When I started trading options, I had hopes of being successful right from the start. Unfortunately, that almost never happens for any trader. It takes time to develop trading skills and master your own psychology.
After trading for a little over two years now, I have learned several key takeaways.
- Keep a trading journal.
When entering a trade, write down the following: The reason for putting on the trade, a plan to take profits, and a plan to limit losses.
As traders have access to larger amounts of capital, they are able to put on more trades. Keeping a journal allows traders to remember the reasoning behind each trade in the mass of positions in their portfolio.
By writing your thoughts out at order entry you can stay the course through the entirety of the trade. If we go against our original plan, it becomes difficult to understand what strategies work under certain setups/market environments.
- Trade small.
What I mean by this is to never allocate too much capital to one trade idea. Successful trading is about small consistent winners and minimizing losses.
If a trader commits too much capital and risk to one trade they can lose a large portion of their portfolio. There is no such thing as a sure thing trade. Variance is a large part of trading, and large standard deviation moves in an underlying stock can put a dent in your account.
- Don’t freak out if a position goes against you!
Go back to step one and look at your thesis. Losses are part of trading, but minimizing these losses is extremely important to becoming a profitable trader. We advise that you setup a mental stop loss (an amount of money you’re prepared to lose).
At Tradezy, we like to sell options that have a longer duration. With duration on your side, you can sit on a position to see if it will turn around.
Another option is to defend the position and roll for duration. By rolling a position you are giving yourself more time to be right and collect more theta decay.
- Make sure that you’re not over trading.
There are times in the market when there are not opportunities that present themselves. In times of low implied volatility, traders are wise to scale back sizing and put less capital to use.
Trading too often leads to a higher amount of money going towards commissions. Commissions are a part of the business, but they can eat away at your profits. Smaller accounts are definitely affected more by commissions as they don’t have the advantage of scale.
- Manage your winners.
If a trade goes your way, ring the cash register. A good rule of thumb is to manage at 50% profit. At Tradezy, we are short premium sellers. When selling options you limit the amount of money that can be made.
When our 50% target is reached we don’t want to risk giving that profit back. The remaining amount of potential profit is not worth the risk of having a winning trade turn into a loser.
- Block out the financial noise.
There are a lot of opinions out there. That’s what makes a market. But don’t let other people’s opinion distract you from your personal trading thesis. You won’t grow as a trader if you are constantly putting on other people’s trades and not thinking for yourself.
- Be greedy when others are fearful, and fearful when others are greedy.
Or something like that. Basically, don’t follow the herd. When everyone thinks the same thing there is no one left to move the market in that direction.
At Tradezy, we prefer to be special and go against the crowd. We like to sell to those that are greedy and buy from those that are fearful.
As volatility traders, we definitely make the most money when everyone is fearful as that increases Implied Volatility (higher the premium collected/more theta decay).
- Don’t give up!
Almost everyone that gives a crack at trading is unsuccessful right off the bat. If you’re doing well. Congrats and keep on doing whatever is working. If not, then use your failures as lessons and continue to learn option fundamentals and strategies.