Basic Trading Principles
You’ll gain renewed confidence in your personal trading once you follow your own basic trading principles.
Let’s break it down to the beginning basic trading principles.
Money + Education + Emotional Mastery = Profits
Money – The old saying; It takes money to make money is true when it comes to trading the markets. Begin your trading principles understanding your personal risk tolerance. If you are new to trading then you must accept that losses are a cost of doing business. Do not risk more than you are willing to lose, especially during your initial trading career. It is wise to establish your trading rules and begin testing your strategies with paper trading. Once your paper trades prove profitable, then and only then, should you move on to live trading.
Education – Right from the get-go; you need to know your strengths and weaknesses. What is your trading style? Do you know your trading niche? In our free podcast Develop a Master Trading Plan’ , Martin explains how many individuals begin their trading careers on shaky ground. Do you have realistic expectations of the amount of time and money you will need to set aside to learn to successfully trade? In addition to your start-up capital you should set aside a commitment to educate yourself in trading. Your basic trading principles need to include specific education plans toward reaching your goals.
Emotional Mastery – Here is the main basic trading principle that makes or breaks everyone. Emotional mastery requires exercise and practice. Ever decide it is time to get in shape? Maybe buy the latest piece of exercise equipment but never quite get into a groove? Exercising emotional mastery is no different. You can have all the right educational equipment and lack the emotional mastery to properly execute your newly learned skills. We provide a large selection of free stock market podcasts to help you improve trading skills. View our growing selection of podcasts now; beginning with our latest on ‘Performance Profiling’ with over twenty minutes of assistance for evaluating where you currently are in your trading career and how to avoid common mistakes.
Options Market
Options Market Introduction
In today’s article we focus on the basics of the options market as an introduction to new investors or to traders who are new to options. First of all, an option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset as a specific price on or before a specific date. An option is a security just as stocks and bonds are, and it is a binding contract. As you expand on your trading education and you learn how to invest options, you will see why they are a great way to make money.
As you learn trading with options you will see that investors must buy or sell the option by the expiration date or they risk losing 100% of their investment. The options market deals solely with a contact for an underlying asset so it is for this reason that options are called derivatives. This basically means that their value is derived from something else. Consistent trading success with stock options requires that you know the basics along with trading strategies.
Calls and Puts – There are two types of options including calls and puts. Calls give the right of the holder of the option to buy an asset at a specific price within a certain period of time. When stock investing buyers of calls hope that their stock value will increase significantly before the option expires. Puts give the holder the right to sell an asset at a specific price within a certain period of time. Buyers of puts want the price of the stock to fall before the options expires. Another way to explain calls and puts is, “calls” are similar to having a long position in stock while “puts” are similar to having a short position on a stock when trading stocks.
When investing in the options market you should also know terms such as the strike price, exercised, and a listed option. The term strike price prefers to the price in which an underlying stock can be purchased or sold. This strike price is the price a stock price must either go above (for calls) or below (for puts) before a position can be “exercised” for a profit. All of this must also occur before the expiration date of the stock option or 100% of the invested amount is lost.
Additionally, a listed option is just that. It is an option that is listed on an options exchange. These listed options have a fixed strike price and expiration date and each listed option represents 100 shares of a company stock. There is a lot more to the options market that every investor should know about before trading stock options. Continue your stock market trading education and see if options are for you.
Day Trading Software
When deciding on the type of day trading software to use you must ensure that it contains the following features at minimum. (This applies to those day traders who practice technical analysis and use technical indictors).
- Brokerage Integration – not all day trading software contains this feature but many do. Broker integration allows for immediate and automatic execution of trades and many applications will directly interface with your firm. Investors find this helpful when day trading stock because it helps to prevent emotional trading due to trading anxiety.
- Pattern recognition – many applications have the ability to automatically detect patterns. These patterns recognize technical indicators such as moving averages, Elliott wave patterns and more indicators used in technical analysis. This automatic pattern recognition can be extremely helpful when stock trading online.
- Back testing – this testing is based on the theories of technical analysis. This type of testing allows the investor to see how a specific strategy would have carried out in the past in order to see how it could potentially carry out in the future when trading in the stock market or in other markets.
In addition to selecting a day trading software that is efficient in order to successfully day trade online, day traders also require additional resources. These resources are explained below.
- Access to a trading desk or computer – access to a trading desk is required for those larger institutions that manage very large amounts of money. Orders can be completed immediately in order to take advantages of potential price differentials. A computer is needed for those who practice day trading online at home. A computer, an internet connection, and the required trading education are what individual day traders need.
- News sources – publications such as the Wall Street Journal as well as access to televisions showing current financial news are resources that every investor should have access to. Keeping on top of important events will keep you on top of the stock trading game.
There are certain characteristics that indicate successful day trading such as sufficient capital, proven trading strategies, and knowledge and experience in the market place. Not only do successful day traders require efficient software but they must also know how to manage risk, and they must commit to a trading plan that works.
Stock Options Trading
Stock Options Trading vs. Trading Stocks
Options can be used to bet on the direction of a stock price just like the stock itself however stock options trading and trading regular stocks have different characteristics. There are many terms that investors must learn about if they are interested in the options market. In today’s article we discuss some of these terms as well as some of the differences between stocks and stock options.
When stock options trading you must know what calls and puts are. If you buy a call option, then you have the right but not the obligation to buy a stock at the strike price any time before the options expires. If you buy a put option, then you have the right but not the obligation to sell a stock at the strike price any time before the expiration date. (The strike price is the price in which an underlying stock can be purchased or sold).
One major difference between stocks and options is that stock gives a small piece of ownership in a company whereas options are merely contracts that give the right to buy or sell the stock at a certain price by a specific date. As part of your trading education you should also learn that for every call or put option that is bought, there is always a seller on the other end. This is why stock options trading is considered a zero-sum game.
Stock options trading also requires the investor to write an option. This is how options are sold. Basically, when someone sells (or writes) an option, they create a security that didn’t exist before. Neither the company nor the options exchange issues options, only investors and stock traders.
Other terms that refer to stock options trading rather than merely trading stocks include the premium and LEAPS. The premium is the price of an option. The investor buying the option cannot lose more than the initial premium so the risk is never higher than the amount paid for the option. The potential for profit however is basically unlimited. The seller of the option on the other hand can lose more than the premium received. This is because the seller assumes the risk of having to deliver the option (call option) or take delivery (put option) of the shares of the stock. The investors must ensure that the option is covered by another option or a position in the underlying stock or the seller can lose more than the original premium received.
LEAPS are longer term contracts that are also available with many stocks. They can have expiration dates up to three years from the listing date. Typically, stock options expire within a time period of up to nine months from the date it was first listed.