TRADING OPTIONS FOR PROFIT

By Peter Douglas

We all want our lifestyle to be the best possible, with our days (and nights) filled with interesting and exciting times! 

What we need to achieve that lifestyle is a source of income that will allow enough luxuries, enough variety, enough pleasure, in fact enough of everything!

So, have a look at OPTION TRADING as a way to achieve that income level!

The requirements-of-good-trading, or what you need to be an Option Trader, are listed here.

This is of course just my opinion of what are the main requirements to be successful as a Trader of Options. There are probably other things you should take into account, but these are by far the main ones.

- background knowledge
- the right psyche
- unpressured time
- spare money
- a minimum bank
- a computer with the right software
- live data
- a broker

Background Knowledge

This is probably the main item in the list of requirements-of-good-trading. 

This is where you study the subject and simulate trades and 'practice' how to be a trader. You definitely need a solid understanding of the 'whole picture' so that you know how, what, why, when etc of the mechanics of your trade. 

You need to understand what actually happens when you place an order (a 'bid'), what happens when you place an 'ask', etc, into the market. Some of these details are on other pages of my site at www.option-trading-for-profit.com

Read everything you can find on the subject of Option Trading, go to seminars, and paper trade with live data, in real-time, to simulate the actual process.

The Right Psyche

I don't know what the right words for this are, but I mean here that included in the requirements-of-good-trading is the fact that you should always have the correct frame of mind to be a trader. 

Traders lose money sometimes - some traders lose money all the time! You have to be aware of this. You need to realise that some trades will go against you, and you need to know that getting out of that trade NOW will cost you less than staying in. 

Therefore getting out with a small loss is sometimes a very successful outcome - but it IS a losing trade. The alternative may be a big loss! Understand that some people who have heard about Option Trading are NOT going to be good at it! Maybe it won't be your 'cup-of-tea'!

Unpressured Time

To be a successful trader you need to be in the correct mental state - relaxed, awake, aware, healthy, and with no pressure from work, spouse, family, friends etc. 

You cannot make decisions instantly, under time pressure, unless you have many years of experience. 

And everyone I know who has tried to be a trader while holding down a 9-5 job has had great difficulty being successful! It's a very delicate and unstable balance sometimes, getting all the requirements-of-good-trading working together. 

Takes a really strong character to succeed, but you can do it. It is possible!

Spare Money

Everyone losses some of their initial starting 'bank'. If you only have a few thousand to spare, option trading may not be the correct investment vehicle to start with. 

As I heard my 'first' Option Trading Instructor, Kim Reilly, state, 'You can only lose 100% of your investment'! That means if one of your first trades goes really wrong, you are out of the game! 

To have enough to 'stay in the game' when things go wrong, you need about $10,000 to start with, and this money has to be 'spare', in that if it is all lost, then your lifestyle will not be seriously impaired! No money, and the requirements-of-good-trading don't matter!

A Minimum Bank

Obviously, one of the major requirements-of-good-trading is to have at least $10,000 in your trading 'bank', preferably more. 

Then only trade smaller amounts, such as $2,000, so that when the losses happen, there is some left for the next trade. It is possible to trade with all your money in one trade, and then for the next trade, put it all into that one, but this 'style' of trading is really, really, risky. 

Don't do it. Smaller amount, take profits while they are available, and minimise risk and losses. 

That way the 'bank' will increase steadily. Remember, if this spare money was sitting in an investment earning normal bank interest of only a few percent per annum, and you can return a few percent per month, or a few percent per day!, you are definitely winning!

A Computer

You need a computer - it's an obvious part of the requirements-of-good-trading. And an internet connection. Obviously you have one to read this article, but I mean a personal computer with access at all required times. 

Not a 'work' computer, as the boss will not be amused when you do 'research' on Option trading when he thinks you are doing research for his company! To trade live, you also need a charting program, and live stock market data.

I use The Bourse, a very easy-to-use and reliable charting program.

Live Data

It is possible to trade without Live data, but I think this is one of the major requirements-of-good-trading.

There are hundreds of sources of data worldwide. I live in Australia, and initially I wanted to get the concepts and intricacies of Option Trading under control by trading options on the ASX, but now I'm researching American stocks, and The Bourse offers data from all the major exchanges. 

Basically, all the data feeds available for Option traders are similar, in that their data provides the stock code, the volume of trades, the opening price, the closing price, the highest price, and the lowest price, for each period of time. 

For instance, this may be every minute. The data feed also shows details such as the bid, ask, identity of the broker, etc.

From this raw data, the charting program summarises and manipulates the data to show charts, with optional things like the ability to add trendlines and similar identifying marks, display indicators, lists, etc. More on charting here.

A Broker

In the requirements-of-good-trading, this is non-negotiable, because all Option Trades must go through a broker. 

Brokers are licensed and trained and regulated, and they get paid large amounts for several services they provide. 

Market research - that is company details - and opinion, and advice, and many other services for both the novice trader and for the experienced trader. 

There are basically 3 different types of brokers:

- a 'full-service' broker, who is a human that you can ask advice from,

- a 'normal' broker, who is a human who just does what you ask,

- or you can use an online trading system, which appears to be totally computerised, and 'un-supervised', but all trades go to a broker (a human) who checks your orders before submitting them to the exchange. This 2nd step is usually nearly instantaneous, and in the near future will be, but for now, it's like a silent-partner who checks details for you.

And that's about it! As I said, this is my opinion of what are the main requirements to be successful as a Trader of Options.

Now all you need to do is to research the subject further, and the best place to start is Option Trading For Profit.

See you at the top!

Peter Douglas