Ever meet a trader who burned through thousands of dollars in stock or options trading before freezing in fear and dropping the game completely? I've been there, and so have most successful traders. There were months or even years when we were flying blind. With no system to guide us, we kept making mistakes and almost burned out.
But trading doesn't have to be a story of failure-- if you learn from your mistakes! Experience tell us there are a half dozen fatal flaws in stock options management.
Can you identify your own basic mistakes?
If you are feeling honest, complete the anonymous poll at the end.
1. Failure to diversify.
Putting all your eggs in one or two baskets is a recipe for disaster. Hinging all your positions on the same expiration month, or on the performance of one market sector, could really hurt you. Don't be tempted by a long-shot that could cost you a quarter or half your capital. Instead, follow our tested method of placing your eggs in 20 or so baskets and managing them so as to avoid losses.
2. Strikes too close.
Tempted by the high premiums, spread traders sometimes place their strikes too close to the current price. If price movement cuts into the strikes on your credit spread, chances are you selected the wrong ones. Let the charts tell you where to place your strikes, not the amount of the premium. If the price action breaks your strikes, then all is not lost. You have many ways to extricate from the trade at break-even or better.
3. Playing long instead of short.
Many beginner traders buy Puts and Calls in the hope they will increase in value. But time is against them, eating away at the premium until they lose 50 or 100% of their money. They may be lucky and win, but the odds of making money this way is less than 50%. Avoid except in special circumstances.
To check your own scorecard of long v. short, go to your thinkorswim platform and open your "Position Statement". Look at the THETA column. If it is POSITIVE, that is good as time decay is putting money in your pocket. But if it is a NEGATIVE number, then you are in trouble, and need to be selling much more premium, that is, doing credit spreads rather than buying or going long. Check with another trader who can review your trades with you and help you correct course.
Here is a current screenshot, showing THETA in green The exact theta is known for each position, and a total for the account of 610. meaning that the account is growing by $610 per day due to time decay. That is a healthy account!
4. Closing in the red.
Emotional traders, afraid to risk and lose, often close positions in a panic! They are gripped by fear, not aware that most others may be feeling the same way. When negative sentiment builds, a turning point is often about to occur, so if you panic you are just putting money in other peoples' pockets. General rule: never close a losing position unless you have exhausted all remedies.
5. Ignoring market direction.
Whether you fall in love with your stock, or are just an eternal optimist, it is easy to ignore the charts and just stick to your belief about a stock. Over the last five years, pundits had been crying that the market was about to fall, and avoided investing. Instead the SPY has been onward and upward in a clear trend for over a year and a half. Now the market is at record highs and they are still crying. Ignore the market direction and you will be punished!
AAPL was once almost $700. Everyone was predicting AAPL would hit $1000, and many traders believed them. But then AAPl started to tumble, losing 50% of it value in just over a year. Those who had fallen in love with the stock lost lots of money. However, if we had let the charts tell us the obvious truth, we could have made just as much.
6. Trading before you have a system.
All this adds up to one thing . . .
Inexperienced traders lose money quickly because they don't have a plan that works. There are many ways to trade that are successful. But if you don't have a system at all, then you are relying on luck. If your plan generates money consistently on paper, then it is ready for real money. So don't trade until you have a plan that works, and then confidently work your plan.
So those are the big money burners. Nobody bats 100% but if you are aware of the six fire devils, there's a good chance you'll be able to put out your financial fires quickly.
"Burn me once, its your fault. Burn me twice, its mine."
لا يلدغ المؤمن من جحر مرتين.
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