A large part of the problem with any stock market investment is the emotional component of the trade, as many never learn how to trade options objectively. Far too many traders get emotionally invested in their portfolios, hanging on to options longer than they should, falling in love with bad stocks, and buying impulsively. The result is heavy losses, a loss of self-confidence, and a blooming risk aversion that can shrink profitability. Avoid this all takes a bit of work, but it can be done.
To learn how to trade options objectively, it is important to understand the psychology of the trading game. In theory, it is all about maximizing the return on each dollar invested. In practice, it often becomes a game of trying to out do other traders, prove something, or show-off. Even the most advanced traders claim that no one in the market is objective enough—but you can work towards greater objectivity when you:
1. Focus on the fundamentals
People lie. Analysts lie. The numbers never lie. If you want to learn how to trade options objectively, cut out all the human factors and focus on what the numbers are telling you. Ignore the talking heads completely, if you can, and focus on the research and your charts.
The fundamentals of a given trade are shown in black and white on paper. They don’t like or dislike you. They simply go up or down in reaction to market movements. Learn to read and understand the numbers side of trading options, and you will be set for success.
2. Recognize when emotion is in play
To learn how to trade options objectively time and time again, you need to be able to recognize when emotion is in play. Get to know your own trading personality. What are your triggers? What makes you feel aggressive, angry, frustrated, depressed, bitter, or euphoric? How do those emotions influence the way you trade?
Understanding your personal emotional influences on your trading strategy will help you pick the trading strategy that best suits you. When writing about the Holy Grail of trading and investments, the case has repeatedly been made that your emotional compatibility with a trading strategy can make it your personal Holy Grail. Learning what strategies require too much patience for you, or which make you too nervous to think objectively is key to avoiding being trapped in a losing system.
3. Set and follow your own rules
When you learn how to trade options objectively, you set and follow your own rules. It’s the second part that is the most important. You can create all the rules you want, but if you can’t follow them you don’t have a functional system.
Most trading rules are in place to limit the size of trades, eliminate risk, and cut losses. You set them when you were calm and thinking clearly. Being able to follow them in the heat of the moment will make the difference between successful portfolio management and heavy losses.
Popularity: 12% [?]
Grab Our RSS Feed
