accustomed trading real money consistently, you discover it extremely different once you increase your capital by tenfold, don’t you?
What, then, is that the difference? The difference is within the emotional burden that comes with the chance of losing more and more real money. This happens after you cross from paper trading to real trading and also once you increase your capital after some successes.
After a long time, most traders realize their maximum capacity in both dollars and emotion. Are you comfortable trading up to some thousand or tens of thousands or many thousands? Know your capacity before committing the funds.
YOU ARE A NOVICE AT EVERY TRADE
Ever felt like an expert after some wins and so lose plenty on the subsequent stock or options trade?
Overconfidence and therefore the false sense of invincibility supported past wins could be a recipe for disaster. All professionals respect their next trade and bear all the right steps of their stock or options strategy before entry. Treat every trade because the first trade you’ve got ever made in your life. Never deviate from your stock or options strategy. Never.
YOU ARE YOUR FORMULA TO SUCCESS OR FAILURE
Ever followed a successful stock or options strategy only to fail badly?
You are the one who determines whether a method succeeds or fails. Your personality and your discipline make or break the strategy that you simply use not the other way around. Like Robert Kiyosaki says, the investor is that the asset or the liability, not the investment.
Understanding yourself first will result in eventual success.
Have you ever changed your mind about a way to implement a strategy? after you make changes day after day, you finish up catching nothing but the wind.
Stock market fluctuations have more variables than is mathematically formulated. By following a proven strategy, we are assured that somebody successful has stacked the percentages in our favour. after you review both winning and losing trades, determine whether the entry, management, and exit met every criteria within the strategy and whether you’ve got followed it precisely before changing anything.
I hope these simple guidelines that have led my ship out of the harshest of seas and into the most effective harvests of my life will guide you too. Good Luck.