15
Oct
The Psychology of Successful Option Traders

A Winning Mindset for Option Traders

There’s a lot of option traders that make trading discoveries through news media, tips from strangers at parties, and even whispers from friends. We all know that we should not take action on this information without looking into the validity of the claims, but we tend to act against our best judgement.

As a small investor, there’s nothing we can do to influence the markets. The faster we can grasp that idea, the better off we’re going to be. The market is going to do whatever it pleases and we have to roll with the punches.

The sad truth is that all traders lose. That’s a fact. However, it’s the magnitude of the loss and how you bounce back from a loss is what makes all the difference. You can prevent large losses by learning from your mistakes and being able to recognize when an investment has already run its course.

In essence, each and every day that we’re out there in the investment trenches, we’re priming our minds for trading success.

How Will You React in the Face of Trading Adversity?

Will you adapt and make adjustments to your game plan and move forward, or will let your emotions take control of your actions.

The best way to approach trading is to simply treat it as a high probability game. This is not a game of chance, but one where every move you make is in your favor. Think poker. Winning at poker is more skill than chance, and thus not gambling. Investing is the same way, except that you have more tools and information to help steer your way to success.

When you treat trading this way, you’re not hoping and praying. You are actually in control. From there, all you need to do is monitor your trades, cut losers short, and allow your winners to fully materialize.

Yes, you still need to be cognizant about what the market is doing, but it’s not as important if you take this approach. All you need is to focus on entering high probability trades. That’s it. From there, you can eliminate the mistakes that come from emotions.

Decisions Controlled by Emotions

You know those feelings that you get when you “missed the boat” and make an irrational decision to buy in after the investment has already made its move. It could also be jumping into an IPO (like Facebook) because everyone is saying that it’s going to be the next best thing since sliced bread. Lastly, it’s hoping that a trade that has gone south turns around so you’re able to recoup your initial capital investment.

The Disciplined Mind Trading Approach

The popular belief is that self-discipline holds you back. It takes from your quality of life and takes away from your freedom of doing the things you want to do. But this is all wrong.

The exact opposite is true. Self-discipline will give you freedom. It will give you more abilities and resources because you know that when you say something to yourself, you will follow through. That has tremendous power, especially when you apply it to your trading approach.

When you create a systematic trading plan and discipline your powerful mind, you effectively remove emotions from your decisions. Removing emotions may not be good for some aspects of your life, but it is critical for trading.

Here are some rules to live by when you make your investment decisions:

  • Stay tranquil and trade without excitement or regret.
  • Listen to opinions but formulate your own conclusions.
  • Know the risk-to-reward ratio of your trades. If it isn’t in your favor, don’t enter the trade.
  • Have 3 plans of actions for all placed trades. One for a losing bet, one for a winning bet, and one for adjustments that will improve your position.
  • Think like a winner. By staying positive will help clear up all the negative thought bubbles that tend to overpower your actions.
  • Use wisdom. Knowledge is different from wisdom. Learn from your mistakes and winners and use them to your advantage.

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