Newcomers to the trading universe arrive with some preconceived notions. To become a successful trader, one has to separate truth from myth, which isn’t always easy. Let’s use some options trading information and bust a few of those trading myths right now.
Myth 1: When managing a position, the most important thing is always to earn a profit.
Rationale behind the myth: Without profits, there is no chance for success, so you must do whatever possible to ensure profits.
Myth busted: When you’re holding a given position, ask yourself if it’s truly in your best interests to hold it. Do you believe the prospects for making money (from the current price) are good? Are the risk and reward within your comfort zone?
If the answer to any of these questions is not a resounding “yes,” you should exit the position as quickly as you can. When trading, the most important thing is to own good positions that fit your investment/trading style.
Myth 2: Trading is easy. If you have a stake, you can quit your job and earn a fortune in the markets.
Rationale behind the myth: This is one of the most pervasive trading myths — and it’s not just about options trading. Plenty of people think they can read a few articles online and immediately become expert traders making huge profits.
Myth busted: Trading is similar to many other professions — the right education and training are essential if you want to find success. A new trader doesn’t have to know as much about trading as a doctor has to know about medicine, but some knowledge is essential.
You’ll need to understand trading terminology and how to navigate trading platforms, know how to enter orders, and understand how options earn profits and generate losses.
Before making a trade, you should have a clear rationale for why you want to make it. Don’t make the mistake of just choosing an option and then hoping for the best.
Myth 3: You can’t go broke taking profits.
Rationale behind the myth: Make trades, earn profits, exit trade, keep profits. What’s wrong with that?
Myth busted: Traders who adopt this mindset tend to ignore losing positions, waiting for them to return to profitability. However, many times, losses continue to grow, and the obvious path to ruin is unmanaged losses.
Myth 4: Options are very complicated, and you’ll never be able to understand how to use them.
Rationale behind the myth: Many believe options trading takes sophisticated math that is so complex that the little guy stands no chance.
Myth busted: Options can be used in sophisticated strategies, but often, options themselves are very simple investment tools.
A call option works just like a rain check you receive at a store. When the store is sold out of a sale item, they give you a guarantee that you may buy a specific item (the one you were unable to buy) at a special strike price (the sale price) for a limited time (until the rain check expires). A real-world call option works in much the same way.
Know Your Trading Myths Before Investing!
These are just a few of the myths in the investment universe. The wary trader verifies stories before relying on them. You might be able to do this through your own research, but never underestimate the power of a seasoned mentor or investment advisor!
When you go in with a clear strategy, you’ll be able to learn, adjust, and sharpen your plan as you go.
On the date of publication, Sarah Edwards did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
