Practical Steps To Mitigate The Negative Emotions-Call and Put Options

Now that you have selected a system that can work well with your trading personality, let’s discuss the practical steps that you can take to mitigate negative emotions when trading your system.One huge reason that many traders lose is that they don’t have a specified predetermined trading system. They are simply entering trades based on their emotions, then rationalizing them and losing.It is an absolute must that you create a trading system that has predetermined rules and addresses exactly what you are going to do no matter what happens.

It is also preferable that you back‐test this system and demo trade it before allocating real live money to it to make sure that it can perform. Risking your hard‐earned money on a trading system before developing specific rules and testing them is pretty much guaranteed financial suicide.A system does not just mean waiting for a moving average to cross, or trading based on the news that comes out. Each system must have specific components.

These components are basically rules that you will need to have to deal with all the possible events that can happen when you are trading. Entering Trades:An entry strategy is the market condition that will have to be true in order for you to enter. This can be a 100 percent quantifiable condition, or it can be slightly subjective to the trader. The key is that you will need to have specific rules in place in order to enter the trade.

This has to be specified and predetermined. Otherwise, you will be making decisions based on your emotions, which we just learned is not a good thing.Traders typically implement a few different conditions for entering trades, for example:1:Technical conditions. These are the conditions in the historic price of a trading instrument. For example, you buy if the price drops for x number of days in a row. Also, technical indicators such as moving averages,Bollinger bands, and stochastics could trigger a buy condition.2:Fundamental conditions.

Traders may want to enter trades based on certain economic data releases. They may also look at news and geopolitical events.Exiting Trades:Just as you have to know when you have to enter a trade, you will have to predetermine when you will have to exit the trade. There are typically two reasons for you to exit your trade:

(1) If you lose on the trade and you need to cut losses, and (2) if you win on your trade and you need to take profit.Traders typically implement many different tactics for exiting trades.Let’s cover some basic ones. 3:Take‐profit. With a take‐profit, you simply exit your trade after it makes a certain dollar or percentage return to lock in your profit.

4:Stop‐loss. You can use a stop‐loss to cut your losses. This means that if you enter the trade and it goes against you by a certain percentage,points, or dollars, you get out. Additionally, you can move your stoploss
up to protect your winnings. If a trade actually goes in your favor,you can move your stop‐loss to lock in at least some profit on the trade.One thing that you should never do is move the stop‐loss against you.

5:Time stop. The time stop is a great exit strategy that is fairly straightforward and is a great way to discipline traders, but it is often overlooked.With this approach you simply predetermine the amount of time that you plan to stay in your trade after you enter it. For example,you can enter a trade and plan to be in the trade for one hour. Or you can plan to stay in the trade for a day or a week. This actually coincides with options quite well because options have expiration dates. With this approach, you are exiting your trade based on time regardless of whether the trade is winning or losing.

6:Conditional stop. With a conditional stop, you will be exiting your trade based on certain technical or fundamental conditions in the market, for example, if an indicator can tell you to enter a trade and to exit a trade.Or you can get into your trade and hold it until a certain economic data release is scheduled to come out. The idea here is that you exit based on the condition regardless of the profitability of the trade that you are in.

7:Stop‐loss based on underlying. When trading options and binary options,you may want to implement a stop‐loss rule that is based on the underlying instrument that you are trading. Here are some ways in which you can do this. You may decide to enter an in‐the‐money trade and cut your losses as soon as the option goes out‐of‐the‐money. Or you may sell an out‐of‐the‐money option and decide to cut your losses when the option goes in‐the‐money. Additionally, you may want to get out of your option trade if the underlying instrument moves against you by a certain number of points.