Majority of options traders aren’t successful, many know that.
Becoming a successful options trader is a journey in itself that requires real-world practice and experience.
The battles one fights when learning how to trade options turns into a war many aren’t willing to persevere through.
In the end, you realize the war was always you vs you.
You are always the boss battle.
This analogy depicts why only a very small percentage of options traders end up becoming successful while the majority fall.
In this article, I’m going to break down the 3 key things that make a successful trader profitable over and over again.
By the end of the article, you will have the knowledge you need to create the income and life of your dreams.
Let’s get started!
Introduction to Options Trading
If you have no clue or any idea about what options trading are, I highly recommend reading this article on what you need to know first before getting started.
The article guides beginners on what call and put options are, as well as what ITM, OTM, and ATM mean.
But if you already know the basics, let’s keep it moving forward.
What Percentage of Traders Are Successful?
According to Investopedia, only approximately less than 20% of traders are successful with more than 80% of traders fail or quit.
Those who failed are those who blew their trading accounts and could no longer afford to fund them, leaving them with no choice but to quit day trading altogether.
Those who quit found day trading too challenging or never sought out solutions to the problems they were facing during the process.
Business Insider says only 6% of people who attempted to become ‘professional’ day traders actually succeed, claiming that those who fail is due to lack of passion.
That passion is what drives traders to continue to learn until they are no longer repeating the same mistakes over and over again.
But do you require passion to become a successful options trader?
The short answer is no, absolutely not.
I know options traders who earn upwards of $8K per day and trading is not their passion but rather the tool that provides them with freedom to pursue their passions.
What’s required is commitment and desire.
3 Key Elements That Creates a Successful Options Trader
The commitment I’ve put into trading options over the course of the year has allowed me to identify 3 key elements that creates successful options traders.
I’ve made a lot of money but have also taken heavy hits in the past.
Losses are part of the game, there’s no denying it.
It’s how we overcome these losses that allows us to sustain profitability.
And it’s the number of wins we have compared to these losses.
Big wins, small wins, and small losses will keep you consistently profitable, but big losses won’t.
Here are the 3 key elements every successful trader masters to create the income and life of their dreams.
#1. Finding a Trading System That Works
Every options trader takes the time to find a trading system that will make them money in the market every single time that system or setup presents itself to them.
Without a proven and ‘back-tested’ system that works, options traders will not stand a chance against the market.
Every trader has their own system, many are similar in some ways, but never exactly the same.
Some options traders enter a trade based on candlestick patterns, some based on supply and demand setups, and others on crossover indicators.
Because every person has a unique perspective, every trader will correspond to a different set of trading methods different from others.
How do you find a trading system that works?
There are two ways to find a trading strategy that will make you money.
- By back-testing your own unique strategy on a practice account. Find out what makes money every time and what doesn’t. Take your time before you commit to trading real money.
- By replicating a proven trading strategy that works from a successful options trader. Some of my readers are using my personal trading system to make money in the market. Find a trader you trust and who posts their gains for other traders to see what’s possible to achieve in the market.
A successful options trader will have their system locked down before anything.
This system will be the platform that will make you money every time it presents itself to you in the market.
#2. Trading Psychology
Trading psychology has to come next because once you find a trading system that will put you in profit every time it presents itself to you, you’ll need to understand how to execute properly and exit with profits.
Most novice options traders eventually find a trading system that works but let profits turn into losses due to a weak trading psychology.
Trading psychology often times has to do with fears in the market.
The 4 primary trading fears are:
- Being Wrong
- Losing Money
- Missing Out
- Leaving Money on The Table
These 4 primary trading fears signal painful information to our brains which often times cause traders distress in the market which leads to painful losses.
*When you are fearful, no other possibilities exist in the market. Fear blocks all available information from the market.
