Option Trading Education – Keep Your Capital Safe!

I feel like a broken record, but as I’ve said before: you need to trade in order to trade. This guideline runs alongside another important rule, which is: keep your capital safe.

People in professional occupations around the world all use tools for their jobs. These tools may be physical things such as a hammer or a computer, or other things that you can’t necessarily touch, like expertise and education.

All professionals take great care of their tools, whether physical or not. A writer doesn’t skimp on virus protection for their laptop and a doctor doesn’t study something just one time.

People who are professional traders are no different. They use tools just like everyone else. As a trader, your tools are mostly intangible; you can’t hold them in your hand. Your tools include reading and understanding things. You also need an incredible amount of discipline for your mind and emotions in order to stick to your specific trading guidelines.

Just as other professionals take care of their tools, you must also care for yours; you can’t afford to be reckless. The balance of your account is your biggest asset and tool, which is why it needs to be kept safe.

According to statistics, within the first six months, or first year, of professional trading, people fail. The longer you’re in the game, the better chance you have of survival in the trading game. After your first year your chances improve quite a bit, but after two your chances are dramatically greater.

The biggest problem is that people get too caught up in the excitement of trades and start getting reckless. Even as you read this from the safety of your home, someone is starting to make mistakes. They’re chasing the wrong trades, changing their stops to give trades more space, vastly overtrading, purchasing at a retail point, selling at wholesale prices or opening a position that’s simply too big for them. In short, they’re getting far too reckless and are no longer keeping their capital safe.

I have enough losses of my own to prove that I’ve been down this road, so I know what I’m talking about. You should always stay aware of the fact that anything can happen with a trade, even if it sounds perfect. Although you may be confident, and you may have done your homework, the fact is that some trades will simply make you lose money. If you accept this fact, you’ll be less likely to get reckless and add to your losses.

Professional traders that make up to six and seven figures a year are as protective of their accounts as a mother is of her children. They have learned to be wary of every trade and their self discipline does not falter.

All businesses have business expenses and trading is no exception to this rule. But all you have to remember is that a trade that results in a loss is not necessarily a loss, but a business expense. This is an entirely normal part of any business, trading or otherwise.

Professional traders know that there are expenses associated with trade, and know not to make their costs higher by getting careless with their capital. Jesse Livermore is known for this famous quote; “I made most of my money sitting on my hands.” Translation: unless conditions were absolutely ideal, he didn’t trade.

Here are three questions to ask yourself as a professional trader before you open a position: 

  1. What purpose does this trade serve? How is the setup? Is the market good for it now?
  2. How ideal is the entry time frame? If it isn’t, wait.
  3. Have you taken stop loss points and profit targets into consideration and planned for them?

Planning your trade and trading your plan are key parts of trading discipline.

After you have had consistent success with trades, your process will become second nature to you. You’ll be able to answer those questions in seconds because you will know exactly what you’re doing. In a business driven by the odds, you want as many of those odds in your favor as possible. Maintaining discipline and creating solid trading plans will allow you to get the best trades, sending you down the road to success and keeping your capital safe.

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