In this Options Trading Tutorial, let’s explore the importance of the correct methodology when learning how to Trade Options online.
A consistent proven strategy is the foundation of feeling confident about the outcome of a trade.
It eliminates the emotions associated with either the fear of jumping in the trade or the exuberance in the hope of easy money.
Table of Contents
Trade Options Online: What is Your Methodology?
The idea of learning how to trade Options may appear strange or new to some.
This is due to the apparent myth that money just flows in Wall Street and anybody can come and make a name for themselves.
Therefore, it is not evident to come to the realization that before making it big in Options trading, one must learn to master a wide range of competencies.
One such competency is the ability to define method by which you, the trader will consistently pull money away from the movements of the market.
We should think of a methodology as a business plan. After all, it is exactly that and as in any successful business, there must be a solid plan.
For example, all the successful companies we know out there have decided one day to hone in on a specific niche.
Apple (AAPL) does not sell natural gas just like Cheniere Energy (LNG) does not export manufacture phones.
Similarly, in our vast market with 10 sectors and over 200 industries, as a starting point of defining a strategy, one could decide to focus on a specific set of industries.
Below is the 10 sectors of the US market with the Top 20 industries (about 10% of total) ranked by market Capitalization.
Such a strategy could be good if we were considering long term investment such as building a long term portfolio.
When it comes to learning how to trade Options, the methodology or strategy (we will use these two terms interchangeably throughout this blog) will on small to medium time frames.
Trade Options Online: What to Do and Not to do ?
In our context, we aim to trade options online on a daily basis doing scalping and swing trades.
In scalping, we hold the position for a few hours or less. For a swing trade, we can hold the position for a few days.
Such strategies require a set of triggers or signals by which we will have a high degree of confidence that the trade will be profitable.
Typically, we accomplish this through technical analysis.
It is the science or art (the jury is still out) of observing price movement through candlesticks and determining the short term future price.
I am fully aware as I am presenting this concept of the divide even among traders of the merit of technical analysis.
Nevertheless, I am coming forward with the observation and the data to back up such observation.
Later on, I will submit here a way to combine a few successful strategies out there today.
Time To Test Your Methodology
In the world of technical Analysis, there are as many technical indicators as traders. Maybe not.
I am exaggerating a bit but my point is that anyone can come up with a presumed technical indicator they believe provide them an edge.
I am providing a list of tools needed for technical analysis on this section.
Yes, in order to trade Options online with consistency as we defined in a previous discussion, we need an edge and such edge is acquired by thorough validation of the methodology or system.
Let me amuse you for awhile. What if I suggest to you that one can make money trading Options by trading only on certain days of the week.
Just focusing in on a set of stocks known as your watch list.
This is a list of stocks a trader has monitored and gathered significant understanding on their movements, supports, resistances and even seasonality.
Yes, there is seasonality in the market. We will devote a full exchange on this topic in the upcoming weeks.
For now, let’s focus on the fact that ultimately, a trader will have to generate a Watch list of stocks, this watch list is dynamic in the sense that stocks can move in an out of it.
Defining And Refining Your Watch List
You see there is this notion in the market called sectors rotation or industries rotation within the sectors.
This is when we observe money flow to a group of stocks that are usually called the darling of Wall street.
Such stocks will be the last ones to fall when the overall market goes through correction.
With over 200 industries as described above, there are about 7800 or so stocks available to trade. Out of which, about 4000 offer Options we can trade.
Let’s further narrow it down by selecting only those with over 1 million shares daily volume. This leaves us with about 1300 stocks.
These could be a good set to use in a large back test scenario. I will further suggest filtering the list down by selecting only stocks price above $25 – $30 range.
We might miss a few good ones but no big deal. By now, our list should be around 700 stocks which is still too many.
But at least this give us a good idea on how to go about creating a useful Watch List.
The Birth of the IB Triggers Report
In an earlier chapter, we established that our Personality Type dictates our assessments and reactions to the market movements.
The same applies to the adoption of a methodology. Hence, no one can determine that their strategy is the best one.
Each strategy will have its own merit to the eyes of its trader.
As long as such trader is able to be content with the performance of their strategy.
For me, the breakthrough of defining my methodology came on a hot summer day in 2017.
After stumbling on a technical paper that was going to change my life from that point forward.
We shall unveil the full meanders of what make the IB report in the next chapter.
Should you be eager to wait until then, I shall leave you with this.
What do you think IB stands for in IB Report ? (Hint: Technical Analysis)
I developed a Methodology in the Summer of 2017 that will lead to a Subscription Alerts Service.
This is supported through a Discord Channel, a Daily Stock Market Analysis Live on our YouTube Channel.
Maybe you would like to take a look and share your comments with us.