Here are examples of how the 4 primary trading fears cripple options traders:
Example: Afraid of being wrong: not getting out of a trade when you should; Afraid of losing money: not buying enough contracts to make a lot more money; Afraid of missing out: chasing plays; Afraid of leaving money on the table: failing to take profits.
Options traders must learn to master their emotions in order to become successful traders.
Emotions in the market will always lose, data will not.
How do you overcome the 4 Primary Trading Fears?
Afraid of Being Wrong: If you find yourself in a losing trade, you must overcome your fear of being wrong by cutting your losses. If you are afraid of being wrong, you will let your losses grow much bigger in hopes that you are right and the trade reverses in your favor. Losses are part of trading, it’s how small you are able to keep these losses that matters.
Afraid of Losing Money: Sometimes a trader might not open a trade when their setup presents itself to them simply because they are afraid of losing money. You can overcome this by downsizing the number of contracts your purchase. Conversely, some traders might only stick to the minimum number of contracts due to being afraid of losing money if they scale up just a little. Successful traders learn to trust their trading systems and manage their risk accordingly.
Being Afraid of Missing Out: FOMO, or fear of missing out, is something every trader experiences at least once. Successful traders don’t blindly jump on a trade because they missed their setup or because price is moving quickly in one direction. If their setup does not present itself to them (or they missed it), they don’t take a trade and give into FOMO. Successful options traders always follow their setup.
Afraid of Leaving Money on The Table: When traders are afraid of leaving money on the table, they let their winners become losers. Failing to take profit (FTTP) often times occurs due to the emotion of greed, of wanting more. Successful traders overcome this emotion by always taking profits. When traders learn that there will always be money left on the table, that’s when they will begin to consistently become profitable traders.
A book I highly recommend reading on the psychology of trading is ‘Trading in The Zone, by Mark Douglas’.
The first chapter alone is enough to provide you with the clarity necessary to improve your trading psychology and succeed in your trades.
Now on to the third and final key element that creates successful options traders, risk management.
#3. Risk Management
Risk management is what keeps successful options traders from blowing their accounts and losing all their money.
I was scalping $1K per day and entering trades with nearly 50% of my account (1:1 ratio) and also scalping approximately $3K-$7K paper trading – so I know my trading system works.
However, when one weak entry combined with the fear of being wrong1 led to the inability to cut my losses short, I paid the price and lost nearly half of my account due to overleveraging.
I was forced to inject my account with enough cash to maintain above the minimum margin requirement if I was to continue day trading.
This loss was such a valuable lesson because it provided me with clarity I didn’t have before.
The capital in my account wasn’t set up for large trades like the ones I was making yet.
I scaled largely because my trading system worked, and I had learned to trust it despite the number of contracts I was purchasing.
I figured out how to exit my trade with profit, but the issue was that although I welcomed risk, I wasn’t managing my risk properly in comparison to the size of my account at the time.
Risk Management Lesson
I had to identify and choose one of the following:
- Trade at a much smaller volume, or
- Continue to trade with large volume, but double down on trading psychology discipline to refrain from creating big losses
But of course, the most successful traders only risk a small percentage of their accounts and gradually scale up as their account grows.
So that’s what I decided to do.
I went from trading 60-80 contracts per trade to only 10 contracts per trade.
I then printed out a scaling system to help me identify when to scale up again based on my account size goals.
This was by far the cherry on top for my success as an options trader and has been for other successful traders too.
If you’re a beginner, start with one contract and identify how to gradually scale up later on as you gain confidence in your setup, improve your trading psychology, and understand the importance of risk management.
How to Stop Losing Money Day Trading
Losing money is part of the process when learning options trading.
The most successful options traders have lost a lot of money investing the knowledge in themselves but have succeeded by not repeating their mistakes.
It’s important to understand that big wins, small wins, and small losses are normal, but big losses shouldn’t be.
Successful options traders still lose money on trades but keeping them small is the key to long term success.
You can avoid big losses by finding a trading system that works, improving your trading psychology, and writing a plan for your risk management.
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