Options trading can be a profitable venture, but only if you avoid making these 4 critical mistakes. Most traders make these mistakes, and as a result, they lose money. Don’t be one of them! In this post, we will discuss each mistake in detail. We will also discuss exactly what needs to be done in place of these mistakes to be a successful options trader.
Real quick guys, please comment and let me know what you think about this post. Also, check out the “Complete Guide To Stock Options – Free Training for Beginners! (Everything You Need To Know)”. It covers everything you need to know about stock options and provides the tools needed to consistently beat the S&P.
If you are interested in learning about the coaching program, please shoot me an email at darren@darrensteves.com and we can book a FREE 15-minute video call. We can talk about your goals and if you may be a good fit for the options coaching program.
So let’s get started!
Buy High and Sell Low
The first mistake that traders make is buying high and selling low. Human nature is to jump all in when things are going well. And then when the market turns, and the waters get rough, people want to bail on their positions and get out of the market resulting in huge losses.
The next mistake that traders make is they trade too big.
Position Size is Too Big
Many new traders think that they need to trade big to make any real money in the market. So they risk way too much per trade. They get greedy when they have a winner. Instead of closing the trade and booking the profits, they add to it. And as a result, they end up losing when the market turns and they may even get wiped out completely.
Don’t Cap Profit Potential
Another mistake that 90% of traders make, is they don’t cap their profit potential. They are always swinging away for that home run. However, the problem with that is that their batting average is super low. Instead of hitting singles with a much higher success rate and probability of profit.
Don’t Trade Liquid Underlyings
Lastly, traders often don’t trade liquid underlyings. What I mean is that they don’t trade the big stocks like Apple or Amazon that have high volumes and are very liquid. Instead, they try to pick the next big winner that’s going to go up 100% or more. And as a result, they get stuck in these small illiquid stocks that they can’t get out of. The difference between the bid and ask price is money that is just flushed down the toilet.
So, why do traders make these mistakes?
Sure some of it is human nature. We want to believe that we can make money by trading this way since we think it is somehow safer. However, this couldn’t be further from the truth! Do we really think that just letting the winners run will result in a never-ending cash flow of income?
The media and analysts are also always jumping on and upgrading stocks after they have moved up and come out with a good earnings report. It sure is easy to be right after the fact! However, this can lead to disaster.
Now let’s look at the other side and what traders should be doing if they want to consistently profit when trading options.
What need to do:
Instead of buying high during a market run, we need to
Buy Low and Sell High
How do we do this? We buy into weakness and sell into strength. However, if we are buying into a selloff how do we know when it has ended? We don’t! No one does. Not even Warren Buffet knows this!
What we do know is that we are getting in at a better price than it when it opened. We don’t use our emotions to jump into a stock or ETF. Instead, we follow a disciplined approach which most others don’t which gives us an advantage.
Close Out Winners and Rollout Losers
We consistently close out winning trades as soon as possible. This books the win and frees up cash for other trades.
If you are cutting your losses short you are going to miss out on winners when the price turns. At the same time when letting winners run you will be disappointed when those winners take a turn the other way and the profits that you could have had disappeared.
We need to be patient with our losers. By following high probability strategies, almost all losing trades can be turned into winners with one or two rolls out in time over the next month or two.
Options traders need to
Stay Small and Place High Probability Trades
By staying small, we can keep our losses small as a percentage of our portfolio. If we are not able to sleep at night because we are worried about our options trading account, then we are likely trading too big.
Only when we are comfortable with the daily fluctuations and know that we cannot withstand a downturn, we can make correct decisions based on probabilities in our favor. It’s when we get too big for our britches and feel like we are invincible that we make mistakes.
Trading high-probability setups with a solid risk-reward profile is best. We need to trade the set-ups where we have a higher chance of success and a nice profit potential.
And lastly, we need to
Trade with a Defined Profit and Reduce Cost Basis
When we have a defined profit, we have reduced profit potential. However, we have a high probability of success. We are hitting singles instead of swinging for the fences.
It’s important to remember that we are always trying to reduce our cost basis on every trade. By doing this we increase our probability of success and decrease the risk of every trade.
Conclusion
By following these steps, we can avoid making the critical mistakes that 90% of other option traders make. We will be trading with the odds in our favor and making a ton of money!
Have you made any of these mistakes? What other mistakes do traders make? Share your thoughts in the comments below.
Also, if you are interested in learning about the coaching program, please shoot me an email at darren@darrensteves.com and we can book a FREE 15-minute video call. We can talk about your goals and if you may be a good fit for the options coaching program. I’ve also put a link down below to a video that tells you more about the program.
Alright, guys, make it a great day, and happy trading!