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6 Common Options Trading Newbie Mistakes

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  • 6 Common Options Trading Newbie Mistakes

    Are you about to put one toe into the world of options trading? Have you started on options trading and made some initial losses? This article is written just for you.

    After 6 years of professionally mentoring beginners in options trading, I noticed that there are a few mistakes that keep showing up, causing initial losses. Good thing is that I always make sure my students start out options trading using virtual trading or paper trading in order to harmlessly get through these initial mistakes and to learn from them.

    These mistakes have been responsible for most of the initial losses that I see options trading newbies make and having an understanding of them would certainly help you avoid these mistakes and avoid the initial frustration of losing money.

    Mistake 1: Choosing the wrong (usually out of the money) options

    Many options trading newbies prefer to buy "cheap" out of the money options the reason being why buy expensive when cheaper options would also profit if the stock moved up (for call options). Well, that one decision alone has resulted in much of the initial losses when a stock moved up insignificantly and the position remains in a loss. Out of the money, options are only good if you expect the stock to move strongly in that direction. If you expect to profit from relatively small movements, at the money or in the money options should be what you should buy. Buying out of the money options is also the reason why many options trading beginners lose all their money in one go. This happens when the options they bought never got in the money all the way up to expiration.

    Mistake 2: Making complex positions as your first few tries at options trading

    Many options trading newbies start out making complex positioning strategies such as iron condor spread or butterfly spreads as their first few options trades and then totally screw up as they did not know how to maintain the position and some don't even know how to set up the positions properly. If you are new to options trading, stick to making a few simple call or put options trades using a small amount of money (or money you can afford to lose) in order to have a feel of how it works first before moving on to more complex strategies. Complex strategies are only good when your trading experience is as comprehensive as they are.

    Mistake 3: Buying options that do not conform to your expected trading horizon

    Most options trading beginners have no idea what an expected trading horizon is in the first place and commonly find the options they buy expiring before the underlying stock made the move they expected it to. If you expect a stock to be a mid to long-term performer, make sure you buy options that are half a year to a year out. If you don't know how a stock is going to behave, make sure you give yourself plenty of time by buying options with no lesser than 3 months to expiration.

    Mistake 4: Placing the wrong orders

    Yes, when under pressure, especially when real money is involved, beginners tend to make silly human errors such as clicking a wrong button, buying a wrong option, buying a wrong expiration month or placing a wrong stop loss order that got the position sold off immediately. Such newbie human errors can only be reduced through an extended period of virtual trading practice on your chosen options platform and then progressively practice using only very little money in order to get used to the feeling of trading real money. Sadly, we are all human, while experienced options traders tend to make lesser of such mistakes, they still do sometimes. However, it is more prevalent in newbie trades and certainly hurts trading confidence. Always give yourself a few months of virtual trading practice on your chosen platform before going on real money.

    Mistake 5: Trading with borrowed money (or money you cannot afford to lose)

    There is a saying "you can't afford to win if you can't afford to lose". This is exceptionally true in trading, not only options trading but any kind of trading. If you trade using money that you cannot afford to lose, the mental pressure will reduce your odds of winning when your odds of winning are already very low as a beginner. This is why we always advise people to trade only with money they can afford to lose.

    Mistake 6: Trading without guidance

    Would you learn to drive a car without anyone guiding you? Why then would you learn to trade without anyone guiding you? Yes, a mentor or a teacher is extremely important to beginners in options trading not because they can give you "tips" but because they can shed light on your situation and reveal weaknesses that you may not have noticed. Newbies trading without guidance typically repeat mistakes over and over again, and if you have traded options before, you know it doesn't take many of those mistakes to wipe your account out.

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    "Step into the arena and hold on to your hat. Don't get discouraged if you don't make 8 trillion dollars in your first month. Trading is not a get rich quick scheme. Realize that trading is a skill and just like any other skill it takes time to learn. Have convictions in your decisions in life and trading. Ignore the comments and "advice" of those that have never traded a day in their life."

    Good KARMA and positive energy abound.

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