FOCUS on few names, others hiking is none of your business
FOCUS on only a few names all year long, other names hiking are none of your business. You should have two lists - watchlist and trading list. The watchlist can change a few times a year based on market conditions or the trend of a sector. The trade list is way smaller - based on particular chart patterns.
Learn CHART to know key pattern/level
Chart learning is a MUST for option trading. Many formations/patterns out there but you don't need to know them all. Start from basics - e.g. rising/falling wedge, bullish/bearish flag, H&S and inverted H&S, ascending/descending/symmetrical triangles. Also look at charts at ALL time frames.
PROGRESSIVELY lock gains or take loss
Progressively locking gains or taking a loss will prevent you from holding overly long so you would turn a gain/loss into an unacceptable condition (i.e., out of control). Make this trading decision based on CHARTS so you must know the key resistance/support levels. Also depends on play size.
CASH OUT gains to bank account often
One big mistake many people make again and again is to let things run. Win may turn smaller or loss may become bigger - then psychologically people can't accept it and expect things to turn better. Most of the time that WON'T happen resulting in things getting out of control. So do it progressively. If you play say, 2-3 contracts, that's really hard to do it progressively. But if you have 5-20 or more contracts, very doable. There's no best solution for everyone - just have to realize AND accept the limitation of having small account. But you can make it right. Small account can trade more conservatively - make sure loss is acceptable or lock win when fail to break resist or win already big enough.
Do NOT keep growing account
Another BIG/COMMON mistake for small account owners is that they want to grow account fast AND big enough to trade with more flexibility. Sadly, that's a top killer for a small account. If you keep growing account and if you lose a trade, the absolute value of a loss will be bigger. It's also HARDER to make it back. In options trading, every day is a new day. Every morning is a new start. You just have to SLOW DOWN and realize that you CAN'T rush to make money. The faster you want to make money, the more likely you will get yourself killed no matter if you're a newbie or an experienced trader. This is proven true all the time. So how to do it? Cashing out to bank account regularly is a GREAT way to mitigate potential risk AND control your very own greedy mindset for going "out of routine" to trade aggressively. If you cash out gains often, your end of year bank account will be MUCH bigger. That's your INSURANCE for options. If you have, say, 10k account and make 1k in 1-2 days. Cash out ALL 1k to bank account so trading account is still 10k. Then if you are lucky to win more, cash out more. If you lose some, do NOT transfer money from bank account back to trading account. Just patiently trade things to make it right. Many people have experiences like winning 10k then losing 5k as they keep growing account. Then they are upset and regret they took it more aggressively. But instead of taking the remaining 5k of GAINS, they trade in a WISH to make it back. Then most of the time, the remaining 5k gains are lost. I am saying this cause I used to make this kind of mistake often. It's okay to make that kind of mistake. It's okay if you are one of the "many people" but what's important is to start making CHANGE. If you never change, no one can save you from losing money, not me, not anyone else. Ironically, those who actually don't need money but instead just trade for fun (so they are not in a hurry to make money) always make relatively better trading decisions, whereas those who need money the most always usually fail to trade rationally and lose more long term. One must NOT keep growing account, doing so will expose you to greater trading risks. Most people don't have either the skill or discipline (or both) to manage a bigger account. That's when never-able-to-recover kinds of mistakes happen the most. As you keep improving/learning, one day you will get to the point where you can start transferring some (say, 10-30% depending on situations) gains back from bank account to trading account so you can start growing your account. But do NOT hurry or transfer heavy gains. Key is risk control. It's pretty normal that you have good days and bad days depending on your trading AND also market conditions. If you keep growing account and market turns turbulent or bad, you may very easily get killed and never be able to really recover. Options trading is about survival first then growth.
