Options trading has, for years, enticed and seduced many people into learning about this relatively unknown form of investing. Stock options are gaining popularity, but the mass population is still not fully aware of their existence. Now that I’ve experienced my own 300% returns on my money, I’ve set out to tell the world about options trading.
The first lesson I will share with you is that when you tell people you’re learning how to trade stock options, their responses will vary. Some will have a vague idea, or think you’re talking about employee stock options. A large majority will tell you that options trading is risky and should be avoided.
Don’t take it personally. They’re just looking out for your best interest.
Many people discouraged me from learning how to trade stock options. I’m glad I didn’t listen because trading stock options has changed my financial future for the better. Learning how to trade stock options was a struggle at first, but over the years I’ve managed to break options trading down into 7 simple steps.
I’m not the original author of the 7 steps, but I have noticed that all successful options traders follow them. Here are the seven steps:
7 Step Process of Trading Stock Options
Finding Hot Stocks: let’s face it, finding hot stocks that are ready to explode is what every trader is looking for. Combine that explosive price movement with the potential gains of stock options and you have a winning combination.
This significant initial step constructs the establishment of a fruitful exchanging business. You can’t discover quality exchanges on a reliable premise unless you have good quality stocks that deliver these exchanges. I use the Investors Business Daily to find my stocks. They’ve created their own proprietary formula for finding the best stocks.
Creating Your Watch List: your watch list is like your pot of gold. It will overflow with endless trading opportunities. This list is your 50-100 best stocks.
Using Technical Analysis to Find Trades: At this point in the trading process you’re going to utilize technical indicators to evaluate the stocks on your watch list. You’re looking for chart patterns and trade entry signals.
Creating Your Hot Stocks: If you found a stock that has signaled for a trade entry, you place it on your hot list. This is the stock list that you’re ready to commit money to. You pull up the choice chain and you pre-select the options you’re going to purchase. You then wait until the next trading today.
Observing the Stocks Follow Through: Did the stock continue in the desired direction? This is considered follow through. After you’ve found a trade, you want the stock to continue in the desired direction. If it does, you enter the trade.
Using Smart Money Management Rules: there’s only one way I know to get rich with options trading and that is to make more money than you lose. In order that you have to have a set of rules that will prevent total financial disaster. Don’t forget this crucial last step.
One of the keys to becoming a successful online stock trader is to be able to find setups that meet the criteria of your stock trading strategy. Once you’ve chosen an online trading system, you need to be able to effectively find stocks to buy and stocks to sell. Many of the stock trading software packages have a scanner or watchlist that can serve this purpose.
There are two types of scanners. There are scanners that scan the whole market, and one’s that scan a list put in to watch. Obviously the one that scans the whole market will be more beneficial to you by giving you more stock ideas, but the watchlists are effective as well.
If your online broker doesn’t have one, there are other scanning software packages that you can subscribe to. Do your research and seek advice online as to which are the best scanners to use. Once you’ve found a good scanner, write down the list of criteria you need in order to meet your trading strategy. Be thorough writing down all the rules and conditions required to make the trade.
Next, look at the filters you have available from within the scanner. Pick out the filters that relate to the rules you just wrote down. For example, if you want stocks that have broken out of a 52 week high, then you want to use a 52 week high filter. Also set the minimum and maximum allowances for price and volume. If possible, set up one scanner for each trading strategy. These will be more efficient during the busy time of trading and you will know exactly what you are looking for when bringing up the stock chart.
You can take this efficiency one step further if your online stock trading platform is able to link with your stock charts. The less typing you do, the quicker and more decisive you can be with your stock trades.
If you’ve been struggling to make money in the market, these seven steps can help you find your way to profitable territory.