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No matter how skillful or how long you've been doing in your stock options trading, it's natural to encounter trading losses along the way. Such trading losses could derive out of our inexperiences, skill levels and sometimes due to unpredictable market reaction.It's certainly a harrowing experience to loss money trade after trade during stock options trading, watching our hard earned money taken away by the market mercilessly. But painful as these trading losses might be, we should accept them as obstacles we must overcome in every other endeavor and pick up the lessons learned from each trading losses. We should certainly not brood over such losses too long. The longer we let these losses overcome us, the longer it'll take us to have the courage to re-enter our stock options trading for the chance to sharpen our skills further. A stock options trading journey is all about having the discipline to follow a trading plan and stick to it & if it sometimes yields a losing trade, we have to analyze the cause behind this hiccup and refine our trading plan so that we would be prepared the next time the same scenario turned up again. Thus, it's important to analyze where we've done wrong so that we become wiser and won't commit the same mistakes again. We must accept losses as part of our stock options trading journey and don't give up too easily.
Here are some ways to minimize your losses during stock options trading and how you could learn from them :
1) Keep every trade to 5% or less of my capital
No matter how confident you are of a particular trade, maintain the discipline of not committing more than 5% of your capital in any stock options trading position. Understand that every trade carries risks. I've picked up some costly mistakes when I was greedy and had plunged a great portion of my capital into so-called "sure bets" and ended up having my hard earned money eaten up alive by the market. Don't be fooled that you could take money easily from the market, trading is a professional trait just like any specialized field and you need years of skills & experiences to understand how the market works. Be cautious that although sometimes every technical indicators might have been lined up perfectly for the so-called "sure-win" trade based on your analysis, things could still go wrong where the market reacted opposite to what you've analyzed and you ended up losing money. So you should always remind yourself never to "bet the farm" on any "sure-win" trades. But if you maintain every position within 5% or less of your trading capital, even when you encountered a few losing trades, you would still have balance capital to fight another battle.
2) Jot down your mistakes in your trading journal
I've realized that keep a trading journal of all my trades has been one of the most important step that I've undertaken in my trading journey. In my trading journal, I would record my analysis of the stocks that I would be trading an option with. Such details include daily trading volume, market capitalization, Stock Scouter Rating (from MSN MoneyCentral), past earnings history, gapping up/down analysis based on earnings announcement etc of the particular stock that I'm analyzing. I would also enter into my journal the reasons why I enter or exit a position.
Whenever I encountered a losing trade, the journal would become even more significant because I would write down explicitly the reasons behind the losing trade and what I've learned from this expensive mistake. It might be painful when these details were recorded during that time but they trust me they would return as important reminder to caution us when a similar trading setup is happening again. So, take this simple advice and start a trading journal to record all your trades and decisions for entering them. Most importantly, write down the lessons behind the losing trades so that you'll remind yourself not to commit them again.
3) Give and You Shall Receive
I think you might have heard the above phrase before. Although I'm no expert in this philosophy, I somehow experienced in my real life some truth in this statement. I tend to receive more when I naturally give more. I believe that if we want to be more successful in our trading, we should also develop the virtue of giving, although not necessary in monetary terms. It could be donation-in-kinds or simply an act of love or forgiveness. Of course, you should also give your devotion towards sharpening your trading skills each and everyday because the market would definitely reward you when you put in much efforts to understand how it works. As always, I wish everyone successful in his or her stock options trading journey.
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Tony Chai has been doing stock options trading, particularly US stocks, since he graduated from Live Freely Options Trading Seminar 2 years ago. His stock options trading technique involves buying options based on earnings gapping analysis. In his stock options trading web-site, you'll find a number of informative articles written by himself and seasoned options traders to sharpen your stock options trading skills. Tony also record his stock options trades and the analysis behind each trades in his stock options trading blog.