Steps in Learning to Trade Options

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So, everyone's making money trading options and you too are eager to make the move from good old boring stocks trading to options trading. That's good, but how do you get started in options trading? What are the steps of learning to go through before you can trade options effectively?

Step 1: Options Education

Options are extremely complex derivative trading instruments and trading options isn't as simple as buying low and selling high. In fact, there isn't just one kind of option and there isn't just one option for each stock! There can be as many as hundreds of options available for trading on a single stock and all of them behaves differently and at a different rate in response to changes in the price of the underlying stock. All of these characteristics make learning about what options are the first steps in trading options. A lot of beginners make the mistake of starting their options education by randomly buying a few options to see how they behave. That usually leads to more questions about why those options behave the way they do and the inevitable loss also affects trading confidence right from the start. Inevitably, beginners starting out this way would have to come back to the education part. There are a lot of websites that give good in-depth explanation on how options work for free.

Education for options trading must also include a comprehensive education in technical analysis as the full benefits of options trading can only be obtained from accurate trend analysis and market timing.

Step 2: Paper Trading

After you have obtained a comprehensive understanding of how options work it is now time to put your knowledge to the test. No, this is not when you should simply fund an options account and start trading with real money. Most reputable online options accounts offer a function known as "virtual trading". This is a function which allows you to practice options trading using real prices with identical trading interface but using fake money rather than real ones. Virtual trading, or paper trading, is the most important step in verifying your options trading knowledge before you do it for real. Very often, beginners will find the confidence they build up in the education phase fizzle out really quickly in virtual trading as they see the fallacies of their methods and perhaps even find holes in their options knowledge which requires more education to patch up. Those options beginners who went ahead with real trading following their theoretical options education usually end up losing all their money and quitting options trading altogether. This is why paper trading is such an important step in the overall options learning process. In fact, it is recommended that the virtual trading phase be at least 6 months to ensure you are not missing anything. It is like practicing in the baby pool after learning the swimming strokes on land.

Step 3: Single Contract Real Trading

After you have mustered enough confidence through an extended options virtual trading practice, it is time to take your knowledge and experience into the real money options trading world. However, it is not yet time for you to start trading your entire savings or retirement account full force. This is time for you to practice using real money trading only one contract at a time. Single contract real options trading training allows you to experience the real emotional stress of trading real money and also allows you to get familiarized with using real money interface while risking only a small, limited amount of money. Such single contract real options trading practice is critical due to the fact that most beginners make their first losses through execution mistakes such as clicking on a wrong link, using a wrong order or placing an advanced order wrongly. Such unnecessary losses can be significant if a lot of money is committed right from the start and its impact on trading confidence cannot be undermined. Trading only single options contracts may be inefficient in terms of commissions for some options brokers but it allows such mistakes to be made with relatively low level of pain on your capital. As such, it is recommended for a beginner options trader at this stage to keep trading only single contract until no more executional mistakes are made moving on to the next step.

Step 4: All Out Options Trading

All out trading is when you are truly ready to make options trading a true source of additional income or income replacement. This is when you will commit significant amounts of money in order to produce a meaningful profit trading options. However, coming out of single contract real trading, one should not immediately commit all the money one can muster all at once. Emotional stress increases as capital involved increases. Indeed, an options trader who can handle trading thousands of dollars may not have the emotional strength to handle trading hundreds of thousands and such a surge in emotional stress usually lead to dire consequences. It is again just like learning to swim; you don't jump straight into the deepest end by rather move deeper gradually as your confidence and competence increases. As such, one should trade options with more and more money only as one's trading confidence and competence increases.

Indeed, learning to trade options effectively without damaging one's trading confidence along the way is the only way to ensure long term success in options trading. This is why adhering to the steps in learning to trade options are so important.

Jason Ng is the Founder and Chief Option Strategist of Masters 'O' Equity Asset Management (MastersoEquity.com) and author of an Options Trading education site, Optiontradingpedia.com. He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.

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Learn How to Use Moving Average Effectively to Make Your Trade Decision

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Definition

Moving average is a lagging technical indicator that is used to identify a trend in the price of a financial instrument. It is useful because it filters out the noise in price and highlights the trend. Mathematically, it is an average of daily closing prices for a specified number of days. It is called 'moving' because the averaging window is moved as we move forward in time. It can be very effective tool in the trending market but not as effective when the prices swing up and down.

Types

There are many types, but the two most common are:

1. Simple Moving Average (S.M.A.) - This is calculated by giving the same weight to all data points. This is the average that we all learned in high-school or college.

2. Exponential Moving Average (E.M.A.) - This is calculated by giving more weight to the more recent data point. This is done because recent data is more relevant than older data. It reacts faster to the price changes than S.M.A.

