As a professional options trader, I always like to have some hard guidelines to follow. Here are 7 must know rules for options traders at all levels that could make you a more profitable trader.
- Never, under any circumstance add to a losing position! This of course is the “Golden Rule” for traders. DO NOT pile bad trades on top of bad trades. This never ends well.
- You must have different strategies for different market conditions. Not every strategy will work perfectly in bull/bear/flat markets. Therefore you MUST learn to trade a couple of solid strategies each month.
- Identify a trend early with internal indicators like MACD, STOCHASTICS, and RSI. Trade in the direction of the next “most likely” move in the market.
- Respect reversal candlestick patterns like shooting stars, hammers, and bullish/bearish engulfing patterns. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Use this time to get out of positions and into new ones.
- Keep technical analysis simple and easy to understand. Most beginning traders try to use hundreds of indicators when they start – but this only confuses them even more. Use a couple of consistent but simple indicators and learn to master these first.
- An understanding of mass market psychology is often more important than an understanding of economics and company earnings etc. Markets are driven, and will always be driven, by human emotions of FEAR and GREED. Learn to master these psychological emotions and you could find yourself at the top of your game.
- Establish small positions first then add if the position become more profitable. Too often traders load up on an option position early and hope and pray the market moves in their favor. We prefer starting with small positions to “test the water” and then are willing to add to that position if the market are favorable. Sure we will pay a slight higher premium later but we would rather be right first.
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