Here are 9 actionable steps you can start TODAY to improve your options trading.
1. Learn and Master Options Trading Fundamentals
It is imperative that you understand the basics of options before you venture out and learn intermediate to advanced option trades. It's the order in life. It's the reason why we learn how to do basic math and subtraction before we go into division and multiplication.
You need to know everything about "puts" and "calls" -- from how they work and when it's best to use them. This also includes knowing everything related to them like expiration dates to where they are found on basic option tables. Skimming over the basics to get into more advanced trading is simply gambling.
2. Read Books on Options Trading
Technically, they don't have to be all about options trading since there is overlap in every investment book. The goal is to learn different approaches to trading the market. You'll learn about things you have not known about before and you'll even be able to refine your original trading strategy.
One great takeaway from reading books is that you can also learn more about the hidden trading factors you don't see everyday like investor psychology or market psychology. Did you know that these psychologies are the reason why technical analysis exist?
3. Streamline Your Technical Analysis
If you are looking at 6+ more technical indicators and use multiple technical analyses concepts against other technical analyses concepts, then you're probably doing yourself a disservice.
Simply learn and use the basics like MACD, support/resistance, trending channels, divergence/convergence, and moving averages.
4. Continue to Paper Trade
Just because you are trading real money it doesn't mean you need to stop learning and trying out different strategies. You have to continue playing the market from all angles. If you are a market conformist (you tend to go with the trend), you can try a contrarian strategy. If you usually close out credit spreads, try keeping one open while legging in an OTM put option.
Experiment and continue to tweak out your strategy
One great tip is to create 2 identical trades. One in your regular account and the other in your paper trading account at the same time. Then you can make experimental adjustments to your paper account over time and see how it fairs against the live account. This is a nifty way you can test different strategies while having a baseline.
5. Choose an Option Trade That You Love and Master It
A great way to improve your options trading is by mastering a bread and butter trade. Learn all the ins and outs of your practice by back-testing historical data, testing current conditions using paper trades, and reading about your favorite trade in books.
When you completely understand the intricacies of your go-to trade, then you'll be able to better recognize situations and markets that your trade will flourish in. In turn, you'll receive a higher probability of success and profit.
The key is to stick to a basic trade like an iron condor or credit spread. No advanced layered trades.
6. Stick To Your Trading Plan
All successful traders have a trading plan. This means, they have a strategy to get into a trade, make adjustments, and exit positions based on SPECIFIC events. Successful traders DO NOT make random decisions. Everything they do is calculated, measured, and analyzed.
You can make an easy-to-follow trading formula based on technical analysis if you want to as well.
7. Wait For Opportunities
This is a huge problem for novice traders. It was even an issue for me when I started trading. I would have a few stocks on my watchlist that I wanted to get into, but knew it wasn't the right time. And then when I'm not looking the stock takes off. On a few occasions, I have actually chased stocks that eventually turned against me.
These types of situations hurt in 2 ways: 1) dents your ego and 2) dents your portfolio balance.
If you have the same issues, don't fret. Luckily, it's been well documented that more often than not, solid annual portfolio performance is often caused by having a strong exit plan.
8. Document and Learn From Your Previous Trades
Every trade is a learning experience. Don't focus solely on losing trades, but also look at your winners. There is always something you can learn.
For losing trades, look into why the trade lost or possible ways you could have prevented it from happening. Analyze your entry, the adjustments you made, the exit, and the overall market behavior.
For winning trades, look into why the trade won and possible ways you could have even profited more. Analyze your entry, the adjustments you made, the exit, and the overall market behavior.
If you notice, it's the same analysis for both types of trades. After a few trades, you'll begin to recognize key characteristics to why some trades win and why some trades lose. From there, you'll be able to recognize what adjustments need to be made in order to mitigate a loss or increase profit gain.
9. Continue to Learn From Successful Traders that STILL Trade
When you have a mentor, they will often look over your shoulder and ensure that you are setting yourself up for the best trade possible for the current market. You'll know that their advice is sound when you see them trading their own recommendations.
I find that it's quite suspect to receive trading advice from someone that doesn't trade themselves.
If you don't think you need on-going options trading education and assistance, ask yourself these questions:
• Why do professional athletes have coaches?
• Why do Fortune 500 companies hire consultants?
• Why does the President have advisers?
The answer to all of these questions is simple:
Mentors hold you accountable, help you define & reach goals, are on the outside looking in, and they can provide a wealth of knowledge when dealing with the subject matter at hand. Basically, mentors help you become BETTER traders.