If one fails to plan, then one must be prepared to fail.
In the article titled How To Trade Options for Beginners, we intend to show you what it takes to plan and Master Trading Options as a Beginner.
How to Trade Options for Beginners: ALL THAT SHINES IS NOT GOLD
If you want to know as a trader a sure validation why you should not be in a given trade, ask yourself this question : Why did I take this trade ?
Should the answer be any one of these (feel free to add your own on this sample list)
- My Doctor got a tip from his friend over the weekend
- The short pundit on the TV was screaming louder than usually on his Bullish view on this stock
- My wife’s hairstylist second cousin removed used to work for this company
- It is the future and they enjoy a great position in their industry
- The stock is too cheap. Or its variant, this stock is already too expensive.
- My wife’s hairstylist second cousin removed works for this company
- (insert yours anything you can think up here)
While all the above may well land you in a winning trade for that day/week/month, chances are none of them can be used as a consistent entry criteria into a trade and therefore is a sustainable strategy in order to become an expert on How to Trade Options.
The market is known to have sudden momentum shifts.
Here is an example illustrated by the picture below.
The worst year-to-date stocks performed the best on Sept 9 2019 whereas the best year-to-date stocks had the worst yield for the same day.
The statistic are clear on this profession : less than 2% of day traders are profitable on a yearly basis.
One of the main reason for this is what we highlighted in this article.
The need for instant gratification tends to cloud some beginners of the necessity just like in any profession to spend time gathering and honing the necessary skills to be successful in Day Trading Stock and Options.
We can integrate the sum of these acquired skills over time into a Methodology or Strategy as shown in the next session.
How to Trade Options for Beginners: The Methodology
In the epic Biography Pit Bull I recommended in this earlier discussion to the new entrants into this profession, Champion Day Trader Martin “Buzzy” Schwartz reveals in Chapter 2 – The Plan – how he became confident about his trading after adopting the “Magic T” as his primary Methodology.
It is this methodology that will be the answer to the question we asked above : What is my reason for being in this trade.
Because the Methodology strategy confirms that all the conditions were met for that trade.
We are talking here about the entrance criteria certainly, but such Methodology must also include profit taking levels and exit levels when the strategy turned sour.
In case you may be wondering the need to exit a position that was confirmed by a proven entry condition – well – nothing is perfect especially in today’s volatile market where a simple tweet can derail your day in just a few minutes – More on this later.
Contrary to conventional wisdom, very successful traders are the ones who actually know when to take a loss and move on to the next setup. In the words of “Buzzy”, they have learned to divorce their EGO from their trades.
Tracking Your Performance
A proven Methodology is one we can test and validate over different types of markets (bull , bear and sideways).
Proprietary firms run back tests over at least 3 years to validate the effectiveness of any strategy before launching it Live.
In our scenario, the demo (also know as Paper account) we strongly recommended earlier will serve that purpose though over a much smaller time frame for back testing.
We shall tackle later on the difference in time frames.
Just to set expectations, any back test that can show a success rate over 60% is actually quite good.
It is enough to get us where we want to be.
Even after adopting a Methodology, constant measurement of the results is a must as it provides opportunities for adjustments that will lead to process improvement through Risk Management for example.
If a Methodology proves to be a winning one over a solid period of time, one can imagine being able to take more risk by trading bigger sizes for instance.
These are details that will help grow your business as you continue to Learn to Trade Options.
So just like the companies you are trading have quarterly earnings results, regular performance evaluation of your trading business is a requirement no matter how well you may think you are doing.
The Routine of Day Trading Stock Options
This would lead the trader into a set of routine tasks void of any emotions.
Trading at this stage after identifying one’s methodology should have this simple code below:
IF (condition c1) is met
THEN (Take actions a1, a2, ..an)
ELSEIF (condition c2) is met
THEN (Take actions b1, b2, …,bn)
The “beauty” of this is that we will automate all of these instructions on most trading platforms.
Therefore there is no room for THINKING !
Yeah, that is the big takeaway for this chapter.
Trading is best when done without any thinking behind it.
But that requires preparation in order to get to that level of simplicity.
Traders are not longer emotionally reacting to the markets but rather just adapting and adjusting with the market flow.
I would leave you with this about the above revelation on automating entries and exits in the market.
Over 60% of the volume in the Stock market today comes from computers.
High Frequency Trading is the name for this.
So who do you think will be faster in executing a trade ?
You and me with our 10 fingers or Powerful fast machines that know where the market is going before it even get there ?
How TO Achieve CONSISTENCY in Options Trading
We show that Success in Day Trading Stock Options comes through consistency.
The ability to repeat the same System/Strategy/Methodology over and over.
After all, it is well know that in any activity, Professional repeat the process until they cannot get it wrong.
On the other hand, “amateurs” are content to do it just to get it right once.
Just for kicks, what do you think the (a1, a2, ..an) and (b1, b2, …bn) are ?
Leave your response in the comments section and we shall pick up from there in our next episode.
In this discussion, we provided important steps on How to Trade Options as a Beginner.
Consistency is the ultimate step in the path to making it full time as a professional trader.
Further chapters will equip you with the tools (A good Trading Platform is the Foundation) and practical examples to get you the confidence needed.
TBP | Becoming A Successful Stocks and Options Trader