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    The 5 Most Dangerous Errors

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    Steve Scrymgeour
    The document outlines 5 common errors made by amateur options traders that often lead to financial losses. These include: 1) focusing on short-term signals without considering longer-term stock valuation trends, 2) betting against prevailing price trends, 3) failing to cut losses on losing trades, 4) lacking discipline in exiting profitable trades at predetermined price points, and 5) poor money management such as over-allocating capital to high-risk individual trades. The document advocates following a systematic approach and strict risk management to avoid these pitfalls and improve chances of success with options trading.

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    The 5 Most Dangerous Errors

    Uploaded by

    Steve Scrymgeour
    47 views2 pages
    The document outlines 5 common errors made by amateur options traders that often lead to financial losses. These include: 1) focusing on short-term signals without considering longer-term stock valuation trends, 2) betting against prevailing price trends, 3) failing to cut losses on losing trades, 4) lacking discipline in exiting profitable trades at predetermined price points, and 5) poor money management such as over-allocating capital to high-risk individual trades. The document advocates following a systematic approach and strict risk management to avoid these pitfalls and improve chances of success with options trading.

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    The document outlines 5 common errors made by amateur options traders that often lead to financial losses. These include: 1) focusing on short-term signals without considering longer-term stock valuation trends, 2) betting against prevailing price trends, 3) failing to cut losses on losing trades, 4) lacking discipline in exiting profitable trades at predetermined price points, and 5) poor money management such as over-allocating capital to high-risk individual trades. The document advocates following a systematic approach and strict risk management to avoid these pitfalls and improve chances of success with options trading.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    47 views2 pages

    The 5 Most Dangerous Errors

    Uploaded by

    Steve Scrymgeour
    The document outlines 5 common errors made by amateur options traders that often lead to financial losses. These include: 1) focusing on short-term signals without considering longer-term stock valuation trends, 2) betting against prevailing price trends, 3) failing to cut losses on losing trades, 4) lacking discipline in exiting profitable trades at predetermined price points, and 5) poor money management such as over-allocating capital to high-risk individual trades. The document advocates following a systematic approach and strict risk management to avoid these pitfalls and improve chances of success with options trading.

    Copyright:

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    The 5 Most Dangerous Errors Made by Amateurs When Trading Options

    Have you ever lost money trading options before, or has someone told you that options are a
    losing game? That's probably because the methods being used to trade options were faulty or
    overly simplified. Here are five reasons why the majority of option players fail to make money,
    and in turn, why others have been able to be so successful.

    1. Inappropriate short-term selection methods

    Selecting the right stock (and the best corresponding option) is the first step in successful option
    trading. Some option traders will take a situation they just read about in the news as an option
    play. Others tend to look at longer-term measures like a stock's valuation as an indication of a
    stock's short-term potential. This mismatching of timeframes is one of the biggest mistakes made
    by those who trade options. DiligenceWorks’ unique Watchlist sorts through a large list of
    stocks, in order to pinpoint only those situations which look most attractive for sharp short-term
    movements. The methodology used is based on not one, but most of the key short-term factors
    that drive stock prices -- technical, monetary and sentiment.

    2. Betting against trends

    Trends in prices, whether up or down, have a tendency to last longer than people expect. Most
    traders lose the bulk of their money trading against trends. We've specifically developed our
    indicators and disciplines to tell us not only the nature of the trend, but also if the trend will
    continue. Thus, our approach in buying options with the trend allows you to trade on the right
    side of the market.

    3. Inability to take a loss

    Sure, everybody loves to hear about gains and profits, as this is what we all seek to achieve.
    While "loss" has negative emotions attached to it, the key is not to be emotional in trading, but
    rather to stay objective in all trading decisions. If the market is not validating our analysis, we
    have specific exit rules to get out of option purchases before their expiration, so that big losses
    can often be avoided and capital can be preserved for future trades which are likely to be more
    profitable.

    4. Lack of discipline

    Many option traders fail because even when they do have gains, they let them slip away by not
    knowing when to get out and take a profit. Often, you should be taking a profit when the position
    is moving most obviously in your favor. What we’ve been able to teach option traders is that a
    mechanical system for entry and exit prices must be in place before the trade is initiated. We pre-
    determine the highest price that should be paid to enter the option, and the subsequent price that,
    when reached, will automatically force profits to be taken. This allows traders to prevent profits
    from slipping away, and enforces the discipline necessary in any successful trading approach.

    Class 5
    5. Poor money management

    Every smart option trader knows that even with a winning approach, money management is
    crucial in building an account's value. The primary consideration is how much to invest in each
    trade every month. Often, amateur option players come into the business and make some nice
    gains right off the bat. Then, thinking this is a simple way to riches, they let all their capital
    (including all their profits) ride on a subsequent trade that wipes them out. Then they vow to
    never trade options again. The answer here is to first know the rules of options: there is great
    upside on winning trades, while you can also lose all of your investment in a particular option
    trade. Clearly no matter how good your approach, you will never win 100% of the time, and you
    should not allocate all (or even the majority) of your trading capital to any particular trade. How
    much do you invest? Refer to our Basic Options Lessons series in detail.

    Class 5

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