Three Easy Steps To Trade Options For Explosive Gains…

| November 13, 2009 | 0 Comments

As the editor of Elite Option Trader, my email is filled daily with questions about stock options.  I’ll often answer subscriber questions in my weekly update.

The question that comes up most often is – how do you know when to take a profit?

The easy answer is… Sell at the top.

Just kidding!  The reality is selling every trade at the absolute top is impossible.

Knowing when to take a profit is really part of a bigger question.  What’s my trading plan?

That’s right, you need to have a plan.  Unfortunately, some people refuse to develop one.  Inevitably they face a small loss that grows into a big loss.  They’re left wondering why they aren’t more successful.  Often they’ll blame their failures on others.  Then they give up their dreams of making money in the markets.

I don’t want you to be one of ‘them’.  So let me say it again… In order to trade any investment, you need to have a plan.  Before you invest a single penny of your hard earned money, you need to understand these five things –

  • What to buy
  • When to buy
  • What price to pay
  • How much to buy
  • When to sell

Here are my three easy steps to developing a successful trading plan.

The first step to developing a trading plan is choosing your trading method.  This is where you’ll determine what to buy, when, and at what price.  (Unfortunately, many investors never make it past this step.)

There’s a seemingly endless number of ways to do this.  You can use technical or fundamental analysis or a combination of the two.  And the number of different indicators, tools, and other number crunching methods seems to grow every day.  It can be a bit overwhelming… especially if you’re just starting out.

It’s important to develop a system that returns more winners than losers. You may choose to go it alone or you can let someone else do the heavy lifting for you.  This is the part of the plan we handle for all the subscribers to our investment products.

Once you have a method for choosing your investments, the next step is money management.

Determining how much money you’ll risk on each trade will vary from one trader to the next.  Everybody’s capital situation and risk tolerance is different.  I suggest keeping the amount of capital at risk on a single trade to around 1% to 3% of your available capital (some suggest more, some less).

When it comes to the volatile world of options, the key is to prevent one or two unsuccessful trades from destroying your capital.  It’s much easier to recover from a loss of 10% or 20% than 50%.  And you’ll never recover if you’re cleaned out betting the farm on one trade.

Remember, you should be comfortable losing the entire amount.  Never invest in options with borrowed money or money you can’t afford to lose.

The next piece of good money management is developing a sell discipline.

It’s called a discipline for a reason… You must adhere to your plan to take profits and cut losses systematically.  There shouldn’t be any thinking, hoping, or deciding when the bullets are flying.  Once you hit your predetermined point to exit a position, you’re out (win or lose).

Now there’s no rule that says we all need the same exit strategy to be successful.  Your individual situation, preferences, and risk tolerances will determine the right one for you.  When it comes to exit strategies, I like to use a baseball analogy.

Some options traders are singles hitters and others are homerun hitters.

Singles hitters get a lot hits and don’t strike out often.  This type of trader will take lots of smaller gains and losses quickly.  They won’t have as many big winners but they won’t see many options expire worthless either.

Homerun hitters on the other hand like to swing for the fences.  As a result, they’ll strike out more often.  This type of trader will endure some options expiring worthless but their 100%, 200%, and even 1,000% homeruns will more than offset the losses.

After you’ve decided on a money management system, the last piece of the puzzle is controlling your emotions.

Fear and greed are the two emotions that ebb and flow through investors.  And if you’re not careful, they can derail even the best plan. You can avoid falling victim to these emotions by being honest with yourself when you set your sell discipline.  By choosing a strategy you’re comfortable with, you’re more likely to stick to the plan and be successful with it.

So there you have it… In order to successfully trade options, you need a trading plan.  Be honest with yourself and stick to the plan.  Identify your trading strategy, implement a strict money management plan, and remember to control your emotions.  You’ll be a better (and richer) trader for the effort.

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Category: Options Trading

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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