Options Trading Strategies - Why Are They So Important?By Owen Trimball | 12 March 2010, 10:00 BST
You may have heard the expression "do one thing, do it well". This was never so true as it is when it comes to the matter of trading the markets. There are many option trading systems out there and the developers of these systems will always tell you that theirs is the one that will solve your financial problems and give you the freedom you've dreamed about.
And some of them may be right.
Some systems will tell you that all you need is the RSI and volume indicators only, together with a few moving averages and bollinger bands. Others will focus on the ADX or the CCH indicators and their systems will focus around that.
Other option trading systems will be simple and involve only going long, or 'buying to open' with the objective of selling to close at a profit within a very short timeframe. They will give you all the indicators and chart setups to accomplish this. Others will emphasise longer term strategies that rely on option time decay. Some systems will involve directional trading, that is, predicting future market direction in the short term, while others will teach you about 'delta neutral trading' and preach strategies such as straddles and strangles which can make you a good profit as long as the market makes a significant move one way or the other.
All the above option trading systems may be great in themselves, but here's the best tip you'll ever get from someone who's done it all. The most important thing is, find one or more strategies that you understand well and that you've had regular success with and just keep doing it. Don't allow yourself to get distracted by trying new strategies using real money, because you've seen the latest DVD or read some book that tells you how someone made a million with it.
It's really as simple as that.
I remember a time in my trading life when I was using an option trading system that really worked for me. I started with about $5,000 and within a short time, transformed it into a bank account of over $20,000. I did this using a simple 'buy to open' and 'sell to close' strategy that I had learned from a guy named Nik Halik, combined with a few straddle trades. I was doing really well.
But then I became impatient. The market I was trading in didn't have the kind of liquidity that allowed me to always take a trade when I saw an opportunity. So I decided to switch from trading options to doing CFDs. At the same time, I was learning about 'ABC swing trading' according to W.D. Gann and changed the way I analyzed chart patterns and identified opportunities without fully understanding the context in which this system works. Now whilst CFDs are far more liquid than options, they also involve much greater risk due to the amount of leverage involved. Unlike option trading, you can lose more than your investment, so the psychology wasn't good for me either. So many times, I found myself stopped out, only to have the stock take off in the direction I had anticipated in the first place. I lost most of the money I had made from my previously successful option trading system.
The point is, you need to stay focussed on a system that you feel confident with and that has proven itself to work for you. Don't allow yourself to be distracted by other systems that look great on the surface, but may not be compatible with your trading style or available concentration time - or that you simply may not yet understand well enough to implement effectively.
Over 90 percent of trading success is about your own psychology. It's the critical thing that causes you to make all your trading decisions. This is why you must enter the market with confidence, knowing that whatever trading system you have adopted, you understand it well, have proven to yourself that it works, know the risks and believe that with patience and discipline, it will make you a consistent income for the rest of your life.
If you don't have all this, there are three little words I have for you, right here, right now. DON'T DO IT!
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