Ten Top Tips To Trade Stock Options Successfully – #6
Welcome again to the 10 keys of how to trade stock options successfully. Previously we have discussed the technicalities of options trading. This week I will start looking at the more esoteric aspects of trading beginning with how to formulate a trading plan.
It is imperative you trade with a plan. No trader has ever successfully prospered without a trading plan or with a plan that they didnt stick to. The main aspects of a good trading plan include, but are not limited to:
1. Money management rules, i.e. acceptable profits and losses per trade, how much capital you will commit to any one trade and to the market at any one time.
It is important you identify what your stop loss margin is (as discussed last week) and even more important you stick to it. Writing this sort of information into your trading plan will help cement it in your mind. We will discuss more on money management in week eight.
2. Stock and option identification rules, i.e. how you will decide which stocks to trade options on and which options you will trade.
Decide if you prefer technical or fundamental analysis or a mixture of both. How big will your watch list be? What price range of stocks will you trade? Do you like trading in the money or out of the money options? What Greeks will you consider?
3. Entry and exit rules, i.e. What will make you enter and exit a trade, what length of time will you stay in the trade and how often will you trade.
Entry and exit rules will depend largely on technical analysis, write down the patterns and indicators you will look for. Deciding how often to trade will be a big factor in your success. Most people over trade, if you have a fixed profit target then once you have met it you should stop trading. Going for an extra profit over and above what you planned for can possibly lead to a loss, which is very difficult to handle if were showing a profit originally!