Option Trading Strategies - Why Are They So Important?

FinanceTrading / Investing

  • Author Owen Trimball
  • Published March 13, 2010
  • Word count 720

You might have heard the expression "do one thing, do it well". This was never so true as it is in relation to the matter of trading the markets. There are a lot option trading systems out there and the developers of these systems will always tell you that theirs is the one that will solve your financial problems and give you the freedom you've dreamed about.

And some of them may just be right.

Some systems will show you that all you need is the RSI and volume indicators only, together with a few moving averages and bollinger bands. Others will give attention to the ADX or the CCH indicators and their systems will focus around that.

Other option trading systems will probably be simple and involve only going long, or 'buying to open' with the objective of selling to close at a profit within a very short timeframe. They provide you with all of the indicators and chart setups to accomplish this. Others will emphasise longer term strategies that depend on option time decay. Some systems will involve directional trading, that is, predicting future market direction in the short term, while others will teach you about 'delta neutral trading' and preach strategies like straddles and strangles which can make you a great profit as long as the market makes a substantial move one way or the other.

Each of the above option trading systems may be great in themselves, but here's the best tip you'll ever get from someone who's done it all. The most critical thing is, find one or more strategies which you understand well and that you've had regular success with and just keep doing it. Don't allow yourself to become distracted by trying new strategies using real money, because you've seen the latest DVD or read some book that claims how someone made a million with it.

It's really as simple as that.

I remember a time in my trading life when I was using an option trading system that really worked for me. I started with about $5,000 and within a short time, transformed it into a bank account of over $20,000. I did this running a simple 'buy to open' and 'sell to close' technique which i had learned from a guy named Nik Halik, combined with a selection of straddle trades. I was doing really well.

But then I became impatient. The market I was trading in didn't have the type of liquidity that allowed me to always take a trade when I saw an opportunity. So I decided to change from trading options to doing CFDs. At the same time, I was learning about 'ABC swing trading' as outlined by W.D. Gann and changed how I analyzed chart patterns and picked opportunities without fully understanding the context in which this system works. Now whilst CFDs are a lot more liquid than options, they also involve much greater associated risk due to the amount of leverage involved. Unlike option trading, you can lose more than your investment, so the psychology wasn't good for me either. So many times, I found myself stopped out, only to have the stock take off in the direction I had anticipated in the first place. I lost most of the money I had made from my previously successful option trading system.

The point is, you have to stay focussed on a system that you feel confident with and that has demonstrated itself to work for you. Don't allow yourself to be sidetracked by other systems that look terrific on the surface, but may not be compatible with your trading style or available concentration time - or that you simply may not yet understand well enough to apply effectively.

Over 90 percent of trading success is about your own psychology. It's the critical thing that causes you to make all your trading choices. For this reason you need to enter the market with confidence, believing that whatever trading system you have followed, you understand it well, have proven to yourself thatit really works, know the risks and believe that with patience and self-discipline, it's going to make you a steady income for the rest of your life.

If you don't have all this, there are three little words I have for you, right here, right now. DON'T DO IT!

Visit Owen's popular blog to understand the advantages of Option Trading and how good option trading systems can work for you.

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