Set BASE for trading and leave rest of account untouched
To help mitigate the risk of options trading, another very effective technique is to setup a base for your trading. This base is ALL the money you should ALLOW yourself to use with the rest of your account sitting tight untouched. This can be viewed as secondary insurance. How to set up this base depends on lots of factors, for example, if your account is 50k and the market is in an uptrend, you may set 30% of initial level as trading base, meaning no matter how big your account grows into, you only use 15k for trading no matter what (even if your account grows to 80k). When market conditions change, say from good to bad/turbulent, you may still use 30% of trading account as base but in real actions you put in way less money. Remember, KEY is to leave the majority of your account money untouched - meaning no matter what happens, you do NOT touch those reserves. I've seen people getting more positive/confident trading when market turns really good so they believe (ASSUME) they would definitely make money so they forget about the trading base and use heavy money trading. When all in a sudden, they start losing way more than what they could afford. So the rationale for setting up a trading base is to put a HARD mental regulation on yourself so you won't get crazy and blow your account. Also it helps you to "recover" when you do have loss.
DROP money making mindset
All in all, dropping the money making mindset is truly everything at the end of the day in options trading. You win some, you lose some. That's reality. No one is God. No one never makes mistakes. No one can be perfectly rationale. Humans have emotions, naturally. It's not a sin. But, if you have this money making mindset, you are always in a rush to make money. You always have eyes on the next trading opportunity to make money. You will always want more after wins. You will always play whatever others are playing that you believe are making them money. You will lose rhythm, discipline, and eventually your own money. The ULTIMATE goal for every options trader in terms of trading psychology is to DROP the money making mindset. It's VERY hard to realize how important this is as its counter-intuitive (most people would say if not for the money, why trade options). But this is so TRUE. Repeat the following every single day to remind yourself: "Progressively lock gains and cash out to bank account otherwise it's NOT your money". Do NOT keep growing account. Know where to start locking gains or taking loss before entering a position. Use 20% max of account playing ALL weeklies. Do NOT set up a specific percentage to start locking gains or taking loss. You may set up a really hard stop line for taking loss, that's probably helpful and much needed. But at the end of the day, it's about reading charts - losing key support level or breakout key resistance. It's possible that you set 25% as stop for loss. BUT based on chart, this particular name drops only 20-30 cents to hit where you should have put a stop (stop would have been, say 15%) so there is really non need to keep waiting. At the end of the day, it’s all about the chart. Also remember that the market can change fast based on news. So the chart helps you better plan your trading and you know in advance all the key support/resistance levels. But when market starts to change based on news, do NOT stick with your plan and you need to re-evaluate the status quo.
Repeat the following every day to remind yourself: Progressively lock gains & cash out to bank account otherwise it's NOT your money. Do NOT keep growing account. Know where to start locking gains or taking loss before entering a position. Use 20% max of account playing ALL weeklies.
Drop the recovery mindset - no matter how good you are, once you are in this trying-to-recover mindset, the chance to recover is pretty low.
Here's my full version of the #2080rule: 20% of max money playing weeklies & near-term monthlies. 80% of max money playing far-term monthlies. 20% OTM, 80% ITM. Never use >20% in options of one stock. Only 20% of the time you have 80% positions so do not bet heavy. 20% time trade, 80% time wait.
Why rush to make money? Mindset determines destiny. If you can't drop the money making mindset and always hurry to make money, you are never really disciplined enough to regulate your own trading.
FOCUS is key. Don't trade names that you don't keep track of. Trade a few names all year long. Other names hiking are none of your business.
There are a few names on my trade list that I keep track of all year long no matter what, and I call them CORE names. The difference between core names and everything else on my watchlist is that for core names, I can tell you their key support/resistance levels without even looking at charts. But for those other names on the watchlist, I need to look at charts.
Patience completely depends on your mindset - if you come to this market ONLY to make money AND you rush to make money, you will never have patience in your trading - which eventually leads to loss of money no matter how skilled you are. Many traders took 10k to 1m but very very few can keep their money.
The chart tells you the probability of a projected path based on the historic average cost of holdings. Essentially it's tied with the value of a stock based on PE.
No two traders trade alike. Learn from others, but trade your plan. Finding a plan that fits your personality expedites the learning curve. Your satisfaction in your success will multiply.
Best option entry happens when:
- 5/10 golden/death cross on hourly when in up/down trend
- Rising/falling wedge break
- Symmetrical triangle support or break
- H&S or inverted H&S confirmed
- Bullish/bearish engulfing on 30/60 min & daily formed