Learn Option Trading
Learn Option Trading. 8 Steps to Successful Option Trading, Excerpted from George Fontainills’ excellent book ‘The Options Course’. I have added in comments, cautionary notes and other words of advice throughout.
Learn to Trade Options 1. Gain the knowledge to succeed over the long run
Do not expect to become instantly successful in options trading. You need to learn as much as you can about low-risk trading techniques and systematically increase your knowledge base. The successful traders have a wide variety of trading tools that they can use to take advantage of a broad spectrum of market conditions. Knowledge breeds confidence; success begins with a strong grounding in the fundamentals of options trading.
Learn to Trade Options 2. Start with acceptable trading capital
If you start with less than $10,000 in your trading account, you would not be able to trade successfully. A small account forces you to be extremely cautious and prevents you from actually taking advantage of any true opportunity when it presents itself. When it comes to learning option trading, ‘you have to pay to play’. Play conservatively, but make sure you preferably have at least $50,000 in your account so you can manage your risks properly.
Learn to Trade Options 3. Establish a systematic approach to the markets
Only a systematic approach will allow you to fare well in the chaos of extremely active markets. This approach must combine all your trading tools and be followed through consistently without fail. Only then would you be relaxed enough to follow through the plan to success.
Learn to Trade Options 4. Be alert for trading opportunities at all times
Fortune favors the brave. Billionaires like Bill Gates weren’t just ‘lucky’; they were prepared to take advantage of the opportunity when it presented itself. Train yourself to actively look for opportunities in everything you do.
Learn to Trade Options 5. Develop the fine art of patience
‘The best investments are those in which I have thoroughly studied the risk and reward and have developed a time frame for the trade to work. For example, if I place a trade with options six months out, I try to stay with the trade for that period of time. This takes patience.’ Indeed, one of the biggest reasons why most traders fail is that they are too impatient for results. Consequently, they overtrade and sometimes even try to trade their way out of a series of losses. This impatience led inevitably to failure.
Learn to Trade Options 6. Build a strong respect for risk
‘You must respect risk if you are to survive as an investor or a trader.’ Indeed, to learn option trading, you must realize that risk management is the central ingredient for options trading success. Calculating your risk/reward ratio often and accurately before launching into a trade is crucial for success.
Learn to Trade Options 7. Develop a Delta neutral trading approach
What is Delta neutral trading? This is a form of trading where trades are carried out by selecting a calculated ratio of short and long positions that balance out to an overall position delta of zero. Delta is a term that refers to the degree of change in an option’s price in relation to changes in the price of the underlying security. Thus, this trading approach reduces risk and maximizes the potential return.
Learn to Trade Options 8. Reduce your stress level
Learn Option Trading by learning to trade systematically at all times. ‘Simply put, stress produces incomplete knowledge access. Stress, by its nature, causes humans to become tense in not only their physical being but also their mental state.’ And the best way to reduce stress? Incorporate strict risk management tools such as stop loss points, and build your knowledge of options as thoroughly as possible. The more knowledgeable you are, the more adept you will be at identifying strategies that consistently work with a high level of success under certain market conditions. To learn option trading successfully, this is the systematic approach that minimizes human error and ensures success.