Thursday, May 15, 2008

20 Trading Tips & Techniques

Listed below are some great trading tips and strategies, I picked up during a recent options trading seminar.

  1. Cynicism: There is a lot of noise out there and you should not believe everything that you listen or read. A healthy dose of cynicism is good for your trading success.

  2. Diversify: Make sure no one position or trade has the potential to wipe you out. 'All or nothing' is a risky approach and if you want to play for a while - not the best approach.

  3. Holistic: Trade within the context of your overall financial portfolio. Don't forget the 401(K) account where you are long or the 529 account where you are also long - when putting a short position in your option's account. Bottomline - take care of your overall financial health versus focusing too much on only one part of the portfolio.

  4. Consistency: If something works for you - stick with it. You can always try different trades or strategies but leverage what works for you.

  5. Success=Boring: Stick with strategies that work so well that they are almost boring. Boring and successful is always better than exciting but losing.

  6. Correlation: Watch for alignment. Alignment of stocks, indexes, stocks and sectors - you will get clues about trends and sometimes - trading ideas. One way to track stock alignment with the market is by tracking the stock's Beta.

  7. Basics: Know the basics. If you are trading options - learn the strategies, the Greeks, the nuances of the trades before you trade with actual money.

  8. Small & Big: Small numbers add up to big numbers. Monitor expenses, commissions, spreads, trading costs and monthly fees - they all hit your bottom line.

  9. Probability: Options trading is a probabilities game. If you are going to trade options - focus on trades that give you a probability advantage (50%-75% chance of success is a good rule of thumb).

  10. Greed: Close a trade when you have made your money. When you get greedy and want to stay a little longer to capture that nickel or dime of profit - ask yourself the following question. Do you want to risk $X to make $Y? $X is usually much larger than $Y.

  11. Flexibility: Your trading strategies need to be flexible and diverse enough to survive any market. If you only trade when the trend is bullish or volatility is below this level or market is trending - you are limiting your trading horizon.

  12. Market: Don't bet against the market. This is the options market where options prices and buying activity is usually a good harbinger of future stock price movement.

  13. Size: Pick SPY over SPX. SPY offers better spreads and faster execution (due to higher trade volume).

  14. Many vs One: Spread your trades out to give yourself better odds. Put your positions over a period of time to capture the price movement.

  15. Test the Waters: Sell or buy one contract to test the price point. Remember - small numbers add up.

  16. Walk Away: If your orders are not getting filled - walk away. If you are not seeing trades that make sense - walk away. Patience is a virtue.

  17. Software: Leverage the technology edge you have by learning the tools and software you use for trading. Technology is sophisticated but if you don't know the features available to you - you are limiting your advantage.

  18. Stop Loss: Limit your losses by using stop loses where applicable.

  19. Move On: You take a hit; you lose a trade - dwell upon it, learn from it and then move on. Bottomline - learn and get better.

  20. Education: Seminars, newsletters, CNBC, webinars - pick what you like but keep learning.

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