As an options trader, a novice is anyone who has yet to gain knowledge in trading. It may be someone new to trading or who has traded for several years but still has loads to learn.
Find a trading strategy that works for you
What is your personality, and why do you trade options? Do you like twso be in complete control of your trades, or would you prefer to limit the majority of decisions? What is your risk tolerance, and how much can you lose in a trade before making you unhappy. Utilising these knowledge points will help determine what kind of trading strategy will suit your needs best.
Paper trade for several months
To make sure the strategy you have chosen works, you should paper trade (simulate trading without real money) on demo accounts to see how it performs in a fake market. Once you feel confident that your method is suitable, it’s time to start trading with real money. When learning to trade options, it is essential not to go all-in and lose everything immediately. It will increase your stress levels and decrease your likelihood of success in future trades. Instead, carefully learn from each trade before moving to the next, so you grow your knowledge with every move.
Document your journey
By keeping a trading journal of your learning journey, you’ll be able to reflect on any errors you’ve made and see how far you have come since starting. It’s also helpful to think about what could be improved in the future before you make more mistakes.
Trade with money you can afford to lose
You should never use the money needed for an essential purpose such as rent or bills. If things go wrong, it can be hard to recover from using these funds, which will increase your stress levels further and decrease your likelihood of success in future trades. You are better off risking only spare cash you don’t mind losing if the worst happens. Using this principle means that when planning your risk allocation per trade, you need to balance taking on only low-risk trades with the potential gains.
Pick stocks that are not correlated
When one stock in your portfolio is doing poorly, another should be doing well, so the overall performance of your chosen strategy does not fluctuate. It is easier to handle losing streaks and allows you to remain calm, knowing that another stock will likely perform better eventually.
Determine what works for you
There is no one-size-fits-all approach to trading strategies, risk allocation and even personality types that suit specific strategies. Ideally, you should find a balance between these three things that best suits you and then stick with it. Successful traders also have their unique methods, making them profitable while others who use the same strategy make losses. Those who make losses will often complain about the market being unfair or accuse other traders of talking rubbish, but they miss the point that everyone has their way of making money from trading, and no two traders are alike.
Increase leverage as you get more experienced
You’ll need to get approval from your broker before using more leverage than usual on each trade, but the aim is to increase your profits on each trade by using this strategy. You can achieve this in several ways, like buying options with high implied volatility and selling those with low implied volatility. You could also close spreads early and wait for time decay (theta) to work in your favour or take ‘calendar’ positions which means you’re betting that the stock will be at a specific price at a set point in time rather than immediately.
Remain calm during losing streaks
It’s crucial not to get too engrossed when you experience minor losses because even the best traders have losing streaks from time to time. If you get caught up in the moment and add too much leverage to your trades or start chasing your losses, you’ll find yourself in a terrible downward spiral. When this happens, it’s best to take a step back and wait for stocks to recover before resuming trading again. Don’t forget that even though you’re making loss after loss- you can still win in the end.
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