December 17, 2008
The 10 Keys to Successful Stock Options Trading Key #6
Welcome again to the 10 keys of how to trade stock options successfully. Previously we have discussed the technicalities of options trading. This week I will start looking at the more esoteric aspects of trading beginning with how to formulate a trading plan.
It is imperative you trade with a plan. No trader has ever successfully prospered without a trading plan or with a plan that they didnt stick to. A sound trading plan includes, but is not limited to, the following items:
1. Money management rules, i.e. acceptable profits and losses per trade, how much capital you will commit to any one trade and to the market at any one time.
It is important you identify what your stop loss margin is (as discussed last week) and even more important you stick to it. Writing this sort of information into your trading plan will help cement it in your mind. More on money management will be covered in week eight.
2. Stock and option identification rules, i.e. how you will decide which stocks to trade options on and which options you will trade.
You should figure out if you like technical analysis, fundamental anlysis or a combination of both. How big will your watch list be? What price range of stocks will you trade? Do you like trading in the money or out of the money options? What Greeks will you consider?
3. Entry and exit rules, i.e. What will make you enter and exit a trade, what length of time will you stay in the trade and how often will you trade.
Entry and exit rules will depend largely on technical analysis, write down the patterns and indicators you will look for. Deciding how often to trade will be a big factor in your success. Most people over trade, if you have a fixed profit target then once you have met it you should stop trading. Attempting to go for that little bit extra can lead to a big loss, all the more difficult to take if you had already met your profit target!
4. Your own strategy rules, i.e. which trading strategies you will use primarily and which strategies suit your risk profile.
Know thyself as the ancient Greek saying goes is critical when formulating a stock options trading plan. You will tend to trade options and you do anything else in life, for example, if you are cautious by nature you will trade cautiously, if you are impatient in everyday life you will trade impatiently. Therefore consider your unique traits and formulate your plan around them.
Once you have practiced trading options you will discover your own style of trading, and from that you will develop a plan that suits you. Once you have your plan, and you know it works, stick to it through thick and thin. That doesnt mean that a plan cant be changed but you must ensure that you give your plan a chance to work and that you dont change it the first time you take a loss.
Once you formulate and implement a good trading plan you will be well on your to trading stock options successfully. Next week we will discuss trading with the overall market and index options.
US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).
By: Roger Cox
About the Author:
It is imperative you trade with a plan. No trader has ever successfully prospered without a trading plan or with a plan that they didnt stick to. A sound trading plan includes, but is not limited to, the following items:
1. Money management rules, i.e. acceptable profits and losses per trade, how much capital you will commit to any one trade and to the market at any one time.
It is important you identify what your stop loss margin is (as discussed last week) and even more important you stick to it. Writing this sort of information into your trading plan will help cement it in your mind. More on money management will be covered in week eight.
2. Stock and option identification rules, i.e. how you will decide which stocks to trade options on and which options you will trade.
You should figure out if you like technical analysis, fundamental anlysis or a combination of both. How big will your watch list be? What price range of stocks will you trade? Do you like trading in the money or out of the money options? What Greeks will you consider?
3. Entry and exit rules, i.e. What will make you enter and exit a trade, what length of time will you stay in the trade and how often will you trade.
Entry and exit rules will depend largely on technical analysis, write down the patterns and indicators you will look for. Deciding how often to trade will be a big factor in your success. Most people over trade, if you have a fixed profit target then once you have met it you should stop trading. Attempting to go for that little bit extra can lead to a big loss, all the more difficult to take if you had already met your profit target!
4. Your own strategy rules, i.e. which trading strategies you will use primarily and which strategies suit your risk profile.
Know thyself as the ancient Greek saying goes is critical when formulating a stock options trading plan. You will tend to trade options and you do anything else in life, for example, if you are cautious by nature you will trade cautiously, if you are impatient in everyday life you will trade impatiently. Therefore consider your unique traits and formulate your plan around them.
Once you have practiced trading options you will discover your own style of trading, and from that you will develop a plan that suits you. Once you have your plan, and you know it works, stick to it through thick and thin. That doesnt mean that a plan cant be changed but you must ensure that you give your plan a chance to work and that you dont change it the first time you take a loss.
Once you formulate and implement a good trading plan you will be well on your to trading stock options successfully. Next week we will discuss trading with the overall market and index options.
US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).
By: Roger Cox
About the Author:
Roger Cox is a native of New Zealand and now resides in Los Angeles. Former President of an international freight company he decided corporate life wasn’t for him and starting his own consulting business. Roger has been successful in trading stock options, having practiced and traded for more than 4 years and teaches others about trading at http://www.prosperitywithoptions.com
Filed under Finance by Administrator
December 14, 2008
The Golden Rule Of Stock Options Trading
Have you ever lost all your money in Stock Options trading?
