Option Trading Tips
I. Set Your Goals
II. Set Your Guidelines for Money Management
- Do Not risk
more than 5% (or less) of your risk capital on any trade.
- Look for
trades that have a 3:1 Reward/Risk.
- Be prepared
for every trade that you make.
Keep a Trading Journal to Record Every Trade
- Before Placing
A Trade: Record exit rules for cutting losses and taking profits,
entry point, reason for entering the trade support and resistance levels,
market conditions, how you feel about the trade when you place it.
- After Exiting
A Trade: Record exit price, profit or loss amount, why you exited
the trade, why the trade worked when you win, why it did not work when you
what you learned from the trade, how you felt when you exited the trade.
- Perform a post-mortem analysis on my
trades on a monthly, quarterly, and annual basis.
Analyze what worked and what did not work and write your conclusions in
IV. Entry Rules
Write down the
Market Direction, Stock Direction, Support, Resistance, Setups,
Entry Signals and Exit Strategy For Every Trade Before the Trade is Placed.
1. Setups (Signals that require confirmation.)
- 5, 10, 20 EMA Crossover
- Bullish when the 5 day EMA crosses
above the 10 day and 20 day EMA and price is above 5 day EMA.
- Bearish when the 5 day EMA crosses
below the 10 day and 20 day EMA and price is below 5 day EMA.
- Neutral when the 5 day EMA is
between the 10 day and the 20 day EMA.
- Candlestick Patterns -
- Bullish: Bullish Engulfing, Hammer,
- Bearish: Bearish Engulfing, Shooting
Star, Evening Star
- Breakout of Resistance or Rising
Trendline (New High)
or Breakdown of Support or Falling Trendline (New Low)
or Breakout/Breakdown from Consolidation Pattern (Triangle)
- Failure of Candlestick, Support,
Resistance, or Consolidation Patterns (includes double tops and bottoms).
for example close below prior day's low after bullish signal,
or close above prior day's high after bearish signal.
2. Entry Signals (Confirmation)
- Above average volume and following
day close in the same direction of the signal.
- Combination of Multiple Patterns and
- Stock price bounces off Bollinger
- Bullish or Bearish Indicator Divergence
(Stochastics, RSI, TSV, MoneyStream).
- Choose Option Trading Strategy to
Match Your Expectations
- Bullish Strategies - For example:
Buy Call, Bull Call Spread, Bull Put Spread, Diagonal Call Spread.
- Bearish Strategies - For example:
Buy Put, Bear Put Spread, Bear Call Spread, Diagonal Put Spread.
- Neutral Strategies - For example:
Iron Condor, Calendar Spread, Strangle etc
V. Exit Rules
Write these down in a Journal for Every Trade before
that trade is placed.
(More important than entry rules).
- For Losses
(or failed trades)
- Always have a Stop-Loss set based on
the minimum risk of these rules:
- Exit any trade that shows a loss of
the predetermined risk level for that trade
- Exit any trade when the stock price
closes below (above) the lowest (highest) price
in the last week.
- For Profits
(or to cut losses shorter)
- Exit any trade when the initial
entry signal is reversed.
- Exit any
trade that has not moved in my favor within two weeks.
- Exit any trade when price closes
below support (bullish trade) or above
resistance (bearish trade)
- Once a trade becomes profitable,
adjust Stop-Loss in the direction of the trade.
Exit any trade when the stock closes below the Stop-Loss position.
- Consider exiting 1/2 of your
position when you have made a profit and the market pauses.
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