Facts are facts right? They can’t be argued. The truth is that most people who trade options fail miserably and lose money each year. But if you’re reading this blog, I think it’s safe to assume that you could be one of the people who prosper from options trading.
Let’s be honest though, most beginner options traders are not professionals by any stretch. In fact, most of them don’t even have a background in finance and don’t understand why things happen the way they do in the stock market or the economy.
For traders like this, learning to trade options and analyze the markets can be a disastrous attempt at first. But rest assured, if you practice and learn you CAN become very successful trading – don’t let anyone convince you otherwise!
Below, I list the top five reasons why most people fail when trading options.
Assuming That Options Trading Is “Simple”
Have you ever attended an options seminar, learned from some guy how “simple” it is to make a high income from options trading, yet when you went home and started trading you failed to make any consistent income?
What a classic story that is told over and over. I have been to those seminars as well and have the scars to prove it.
Realizing right now that options trading is NOT a “get rich quick” industry will save you thousands over the course of your life – maybe even millions. You have to establish a strong trading mentality which comes not by nature but is something that can be learned/trained.
Options trading is like running a marathon. There is no short cut and no easy way to make money or else everyone would be doing it, right?
You have to make a conscious effort each day to learn and get better.
Not Creating a Non-Emotional Trading Plan
This is where a lot of beginners quite frankly fail. In order for beginners to become consistent in options trading, a robust and objective trading system should be created so that all you need to do is follow your own rules and make very limited emotional decisions. We are all human and thus our EQ (Emotional IQ) leads our decision making.
With a proven system and framework for trading like a business (and not a hobby) I can teach any person to trade options successfully. Because at this point it’s not about how “smart” you are. Rather, it’s about following the system and making non-emotional trades that generate consistent returns.
It’s Always Lack of Knowledge That Kills
Of all the things we do in life, it’s always a lack of knowledge that hurts us the most. I always use the mechanic example when coaching students each week. It goes a little something like this…
My father was a mechanic for Nissan for many years, so he knows specifically how to tear down a car and rebuild it from the ground up. I do not know how to do this and would fail miserably if I tried.
It’s not that I don’t have a lack of ability – I can absolutely do the hard labor. And if anything, since he’s older it should be much easier for me to do the work. So the only real difference between us is that he has the KNOWLEDGE and I don’t.
As with anything, people who are wildly successful trading options continue to learn and grow each and every month. They put together a great trading plan, have solid risk management and learn about new strategies.
Not Having a Coach
Every great athlete knows the immense value of having a coach. The same applies in options trading.
Yes, you might do reasonably well on your own. However, if you want to avoid pointless mistakes and advance faster while getting higher returns, you certainly need a coach.
It’s not uncommon to hear failed investors make remarks as these: “I should have seen that coming,” or “If only I stayed focused, I would have made it.” In such instances, a coach would have provided valuable, impartial insight to help you avoid such disappointments. Such a coach would have to be an experienced trader with proven expertise.
Most of all, if you want to move to the highest levels, you might need not just one but a whole bunch of coaches. Just look at the great investors of our time; they have teams of highly qualified professionals guiding every aspect of their portfolios.
This is particularly valuable since no single person possesses every skill and insight in this world. You might easily overlook new opportunities that arise outside your initial plans. Alternatively, you might not be aware of external threats that may affect your plans. At the very least, it’s always wise to have a second set of eyes to assess your progress.
Additionally, always have an eye out for what other option traders are doing. Although you should remain focused on your specific plans, finding out about others can help you tweak a few things here and there.
Not Understanding Risks and Rewards
Not understanding the underlying concept of risk and reward will ultimately lead to disaster. Some who experience major financial losses early on in their trading careers might end up fearing risk. This makes them less open to legitimately good opportunities. Instead, they hold on to options with minimal returns just because they are less risky to trade. Eventually, such people wouldn’t achieve much financially because reward is often closely tied to risks.
On the other hand, some traders focus too much on rewards and end up giving little concern to risk. It may actually go well for some time but the good run is bound to come to an end at some point.
Understanding the concepts of risks and rewards will save you from the downfall of pushing your position until you lose.
It’s always wise to know when to stop taking trades. If you’re up 40K and think you could be up 80K, stop yourself and look at the risk too. Thinking only of the 80K reward would only make you blind to the risk involved in getting there. As you very well know (at least you should), every reward has some risks attached to it. And often, higher rewards have higher risks.
Can you relate to some of the mistakes described on today’s blog? Feel free to share in the comments how you deal with them.
— The Option Specialist