So, everyone’s making money trading options and you too are eager to make the move from good old boring stocks trading to options trading. That’s good, but how do you get centralex started in options trading? What are the steps of learning to go through before you can trade options effectively?
Step 1: Options Education
Options are extremely complex derivative trading instruments and trading options isn’t as simple as buying low and selling high. In fact, there isn’t just one kind of option and there isn’t just one option for each stock! There can be as many as hundreds of options available for trading on a single stock and all of them behaves differently and at a different rate in response to changes in the price of the underlying stock. All of these characteristics make learning about what options are the first steps in trading options. A lot of beginners make the mistake of starting their options education by randomly buying a few options to see how they behave. That usually leads to more questions about why those options behave the way they do and the inevitable loss also affects trading confidence right from the start. Inevitably, beginners starting out this way would have to come back to the education part. There are a lot of websites that give good in-depth explanation on how options work for free.
Education for options trading must also include a comprehensive education in technical analysis as the full benefits of options trading can only be obtained from accurate trend analysis and market timing.
Step 2: Paper Trading
After you have obtained a comprehensive understanding of how options work it is now time to put your knowledge to the test. No, this is not when you should simply fund an options account and start trading with real money. Most reputable online options accounts offer a function known as “virtual trading”. This is a function which allows you to practice options trading using real prices with identical trading interface but using fake money rather than real ones. Virtual trading, or paper trading, is the most important step in verifying your options trading knowledge before you do it for real. Very often, beginners will find the confidence they build up in the education phase fizzle out really quickly in virtual trading as they see the fallacies of their methods and perhaps even find holes in their options knowledge which requires more education to patch up. Those options beginners who went ahead with real trading following their theoretical options education usually end up losing all their money and quitting options trading altogether. This is why paper trading is such an important step in the overall options learning process. In fact, it is recommended that the virtual trading phase be at least 6 months to ensure you are not missing anything. It is like practicing in the baby pool after learning the swimming strokes on land.
Step 3: Single Contract Real Trading
After you have mustered enough confidence through an extended options virtual trading practice, it is time to take your knowledge and experience into the real money options trading world. However, it is not yet time for you to start trading your entire savings or retirement account full force. This is time for you to practice using real money trading only one contract at a time. Single contract real options trading training allows you to experience the real emotional stress of trading real money and also allows you to get familiarized with using real money interface while risking only a small, limited amount of money. Such single contract real options trading practice is critical due to the fact that most beginners make their first losses through execution mistakes such as clicking on a wrong link, using a wrong order or placing an advanced order wrongly. Such unnecessary losses can be significant if a lot of money is committed right from the start and its impact on trading confidence cannot be undermined. Trading only single options contracts may be inefficient in terms of commissions for some options brokers but it allows such mistakes to be made with relatively low level of pain on your capital. As such, it is recommended for a beginner options trader at this stage to keep trading only single contract until no more executional mistakes are made moving on to the next step.
Step 4: All Out Options Trading
All out trading is when you are truly ready to make options trading a true source of additional income or income replacement. This is when you will commit significant amounts of money in order to produce a meaningful profit trading options. However, coming out of single contract real trading, one should not immediately commit all the money one can muster all at once. Emotional stress increases as capital involved increases. Indeed, an options trader who can handle trading thousands of dollars may not have the emotional strength to handle trading hundreds of thousands and such a surge in emotional stress usually lead to dire consequences. It is again just like learning to swim; you don’t jump straight into the deepest end by rather move deeper gradually as your confidence and competence increases. As such, one should trade options with more and more money only as one’s trading confidence and competence increases.
Indeed, learning to trade options effectively without damaging one’s trading confidence along the way is the only way to ensure long term success in options trading. This is why adhering to the steps in learning to trade options are so important.