No joke – during my first week as a stockbroker, I saw an older middle-aged broker pass out in the office.
They hauled him out on a stretcher. (read the full story here)
I later found out from the boss that the guy lost all his money in options.
There are more mistakes you can make trading options than anything else.
It’s important to cover the top five mistakes options traders make before we talk about how to trade options…
Mistake #1 - Not Understanding Options
Not understanding options and how Puts and Calls work. More than anything else, you need to know how these work. Just to make sure, we’ll cover it in a few minutes.
Mistake #2 - No Exit Strategy
This is the single most common thing I see in new traders. They buy a stock for all kinds of reasons but never have a plan to sell. A successful trader always knows how, when and where he’s going to get out before he gets in. To avoid this, you should know, where your break even point is and how to get out or unwind the trade.
Mistake #3 - No Strategy
Not fully understanding the strategy you are trying to use. This is a common mistake and it’s not your fault. The best way to gain confidence is to better understand the strategy. Understand it better and you will have more confidence to enter your trades.
Mistake #4 - Fear of Loss
Fear of Loss/Trading with the wrong money. I can’t even begin to tell you how many people start out with the wrong money. The “wrong” money by the way has nothing to do with any amount of money.
It has to do with the type of money.
This part is critical => in order for you to have any kind of real success trading sticks you have to be trading with what you consider “risk capital.”
This means you can’t be using the rent or grocery money to make trades with. This is money you can’t afford to lose… also known as “scared money”. Scared money never wins, period.
My general rule of thumb on how much money you should start trading with is any amount that you could take a lighter to and not cry about it. If losing this money impacts your life, it’s not risk capital.
By the way, this does not mean you will lose all your money, but once you’ve initially set yourself up to trade only with risk capital, you are far less likely to make emotional trading decisions. This also mentally frees you up to experience larger and more frequent trading profits.
Many people have made fortunes trading. The reason that you can make money at it is because it involves risk. Nobody can predict the market’s direction or what a stock will do with 100% accuracy.
Therefore, you should ONLY trade with risk capital. You may have heard me say this before, but I don’t just say it as a general warning. I say it because the key to avoiding the emotionally painful and financially costly learning curve that most traders initially go through is in the deeper meaning of that statement.
You CANNOT have any type of long term trading success with money that you are emotionally attached to. It’s impossible. Human nature is such that our fear of loss is greater than our greed for gain. That’s why, if you’re trading with scared money, you can’t be successful trading because, like I said earlier, scared money never wins.
Mistake #5 - On the Market's Bad Side
On the wrong side of the market. This is a very, very common mistake. The worst part is, no one who makes this mistake even realized they were on the wrong side of the market or they wouldn’t have done the trade in the first place.
Check this out, my research indicates that you can improve your odds of success by 85% simply by trading in the same direction as the broad market.
Hope this helps.