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What You Should Know Before Getting Involved in Options Trading

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  • What You Should Know Before Getting Involved in Options Trading

    One question that is frequently asked on Google is "What is Options Trading". As the topic has received more profile in recent years, and as gyrations in the stock market have done serious damage to retirement plans, investors are starting to look at alternative strategies to use in growing their portfolio. Options trading is a broad field that contains plenty of strategies, with all risk profiles, and so a serious trader really needs to take a serious look at the possibilities. Unfortunately, the first word that most investors hear is that "Options trading is high risk". Is this true? Here are some things that you should know before getting involved.
    1. Options trading is less risky than trading stocks. Face it: the "buy and hold" stock trading strategy is dead, or it should be! Too many people had their retirement plans wiped out in the 2009 and 2010 stock market crashes. It will take many of them years to recover. Is this not the truly risky strategy? Options trading is mostly short term, and takes advantage of both upward and downward trends in the market. There are several strategies that offer a much lower risk profile than "buy and hold", and at a conservative level can still grow a profile by 5% per month.
    2. Options trading is risky. The big problem with options trading is not the inherent risk in the strategy, but in the greed of the investor. Many times, it is associated with "get rich quick" schemes. In order to be successful, you need to have a clear trading plan for the strategy that you are using, and stick with the trading rules, no matter what. Because some (not all) strategies carry the risk of a 100% loss on a given trade, the rules need to be quite a lot tighter than with stock trading - the field does not allow much space for careless mistakes!
    3. Do you require knowledge of superior analysis techniques? No, not as much as with stock trading. If you are trading stocks, you need to be familiar with both fundamental and technical analysis methods. You pick a good company based on its fundamentals, and you pick a trade based on the technical indicators (of which there are many!). Options trading is much more simple: each strategy has its own limited set of technical indicators. For example, if you start selling credit spreads, the only things that you need to know is how to recognise a trend, using three indicators, and how to pick support and resistance levels. You don't need to know about P/E or Elliot waves or Fibonacci or anything like that! Even if you take on some of the higher risk strategies (which you should only do after a few years of experience), you need to be familiar with a broader suite of technical analysis techniques, but it is possible to get started with options with a simpler approach.
    4. Do you require a big time commitment? Again, this depends on the strategy that you are utilising. It is possible to grow your portfolio by 10% per month with less than two hours of work per week. However, if day trading is your style, and you have the knowledge and commitment to follow the more intricate technical indicators, options trading can certainly suck you in and swallow your time!

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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."

    College is here to read more about the college scam!

    Good KARMA and positive energy abound.

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