The 7 Common Options Trading Mistakes
By Ryan Round
Trading options in only one direction and that’’s usually up.
A common mistake options traders make is one of omission. They forget or fail to realize that options trading allows one to make money on falling prices as well as rising prices. By not trading in both directions they leave a lot of money on the table. In effect, by sitting on the sidelines during market downturns, they are leaving half the available action on the table.
Additionally, by focusing on upward directional trades only, these traders may end up forcing themselves into bad positions when they would be profitable on the other side of the trade.
Lastly, security prices tend to fall faster than they rise, so some of the biggest, quickest gainers are executed via falling share prices. So if the intrepid options trader is not looking for short trades they are truly cheating themselves out of some of the best trades going.
#2 Not having money-management rules in place.
Another common mistake is to not strictly adhere to sound money-management rules. Critical metrics arise from guiding principles such as how much should you trade and how much should you risk? Where should you set your stops or in what manner should you hedge?
Solid money management rules control help you to control your trades. And most importantly, they help to prevent catastrophic losses so that you can trade another day.
#3 - Letting your emotions dictate your trade entry and exit points.
Too often irrational behavior drives investors into trades that lack appropriate fundamental or technical support. Instead of letting sterile indicator guide their decision making, they operate on emotion or impulse. Fear of price reversal drives traders out of winning trades too soon and fear of loss makes them stay in losing trades for too long.
Since there is no way to completely eliminate your emotions you must control them. The most realistic and effective way to do so is to develop a set of trading rules to constrict your trading activities and to conduct the majority of your research and trading decisions outside of open trading hours. This will help to make your trading decisions more objective and less emotional with fewer distractions.
#4 Listening to the wrong advice or instruction.
Taking advice from traders that lack the requisite knowledge, experience, and authority to qualify as a bonafide expert or mentor. This is often characterized by the hot tip one hears on TV from the latest talking head, or during real boom times the cant-miss bit of advice from the cabbie driving you to the airport.
It’’s often difficult to discount this advice for what it really is because humans like to believe that somebody else must know something they do not. Other times, an options trading course or system leaves out crucial information about when to exit trades or how to salvage trades that go against you.
#5 Skipping the “paper trading” phase.
This is a very common error with often disastrous consequences. Paper trading allows the novice to all elements of the trade from initial research and analysis to the mechanics of entering and exiting the trade. By doing so, you”ll understand how the techniques work and the process unfolds. The major benefit of paper trading is that you”ll hone your skills without paying commission or taking devastating losses right out of the gate. This is especially important in the sometimes fast moving arena of options trading.
#6 Not using automation with your exit trading strategies.
Even an active trader needs a break once awhile. Or what if you purposely set up trades in fashion that does not require your constant attention. Or perhaps a distraction pulled you away for a critical moment. It’’s crucial to set up alerts that inform you when a particular exit signal has been met, or automated triggers such as a stop-loss which exits you out of the position once certain price or movement conditions have been satisfied.
#7 Failure to create and follow a daily trading routine.
Treat options trading as you would a business or your workplace, and more than just your hobby. For many successful traders, this is their business or work. Develop habits and behaviors that help you to succeed and expand your abilities. Remain disciplined and stay committed to the entire process.
Successful traders achieve their status because they study and practice their craft, they become confident in what their ability, they stay focused and true to form through sound discipline, they utilize tools and indicators to keep them on the right track, and they don”t invest more than they can afford to lose on a position.
About The Author
Ryan runs a site called Monthly Content where internet marketers are provided with all the PLR content, MRR content, Articles and Internet Marketing Training that they need to be successful: http://www.MonthlyContent.com