As a trader, its important to ensure that you have a checklist because while trading is volatile, the most important skills are still the same. Consistency is key.
1. Manage Risk
Options are generally high risk instruments, so its wise for traders to understand the degree of risk that they are getting into. What is the worst case scenario? How much capital am i throwing away?
Traders also need to take appropriate measures to control risk. In particular, if you are a short-term options trader, you will regularly come across loss-making trades. For example, if you hold a position overnight, your bet may go bad because of adverse news. You need to be able to minimize the risk of your positions at any time. Some traders do so by limiting their trade size and diversifying into many different trades so all their eggs aren’t in the same basket.
2. Be Good With Numbers
This is a no brainer… Working constantly with indicators and projections, your number game has to be strong. Fibonacci retracement levels, bollinger bands and moving averages become your best friends.
3. Have Discipline
To become successful options trader, this is an absolute must. You must trade the same way when you are up as when you are down. Doing extensive research and identifying trend opportunities, setting up the right formations and understanding what your strategy is will help you form the proper exit strategy. Never trust an opinion without doing your own research. You can’t skip your homework and blame the herd for your losses. Instead, you must devise an independent trading strategy that works in order for it to be a successful options strategy.
While formal education in the form of higher degrees can be associated with elite traders, it is not necessarily the case for all. But you must be educated about the market. Successful traders take time to learn the basics and study the market—various scenarios, different trends—anything and everything about how the market works. They are not usually novices who have taken a three-hour trading seminar on “How to get rich quick trading,” but rather take the time to learn from the market.
4. Be Patient
Patience is one quality all options traders have. Patient investors are willing to wait for the market to provide the right opportunity, rather than trying to make a big win on every market movement. You will often see traders sitting idle and watching the market, waiting for the perfect time to enter or exit a trade. The same is not the case with amateur traders. They are impatient, unable to control their emotions, and they will be quick to enter and exit trades.
5. Develop a Trading Style
Each trader has a different personality and should adopt a trading style that suits his or her traits. Some traders may be good at day trading, where they buy and sell options several times during the day to make small profits. Some may be more comfortable with position trading, where they form trading strategies to take advantage of unique opportunities, such as time decay and volatility. And others may be more comfortable with swing trading, where traders make bets on price movement over periods lasting five to 30 days.
6. Interpret the News
It is crucial for traders to be able to interpret the news, separate hype from reality and make appropriate decisions based on this knowledge. You will find many traders eager to put their capital in an option with promising news, and the next day they will move on to the next big news. This distracts them from identifying bigger trends in the market. Most successful traders will be honest with themselves and make sound personal decisions, rather than just going by the top stories in the news.
7. Be an Active Learner
The Chicago Board of Trade (CBOT) reported 90% of options traders will realize losses. What separates successful traders from average ones is successful traders are able to learn from their losses and implement what they learn in their trading strategies. Elite traders practice…and practice some more until they learn the lessons behind the trade, understand the economics behind the market and see the market behavior as it is happening.
The financial markets are constantly changing and evolving; you need to have a clear understanding of what’s happening and how it all works. By becoming an active learner, you will not only become good at your current trading strategies, but you will also be able to identify new opportunities others might not see or may pass over.
8. Be Flexible
You cannot stake a claim on the market but must go with the market or leave it when it is not the type that suits you. You must accept losses occur and that it is inevitable that you will lose. Acceptance rather than fighting the market is paramount to understanding, clarity and finally winning.
9. Plan Your Trades
An options trader who plans is more likely to succeed than one who operates on instinct and feel. If you don’t have a plan, you will place random trades, and consequently, you’ll be directionless. On the other hand, if you have a plan, you are more likely to stick to it. You will be clear about what your goals are and how you plan to achieve them. You will also know how to cover your losses or when to book profits. You can see how the plan has worked (or not worked) for you. All these steps are essential to developing a strong trading strategy.
10. Maintain Records
Most successful options traders keep diligent records of their trades. Maintaining proper trade records is an essential habit to help you avoid making costly decisions. The history of your trade records also provides a wealth of information to help you improve your odds of success.
Risk Disclaimer. DISCLAIMER: Futures, stocks, FX and options trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures, stocks and options may fluctuate, and, as a result, clients may lose more than their original investment.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Past performance is not indicative of future results. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.