Today’s topic will be a common one. The question is “Why do most option traders fail?”
In my humble opinion the reason why most option traders never find long-term success is because they don’t spend time or have the tools to back test their strategies to create specific rules based on their back tested results.
Option trading and software is still really in its infancy, and the back testing tools on the market are very limited. The current tools on the market are obsolete and they require the user to expand great energy in order to back test and to create reports that they need in order to design trades that work over and over again.
Since back testing is so tedious, most option traders do not do any at all, while others do just enough to preview the results of their trading system. The lack of back testing and gathering this necessary information is one of the greatest reasons why option traders never succeed.
The other reason is simply discipline. Once the trader has a system that theoretically works, it’s also just as important to stick to the rules that have created such a favorable trading strategy. However, human emotion and greed often take over and most option traders bend the rules until they break. When this happens, the designed strategy will fail.
Another reason why the option trader might not succeed is because of trade execution. Often times the trader will know the adjustment that needs to be made, but then if the broker does not fill them at the price they want, they pass up the trade. This is very common and once again it will lead to problems. In fact, a good rule to add your trading system is to make sure you get filled even if you have to cave-in on the price a little bit in order to do so.
Another reason why the option trader may not find success could be due to the lack of understanding of options and their Greeks. Although it might not be necessary to have the deep understanding of options in order to design a successful formula, it certainly does help. When you do not have this education, then most likely you will find that your trading system has exposure to risk that you were not aware of because of your lack of education on the topic.
I hope you’ve enjoyed today’s lesson on why most option traders fail, and I wish you the best of luck with your own trading and creating your own successful option trading strategies.