Unleashing the Power of an Options Trading Plan: Beyond Strategy

Seth FreudbergGeneral CommentsLeave a Comment

One common reason that options traders can’t find consistency is because they lack of a trading plan.

You may be able to track your performance, but without an options trading  plan it will be very difficult to repeat your success and minimize risk.

A comprehensive options trading plan outlines how you will trade (your method), how much money you will allocate to trades, how much risk you can afford and defines your overall performance goals.

Deciding on your option trading strategy and adding it to an overall trading plan is critical in your journey to finding success in options trading. As discussed in a previous article, the secret to success in trading is to find an edge and developing the skills to execute that edge over and over again. This is “flawless execution of your probability”. This is where the SMBU mantra of elite performance comes into play.

As traders we need to do everything we can to execute our trade edge each and every time but first we must commit it to paper.

Two of the most common mistakes when learning how to trade options are: not having a big enough account to trade and/or putting on positions with risk that is too big for the account. Those new to option trading want to hit a home run immediately involving too much risk and too little capital for that risk. But what they fail to understand is that trading is a marathon not a sprint and thus you need to make sure you stay in the game long enough to learn from the mistakes and losses that are inevitable with all traders. Whether your goal is options trading as a career or passive income you will need actual trade experience to improve.

We’ve all had sleepless nights when positions are going against us. But we can eliminate this stress by putting on positions that represent an acceptable percentage of  our account—preferably involving trades with maximum losses of less than 2% of the  account size—constituting  a dollar amount at risk that allow the trader  to not worry about any one  loss. You have to learn that losing is part of the game and as such, losses need to be small enough that any one loss does not put a big dent in your capital.

Another point that is often missed about taking risk too large for your account size is that traders find it psychologically difficult to take a large loss because the act of closing that trade is final. So traders tend to leave the losing trades open, ignoring their trading rules, and thus failing to execute their plan as they should have. A properly written trade plan tells you what and when to do things—win or lose.

Trade planning when done correctly and followed flawlessly, helps keep us in the game by helping us to avoid big draw downs and allowing  us to think  clearly without the overhanging stress of the prospect of an inappropriately large loss. In brief, we will be able  execute our exits and profits according to plan in a calm and orderly way.

Journaling,  as we have said in prior blogs, is also important because it allows you to document your trade execution and compare it to your plan. It also is a way to help you think through your open positions, and what your next move should be based on different market scenarios. In the journaling process you are planning your next move before it happens which is another helpful method to ensure “flawless execution” of your trading plan. You would not typically plan a deviation from your trade plan, so journaling reinforces the likelihood that you will  follow your options trading plan.

Many traders are use online blogs to post their trades publicly or among friends or trading partners. They take snapshots of price charts, options risk charts, and current positions and then post them with their comments for others to peruse.

No matter how you do it, join the” 2% club” and create your trading plan today. It will be an invaluable tool to  help you towards reaching your goals as an options trader.

Seth Freudberg and Michael Schwartz

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