Time Frame

Another important property is the time frame over which the average is calculated. A 20-day S.M.A. is an average of closing prices for the past 20 days; 50-day S.M.A. is the average for 50 days and so on. The shorter the time, the faster it reacts to the changes in the price.

How to trade?

There are three major strategies that are used to trade based on moving averages. All strategies attempt to identify the start and end of a trend. To profit from a trend, you must buy the stock at the start of an increasing trend and sell it when the trend ceases to exist.

1. Follow Moving Average: In this strategy, you buy when the moving average starts increasing and sell when it starts decreasing. This is the most simple strategy but nevertheless very effective. This works because when the moving average is increasing, that means the price is increasing indicating an up trend.

2. Price crossover: In this strategy, you buy when the price is greater than the moving average and sell when the price is less than the moving average. When the price crosses over, it indicates the start of an up trend.

3. Slow and Fast crossover: In this strategy, you use two moving averages for two different time frames (for example: 20-day S.M.A. and 50-day S.M.A.). Buy when the faster one crosses over the slower one and sell when faster one crosses under the slower one.

Will these strategies work?

The strategies have proven to work at varying degree depending on what parameters you pick. Every trader who trades based on technical analysis is likely to have it on his or her chart. What affect the strategy's performance are the variables that go with the strategy - its type (S.M.A. or E.M.A.), time frame, and the stock you exercise the strategy on. There are no magical numbers that will make your strategy work on all stocks at all times. You will have to come up with your own combination by experimenting with different stocks. This is where virtual trading site like Strategyard.com come in handy. You can create different strategies with different combinations and evaluate them. Once you have a strategy that you are comfortable with, you can start trading in real market and make some money.

The author has been trading stocks and options for the past five years. He likes to trade based on technical analysis. He is also the owner of http://www.strategyard.com/ that allows users to trade virtual stock/

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How to Trade Stocks - Technical Vs Fundamental Analysis

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Trading stocks is not something that every one of us is capable of doing without losing money at first. Just like anything else, it requires experience. The experience of stock trading is what will make you a better trader and nothing else. Not one "how to trade stocks" guide will make you an expert in the field of trading. It will not make you an expert and it will not bring in millions of dollars to your trading account.

With that said, however, by finding this article you are most likely in the losing side, and are looking for ways to improve your trading results. I have traded stocks for a long time, and still do.

Here is the simple fact. Most people rely on the information published by the company itself. They fail to understand that the company management and executives are paid, or at least supposed to be paid and rewarded based on the way company's stock performs. Most company press releases, earnings reports are bogus. That is right, I said bogus. Have you ever heard of Enron, and WorldCom, formerly known as MCI, and MCI WorldCom? Well they are just the ones that got caught. A LOT of companies "restate" their earnings on regular basis. The term "restating earnings" is just a fancy term for saying "We lied on our reports previously, so our stock value does not depreciate, and now we are giving you the 'real' data, which is subject to further changes in the future, as we see it fit."

This may sound shocking to you, especially with the laws passed by Congress after the Enron fiasco, but the truth is that it happens every day and it is perfectly legal; at least it seems that way, because companies who restate their earnings don't seem to get in trouble.

So who, or what does one rely on for good and solid information? The answer is simple. You have to learn how to read stock charts. By understanding the charts, and patterns, you will be well on your way to getting sound advice by someone who cares about you and your money the most; YOU!

I've heard the saying "Reading a chart is like playing with an Ouija board." I just laugh at that - honestly. See, here is the issue. A stock chart is simply a graphical representation of the action of that stock over a defined period of time. We know that stocks move based on fear and greed. These two factors, and understanding human psychology of predictability (humans tend to repeat their mistakes and not learn from them), we can understand a chart. Here is how it REALLY works...

When the stock is going up, everyone jumps in the bandwagon, and buys that stock, fueling the fire, so to speak. Something had happened that ignited this greedy buying. We can also take the opposite approach; when the stock starts to go down, everyone wants out - the fear factor. Price action combined with volume increases during these stages form patterns, which with a bit of experience, can become very easy to spot. Understanding these patterns and studying the action just before these erratic moves can alert you to get in just before greedy buyers jump in, and dump the stock - or even sell it short - before the panic selling kicks in.

Knowing how to read a stock chart though, is a combination of both science, and art. I've heard chart gurus say "A good defined chart pattern is like one of DaVinci's masterpieces. It can bring you in a lot of money." Well, I wouldn't go that far, but there are really two options here. Trust the thieves and cheats at the company's board of directors, whose jobs really are dependent on stock's performance, or at least it should be that way, or trust something that tells you simply what has happened in the past, which will allow you to make decisions for the future. Charts do not lie, people do.

Mentor is the founder and publisher of http://www.roguereason.com/

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