Creating an Online Stock Option Trading PlanAn Online stock option trading plan is critical for anyone who wants to be successful trading options in the stock market. They may be profitable, but unless you have a plan to keep the risk in check they will probably do more harm than good to your account. I’ve shown an example of a stock option trading strategy before on my trading stock options page. But there is no one size fits all method of making money. So instead of looking for some Holy Grail profitable option trading systems you may be better off to create your own system and back test it against the market. But what does your system need in order to be profitable? There are 4 criteria’s that can help you create a winning plan. 1. Limiting Losses Options are dangerous, there is no faster way to lose all your money in the market then to bet it all on an option that is about to expire worthless. That is why the first thing that every profitable stock option trading strategy needs is a way to keep the losses small. Never risking more than 5% or even 2% on a single trade is normally a wise idea, especially when dealing with options. 2. Make Huge Gains The goal of option trading is to make huge gains, so don’t get out of profitable trades too early. Most traders will use a 2 for 1 risk to reward, meaning that if they risk $1 on the trade they expect to make at least $2 when profitable. Stretching that out to a 3 to 1 risk to reward if you need to is not a bad idea. If you only make a 50% profit when you are right and take a 100% loss when you are wrong you are going to have to be right over 67% of the time. On the other hand if you make a 200% gains when you are right and take a 100% loss when you are wrong you only have to be right over 34% of the time. It is a lot easier to be right over 34% if the time then over 67% of the time. 3. Create Rules To be a profitable at stock market option trading you have to have a specific set of rules that allow you to keep loses short and let winners ride. Using technical indicators can give you an advantage here. 4. Does it Work? Does your online stock option trading plan actually work? Before investing real money into your strategy it is normally a good idea to paper trade and back test it so you have some idea of how it performed in the past. Remember just because it worked well in the past does not mean that it will work in the future, or that you will make the same returns with real money. But it can be used as an indicator of what is likely to happen, especially if all the market conditions are the same. |
