So many new traders and investors believe there is a magic formula for trading success. They hear stories about huge piles of cash earned from the stock market, and they want a piece of the action. When it comes to how to trade options – or stocks for that matter – you need patience and experience.
Scottie Scheffler didn’t just pick up a golf club one day and start winning the majors. He practiced, watched videos of his swing, listened to his coach, shaved strokes off his game, and then he started winning. What he did is no different than what successful traders do.
How to trade options: 3 keys to success
Control your emotions
Controlling your emotions and staying focused are as important in golf as they are in trading. The stock market can easily make you feel like you’re on a rollercoaster ride. With a disciplined approach, you can fight through tough days, weeks, and even months.
On really bad days, remind yourself that the stock market moves up and to the right over the long-term. Even an 18-month bear market will appear as a brief dip on a long term chart.
Learn technical analysis
Once you understand how to analyze a chart, you can paint a picture of a stock, index, or ETF that is rich with information. Price, volume, sentiment indicators, and the scores of technical indicators out there take the guess work out of stock movements. You will learn to see patterns and how they repeat themselves. In fact, pattern recognition is key to my trading strategy.
Manage risk
You cannot control what the stock market is doing, but you can control your risk. I would argue that risk management is the most vital control mechanism you have as a trader. You never know when the opportunity to buy is going to drop in your lap, and you never know when a market downturn is going to hit your portfolio.
In real life, this means taking profits regularly, cutting losses quickly, keeping protection on at all times (via put options), and hording cash.
Selling is particularly hard for traders. They are afraid to miss out on even bigger returns. However, stocks don’t go up forever, which is why I always advise you to take profits when you have them. When a stock corrects, you’ll be glad you did.
Finally, let’s remember that account size or number of wins doesn’t define a success. A successful trader has a sustainable, long-term strategy and a portfolio that steadily grows over time.
