If you trade options, there are 10 things that you must do!
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1. Realize that you are starting a business.
You are not just throwing some money at the market as if you were in a casino. You are in the trading business and you have a few million very smart and very rich competitors. Become an expert at some aspect of the trading business, or you will lose.
2. You must do the accounting for your trading business.
You have to know how much money you are making or losing every day. You cannot justify losses in one symbol because you are making some money elsewhere. Losing money is losing money.
3. You can’t lose money.
If you let your account size shrink, you have created all kinds of problems for yourself and your business.
4. The trading business is all about one thing – winning.
Trading is a unique business that calculates your success to the penny, every day. If you are not winning, then fix it now or quit. It’ll never fix itself.
5. You must either get out of a losing position or have a plan to generate income by selling premium against that position.
You cannot just wait for things to “turn around”. You must manage each position as a piece of inventory in your business.
6. There are 3 possible outcomes to each new trade.
It is either going to be profitable, flat, or a loser. Your odds are only 1 in 3 of getting it right the first time.
7. As soon as you can see that your 1 out of 3 pick is the wrong one, change your mind.
You now have moved from a 1 in 3 chance of success to a 2 in 3 chance of success. But with options, you can make it even better than that. You can build an option structure that will have almost 100% chance of success, over time.
8. You must have a realistic long term goal and then do the things to achieve it.
If you think you are going to make 30% on your entire account every year, you are not being realistic. The best traders, like Warren Buffett, average maybe 20% a year. Admit that you are not that good and work from a realistic starting point.
9. A chart can be made to say anything.
And the talking heads on TV – same thing!
10. You need a clearly defined system that you can write down in a short paragraph.
That’s the easy part. The difficult part is to stick with the system you have designed. The daily swings of the market can shake your resolve.
Stay optioned, my friend!