There are actually four stages to any option trading system: selecting the stocks, option selection, and the entry and exit procedures. Option trading can be approached either as a mechanical trader or a discretionaryThe discretionary option trading system does not abide by any particular regulations. The trader is reliant on their gut, doing whatever they feel is right during the time. They opt for a trade, and determine when to enter and exit based on their own skills and experience.
A mechanical trader uses a pre-determined task applying all their experience to make an objective set of rules to govern all stages of trading, from picking out stocks to entry and exit. These rules are usually laid down in a computer software application that will carry out the process as automated as possible. Mechanical style traders remove the control of human emotion on their process, thus minimizing human error. To be able to improve a mechanical system, all levels of the task require to be properly considered.
Initially you simply must do a list of all the quantifiable criteria that enable you to determine whether a stock would be the best candidate for options trading. They must be quantifiable so that you can chart them using a computer, allowing all qualified stocks to be automatically analyzed every single day. This could greatly cut down as much time it takes to identify qualifying stocks. Working with quantifiable features also avoids you from depending on your own common sense. The sort of measures you should think of include a final close that is at least ten dollars, last price rising over the last three days and having a PE that is positive. Using the measures is how you would choose which stocks to watch.
The next stage would be to select which options will qualify for your trading system. This relies on your wishes to base your system on. You could use ITM or OTM options, or base it on bearish or bullish spreads. Whatever you decide on is the method that you will choose the option to buy for the stock chosen in the first stage.
Third, you’ll need to determine the conditions under which you will actually buy. There are actually many different entry procedures that can be applied. You may choose that it’s best for you to buy at the opening of the market, or that you need a more complicated process which could require watching the underlying stock movement for a given period of time before it meets the conditions for entry. Design a process that fits with your own trading style. This process is how you will use to decide when to buy.
It is always best to understand as much as you can before jumping in. Start little while you get the feel of trading. That allows you to reduce losses throughout the learning curve.
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Tags: option, option trading, Stocks, Trading, trading system