Options and derivative trading is especially difficult, but it can be intoxicating. You hear outlandish stories that turn out to be true — like the trader who made $2.4 million in less than 30 minutes.
But when you've got it, you know you've got it. We want to help you avoid common mistakes as you trade options more frequently to build your portfolio.
Check out these five options trading mistakes that happen way too often, and learn what you can do to avoid them.
No Risk Aversion
There is such a thing as "trading mania," and you shouldn't develop it. It's not a mental illness, but it can manifest as doubling down on what you know are bad bets because you're not prepared to dial down your risk.
If you have early success as a trader, this can happen to you. You might begin to feel invincible. Trust us — you're not.
Options traders are at specific risk for this problem, as often those who take the biggest risks are rewarded. It's crucial not to get caught up in the romance of trading. You need to stay steady in your decisions, no matter your highs and lows.
The best way to manage this tendency is to set risk parameters for yourself. And stay within them. It can be done!
One of the most common options trading mistakes in the world is thinking you are disciplined when you're not. There is a difference between discipline and obsession. Options trade mistakes happen to those who are obsessed with the markets but not methodological about them.
Take your time learning, and don't re-invent the wheel. You can learn from watching the patterns of others, such as Warren Buffett. Stand on the shoulders of giants, and keep to your strategies in times of income and loss.
Are you seeing a pattern here? An impatient options trader is a failure. Because your stocks are derivative, you must wait for their parent asset (stocks) to rise or fall while you calculate your options trading strategy.
Don't mistake quick moves with smart moves. Patience is a virtue in options trading. Mistakes are most common among the fast and furious.
Young people sometimes have the worst problem with being impatient. If you're a teenager who is new to investing, learn a few tips about business here.
Only Expecting Wins
The Chicago Board of Trade showed that about 90 percent of options traders report losses. This doesn't mean they have failed, it only means that the 90 percent of options traders have learned a lesson.
The most successful options traders will win and lose in their lifetime. It can't be helped in the market. It's what you do with your losses and how you adjust that makes all the difference.
Not Listening to Experts
There are hundreds of gimmicks out there, but some of the options trading experts really can help you forge a path to wealth. D. R. Barton is the author of 10-Minute Millionaire, and he knows that options trading can be a great place to grow your net worth.
Listen to the right type of experts, and you won't miss many margin calls!
Make Fewer Options Trading Mistakes
You can learn from these five tips how not to make options trading mistakes, but it's important to remember there is always a steep learning curve. If investing was easy, everyone would do it!
For those new to options trading who don't have money to lose, or for those who need a break from the grind, try these alternatives to investing in the stock market. There are lots of ways to invest and see returns!