Option Investor
Educational Article

Developing a List of Trading Rules is Always a Good Idea

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Just about everything that we do as individuals in a democratic society is based on some type of law and order, specifically when it relates to rules that oversee such a society. The world of investment is no different and the world of option trading falls under that category as well. The importance of this statement can be best witnessed by taking self-examination of our own trades. Every good or even bad trade can be reevaluated more effectively if you are able to go back and reassess the mistakes you made. The same can be said of the "great" trades that you made as well. However, you will never be able to make heads or tails of any trading decision that you made, god or bad until you have some set of guidelines or set of rules that you base your strategies and decisions on. Your Bible, Your Koran, your little black book. What ever you call it, it is the backbone of your success or failure as a trader. Every good trader has one. Most of the time it has been carefully planned and thought out. Most of the time it is reduced to a written document with a title that may read along the lines of "Trade Guidelines", " My Trading Guidelines", etc. It is not important what it is called, but all traders need to have some type of guideline that they follow to insure they make the decisions that they make when trading as consistent as possible.


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For example, you can't be consistently successful if you arbitrarily decide to chase an execution price one time then the next, you put in a market order, then another time you use a limit. You can have no consistency. However, what will happen is that you will over time, overpay for some transactions, not get executed on some transactions, miss a transactions that you should have been filled on and finally get frustrated when you look back and see that you entered all of those trades over time with no consistent game plan. I have listed a number of guidelines that you might want look at to help you get an idea of just some of the things you should be thinking about on each and every trade. Remember this is just a guideline and nothing that I am relating to you is "written in stone" These are just ideas that you may or may not incorporate in you own guidelines. However, what is important is that you need to consistently to refer to them and stick to them when it comes to each and everyone of your trading decisions. It makes no sense to have rules if you violate them or choose to use them sometimes and ignore them when you emotionally decide they may not be in the best interest of any one particular trade. Remember if you have a rule that says," I do not chase a trade", then you don't chase a trade. So you miss some great trades, but you also miss some bad trades. So as to be consistent, you have now eliminated an emotional variable from you trading decision. Why? It is eliminated because you do the same thing each time that situation appears. You never second-guess yourself. You either do it all the time or never. When you do this you never have to go back and say to yourself," I should have bought those calls", or I sure am sorry I got that execution, I should have never chased that option." We have all done it and probably will continue, especially if we do not have a list of well thought out trading guidelines. History tends to repeat itself, especially in the form of bad trades. The idea is to eliminate as many of these bad trades as possible. Lets take a look at a few ideas that you might want to consider when you develop your own guidelines. Once again, these are just ideas to get you started. I am sure you will have many, many more than the ones I list below. Are you ready? Let's GO!

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