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 THE ABC OF... |
ABC of...
7 tips for beginners
CS journalists
1. Never get so focused on a specific options contact that you forget about your overall trading plan. And if you haven't already formulated a personal trading plan, then whatever you do, stop trading until you have spent some time devising one.
2. Novice traders often think that they can sell options and make easy money as the contract declines in value closer to its expiry date. In other words, by selling a contract these traders aim to make a profit when buying the contract at a lower price in the future. As a word of warning, this strategy is simply too risky for a newcomer to options trading to undertake because you are dealing with an unlimited downside. Instead, beginner traders shouldn't sell options unless they also hold a long position on the contract.
3. Diversify your positions by selecting various issues and using a number of different strategies. While you may feel more confident using a special strategy that works for you, having other strategies at your disposal - suitable for particular market conditions - can enhance your trading performance and profits. Spend some time educating yourself on the various options strategies available.
4. To reduce risk and average out your entry price, scale into positions over a period of a few days or weeks rather than dumping all of your capital in at once. As the market moves in your favour and as your confidence builds, you can slowly build up your exposure to the position.
5. Select highly liquid markets to avoid slippage.
6. Options traders need to know whether the market is trading at fair value, is undervalued or overvalued. Some traders will use computer-based options pricing models for valuations while others will rely on their full-service stockbroker for information.
7. Beware of investment gurus or educators selling the ultimate formula for trading options. As any professional trader will tell you, there is no secret recipe for winning in the options market.
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