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Covered-Calls 101

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Planning to Succeed!

Traders have an overabundance of opportunities in the financial markets but without careful position selection and preparation, even the best strategies will fail to produce consistent profits.

Position selection and entry/exit timing are the basic components of any winning trading system. The first step in mastering these concepts is to find a time frame that you are comfortable with and use the appropriate form of analysis to generate signals for that particular period. In the stock market, there are a number of cycles (or rhythms) which continuously repeat. These range from the very short term to the very long term and nearly all of them are non-linear. These rhythms help astute traders identify key reversal points and also allow them to anticipate recurring highs and lows during specific periods. In addition to trading in a time frame that is well suited to your personality and circumstances, it is also important to use only the best signals when entering new positions. Most methods of analysis produce a variety of indications with the quality of entry and exit signals ranging from excellent to borderline. In order to benefit from these indications, it is necessary to overcome the enthusiasm that clouds one's judgment and focus only on the best prospects. In cases where the pattern is clear and well-defined, market activity tends to be much more direct and easy to predict. Conflicting indications are difficult to interpret and generally produce poor results in the long run. Trading only those situations when the outlook is superb allows you to proceed with confidence and the margin for error is far greater with regard to mistimed entries and exits.

Traders who lack the ability to identify high-probability positions and initiate them in a timely manner are destined to endure substantial capital draw-downs. However, another principal reason novice market participants lose money is they fail to plan for unfavorable price activity and anticipate the possible adjustments that are often necessary to ensure a profitable outcome. They simply don't understand how important it is to evaluate every potential scenario and develop a strategy to overcome unforeseen events. In addition, those who plan their trades effectively frequently become complacent after the initial position is in place. The temptation to relax is based on the belief that the work has already been completed. Of course, the responsibility to manage a trade does not end until the position has been closed out with a profit or loss. Statistics suggest the odds of successfully completing a specific task are greatly enhanced when the procedure is rehearsed. By mentally visualizing all the possible outcomes, a trader will be better prepared to objectively assess the changing conditions and is less likely to be overwhelmed by an unexpected setback. Through the use of this technique, even the most inexperienced player can learn to foresee potential problems and make the appropriate corrections before substantial losses occur.

Despite the complexities of stocks and options, successful directional trading can be a relatively simple activity. Indeed, there are few rules to follow and the process itself (buy low, sell high or vice-versa) is not difficult to comprehend. The reason we find it so hard to succeed is due, in large part, to human nature. Emotions such as hope, greed, and fear are integral parts of our existence and each of these instinctual responses has a major influence on our trading decisions. The struggle to overcome these feelings is a constant battle that all traders wage on a daily basis and those who can reduce their adverse affects on the logical thinking processes will find it easier to follow the essential rules. Unfortunately, this task is easier said than done. It is straightforward enough to devise a sensible set of guidelines for trading but many people still don't succeed even when the facts are obvious. Why does this happen? They don't stick with their plan! While nearly everyone understands that predicting the market in all situations is impossible, few people realize that the fundamental requirement for success is to take small profits regularly and prevent losing plays from significantly eroding capital. Losses are bound to happen and in fact, they are inevitable! However, this condition shouldn't keep anyone from earning a reasonable income as a trader. The truth is most people simply can't learn to close losing positions early, regardless of how essential it is to achieving consistent profits. Those who survive long enough to become experienced traders will tell you there is no reason to hang on to a losing play when there are so many other profitable opportunities that deserve your time and attention.


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