If you are like most of us, then you might have lost an entire trading account just trading stock options before. No matter how hard you try, you seem to always lose all your money eventually even if you made some initial profits. Why is that so?
The truth is, stock options trading is risky business! Why is it risky business? Stock options trading is risky because you could lose all your money on any stock options trade if the stock eventually close with the options out of the money during expiration! Yes, even stocks that seem to be rising very quickly and steadily could take sudden and unexpected drops near expiration, taking your in the money call options way out of the money before you can react to it! This means that no matter how certain you are in stock options trading, there is always the possibility of a total loss. Stock options are fantastic leverage instruments but if you simply throw all your money into every trade and hope to strike lottery, then stock options trading would one day wipe out your entire account in one fell sweep.
So, how do we avoid such a predicament?
Simply by applying the golden rule of stock options trading! That is:
Use Only Money You Could Afford To Lose!
Yes, if you could afford to lose only 10% of your account at any one time, you should use no more than 10% of your account on any single stock options trade! This rule is especially important if you are trading out of the money options which have an incredibly high chance of expiring worthless.
For example, if you have a $10000 account and you do not wish to lose more than $1000 at a time, $1000 should be the amount you use on any single stock options trade. Simple as that! The obvious drawback of this rule is that you will not make as much money as you would have if you had simply punted all your money on a single trade, however, just like you would never bet all your money on a single gamble, you should also never put all your money into a single options trade no matter how confident you are! In fact, this applies to any form of trading as well. It takes a little discipline to stick to this rule especially if you are “on a roll” and tempted to go for a “show hand”. Let me assure you that there never is a problem with making lesser money but there always is a problem losing more money!
In fact, when you are using only money that you could afford to lose in stock options trading, you sleep better knowing that you cannot lose more money than you have decided to lose! Your holding power becomes greatly enhanced and you could ride out temporary downturns better than those stock options traders who punted all their money in one trade. This consequently translates to a higher chance of a win as most stocks eventually come back profitably after temporary pullbacks!
So, stick to the “Use Only Money You Could Afford To Lose” golden rule of options trading and you will be safe in your journey to financial success with stock options trading!
By: Jason Ng
About the Author:
If you are like most of us, then you might have lost an entire trading account just trading stock options before. No matter how hard you try, you seem to always lose all your money eventually even if you made some initial profits. Why is that so?
The truth is, stock options trading is risky business! Why is it risky business? Stock options trading is risky because you could lose all your money on any stock options trade if the stock eventually close with the options out of the money during expiration! Yes, even stocks that seem to be rising very quickly and steadily could take sudden and unexpected drops near expiration, taking your in the money call options way out of the money before you can react to it! This means that no matter how certain you are in stock options trading, there is always the possibility of a total loss. Stock options are fantastic leverage instruments but if you simply throw all your money into every trade and hope to strike lottery, then stock options trading would one day wipe out your entire account in one fell sweep.
So, how do we avoid such a predicament?
Simply by applying the golden rule of stock options trading! That is:
Use Only Money You Could Afford To Lose!
Yes, if you could afford to lose only 10% of your account at any one time, you should use no more than 10% of your account on any single stock options trade! This rule is especially important if you are trading out of the money options which have an incredibly high chance of expiring worthless.
For example, if you have a $10000 account and you do not wish to lose more than $1000 at a time, $1000 should be the amount you use on any single stock options trade. Simple as that! The obvious drawback of this rule is that you will not make as much money as you would have if you had simply punted all your money on a single trade, however, just like you would never bet all your money on a single gamble, you should also never put all your money into a single options trade no matter how confident you are! In fact, this applies to any form of trading as well. It takes a little discipline to stick to this rule especially if you are “on a roll” and tempted to go for a “show hand”. Let me assure you that there never is a problem with making lesser money but there always is a problem losing more money!
In fact, when you are using only money that you could afford to lose in stock options trading, you sleep better knowing that you cannot lose more money than you have decided to lose! Your holding power becomes greatly enhanced and you could ride out temporary downturns better than those stock options traders who punted all their money in one trade. This consequently translates to a higher chance of a win as most stocks eventually come back profitably after temporary pullbacks!
So, stick to the “Use Only Money You Could Afford To Lose” golden rule of options trading and you will be safe in your journey to financial success with stock options trading!
By: Jason Ng
About the Author:
Jason Ng is the Founder and Chief Option Strategist of Masters ‘O’ Equity Asset Management ( MastersoEquity.com ) and author of OptionTradingPedia.com . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.
Filed under Finance by Administrator