Option Investor

Covered-Calls 101

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Trading Basics: Rules For Success

With the recent volatility in share values, it has become more important than ever to utilize proven investing strategies and trading techniques. While this requirement applies to all market participants, it is absolutely essential for those who are less experienced so we have assembled a collection of "rules for success" in the financial markets. While it is impossible to list every idea or methodology that might be beneficial, understanding these concepts will help any trader become more profitable on a consistent basis.

First, you should always be mentally and physically prepared to participate. The decision-making ability and emotional control necessary to be successful is so great that it is impossible to manage a portfolio during periods of serious health or personal problems. Having achieved a keen and enthusiastic state of mind, the next step is to assume full responsibility for all actions you initiate. A well-known characteristic of professional money managers is their willingness to assume personal accountability for any trading decisions. Those who routinely blame their losses on unexpected events or failures by other entities, such as the broker for "bad fills," are never successful. It's also important to have realistic expectations. When one anticipates results that are far too optimistic, making objective decisions becomes nearly impossible, eventually resulting in emotionally driven "reaction" trading. If it seems like that might be a problem, ask yourself what you really want. Is your goal well defined and achievable? Are you serious about devoting the necessary time and effort to become a successful trader? Can you overcome the urgent desire to always be "in the market?" In short, can you eliminate the destructive compulsions that doom novice players long before they have time to learn (and absorb) the various techniques required for profitable trading.

When you begin to explore trading strategies, keep it simple and consistent. Be sure that you clearly understand the risk-reward ratio of any potential position and use only those methods that conform to your experience level, portfolio capital and personal trading style. Always check the overall market indicators for primary direction. Analyze the sector and industry in which your stock resides and study the performance of similar groups to make sure it coincides with your forecast. Before making any trade, check the trend and character of the issue against other time periods. In some cases, this extra step will identify areas of support or resistance that were not previously apparent, substantially changing the outlook for the position. Understand that new investors often study too many indicators and they listen to such a variety of differing opinions that "information overload" ultimately paralyses their judgment. The incessant deluge of facts and figures (financial fodder) by the media, whose true goals are to simultaneously hype, shock, and entertain, often leave traders unable to make sensible and unbiased decisions. In fact, few people realize that most of the top fund managers focus primarily on two or three fundamental indicators and they rarely listen to the opinions of the popular market gurus.

Timing is everything and there is much to be said for the ability to wait for the correct entry opportunity. For most investors, profit comes from the successful participation in specific plays and as with any investment or speculative venture, the key is to remain alert for signs of change in character or direction, and respond promptly and decisively, when and if such events occur. Professional traders know they will encounter very few clear-cut opportunities in a lifetime and yet they train themselves to wait for the absolute best conditions before committing any funds to a prospective position. In this manner, they can identify the most important elements of technical analysis and market signals that afford the highest possible probability of a successful outcome. When it comes to specific trading axioms, one important guideline that new traders should adhere to is the need to outline an exit strategy, before initiating any position, to eliminate emotional decisions. Using predetermined targets for profit (and potential loss) addresses a number of problems. First, it eliminates the need for "judgment under fire." Second, it keeps one from selling too soon, thus eliminating potential upside profits. Finally, a sound exit strategy will help you lock-in previous gains, rather than exposing a winning position to a possible loss.

Good Luck!

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