It’s safe to assume that most of you are losing money each month trading options because you don’t trade with a purpose. I know full well that the “purpose” of you trading is to make money and start working at your day job less, but that’s not what I’m referring to here.
Successful traders are self-disciplined
As you’ve heard me say over and over, the most difficult aspect of trading options for most of you is self-discipline. You know what to trade and how to trade but you just don’t trade with purpose. Blindly buying deep OTM options you know you shouldn’t is just one example.
Purpose – the reason something is done…
If you do not set your own trading rules and goals right now – you are dead in the water!
You might as well give up all together and take what money you have a buy lottery tickets.
Every successful trader already knows when to close positions, how to reduce risks, or what strategies to use in which markets. I have have re-re-re-re-done my own personal trading plans so many times it’s sick. BUT, it’s worth it!
Each time I add or remove a rule, strategy, idea I become a more consistent and profitable options trader. I have purpose in my trading and I don’t blindly go into each trading day not knowing what to look for or which trades I might want to enter.
Know your purpose for trading options
What’s the goal and how are you going to get there? Are you using options for income, speculation, or hedging? Each answer creates another series of questions and different strategies.
In general, understanding what category of option trader you fall under will help define your purpose and plan. If you still need help here are some areas to think about:
What’s your exit strategy?
If you have a profit or a loss, what will you do to get out of the position. You need to have this plan in advance. Too many times when I’m coaching a student, we will successfully make a profitable trade and then they are like a deer in headlights!
I’ll ask them, “what do you do now?” and they have no clue. If you have bought an option, you should identify a profit sell point as well as a maximum loss area. You might decide to sell if you make a certain percentage or dollar amount. Whatever the case, these kind of rules help define a specific event where action should be taken.
This again removes YOU and YOUR emotions from the trade.
How much can you risk?
What kind of wiggle room does your portfolio have? If you lose all your money what will you have to come back and trade with? These kinds of questions need to be addressed now. Sure you think about it, but a solid plan needs to be put down on paper. You have to have a dollar or percentage figure on each trade where you have to walk away and live to fight another day.
What’s the “end all” goal?
If you follow your rules and are self-disciplined, I have no doubt you will succeed. And without a clear and specific purpose for trading, I also have no doubt that you will certainly fail.
Have a final goal in mind right now and start working towards that goal each and every day. When I first started my goal was to stay at home trading. I didn’t want to go back to the banks. After I kept myself profitable at home for the first 6 months, my goal changed again. Now I wanted to bring my wife home from work – which I did 8 months later.
What are your goals right now? As you can tell, I didn’t shoot to make $1M in the first month – that would have been completely unrealistic. So what are your goals right now that are easily obtainable in the next 6-9 months?
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I’ve been told by tons of people that you’ve got to either have a lot of money or a really killer system to trade options and win. Some new indicator or signal that will transform your portfolio.
And I’m sure you’ve heard the same thing and are sick of these expensive, dead-end courses and websites wasting your time and money.
Honestly, there is no “magic secret” to trading options. It simply comes down to an understanding of risk management, option pricing and strategy selection.
Instead of learning these lessons the hard way (i.e. losing your shirt in the market), why not take my free 4-part video course as I cover each area in detail. Plus, I’ll go over the exact checklist I use for selecting trades each month!
Leave A Reply (8 Comments )
Henrik
465 days ago
Very well put man.
Small hits consistently here and there instead of constantly looking for the homerun. The dreaming about the homerun all the time tends to makes you undisciplined
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armst
465 days ago
ding ding ding ding ding.
I should read this post every day before I start trading. Here's what I have done. I've basically been making great otm naked trades consistently, and have made about 20k over the past 3 months since I began doing this. However, I've then turned around and went for the moon with about 20k in losses (mostly put & 3x etf buying), so am at break even now. Half the plan is working, but I have finally decided that I am not going to do the speculative moonshot, especially when I don't even have it working as a hedge.
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Kirk - Admin Reply:
February 8th, 2011 at 9:06 PM
well we have all been through the "expensive trading lessons" before – myself included!
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Bill Place
117 days ago
One thing that I have observed having been on several sites, is the chasing of the stock or option. They chase, or at least those are my words, the momentum, whether going up or down for a quick profit. Yes, some of them work, but alot do not. To me the quickest way to lose money is this way, but I could be wrong, alot of people think I am wrong.
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