Trading stocks and option, just like any other financial instrument involves some potential risks that can quickly crash your account. Knowing the possible traps traders fall into, and being prepared to avoid them, can give you the edge in your trading career and make it more profitable. There are 3 major deadly sins we have identified below for your information.
SIN # 1
Buying stocks and specially options and letting them expire.
Even though your losses are limited and under control when you buy options, it does not mean you have to let it expire worthless.
You have to still understand that you have paid the premium to own those options and in case the trade does not go in the direction you were anticipating, you have to exit the position before losing the whole premium you have paid for it.
SIN # 2
Don’t’ think and act like trading is a gambling. If you trade like you gamble then most probably you will lose you capital just as you do it if you would gamble. When buy options or stocks, you have to give an explanation to yourself why you did so and consequently if you don’t like the answer you like and you are not able to justify your move, then most probably that trade should never take place.
SIN # 3
As you may already know the most important component of the options is the implied volatility. It may dramatically affect the price of the option and make your trader a winner or a loser.
As in any successful sale and trades, it is best to buy low and sell high or sell it during high implied volatility and buy back at low implied volatility.
Unfortunately many new traders sell options when the implied volatility is low and over time if due to market changes the volatility increases then the option sold for X dollar become much much more expensive to buy back to exit the positions.
On the other hand, some of the traders we know trade market volatility only and they always try to buy when its low to sell them when the price is double, triple digit percentage high.
Use caution when trading and never do it by yourself until you get the proper training, knowledge and understanding of the mechanics, system, traps, etc.
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