The First Trade

First Trade. Sorry! by Hasbro

Making your first options trade with can represent a psychological ordeal. There is no doubt that most beginners are anxious to trade and get their feet wet. As a result, many begin before they are truly ready.

But there are also traders who live at the other end of the fear spectrum. They are careful and very conservative with their money. They take time to understand what they are doing before putting their money at risk.

Trading is personal. There is no single way to trade or no single strategy that is suitable for everyone. Knowledge is required, and it is often costly to trade when you are under-educated. There is no ‘proper’ curriculum that the student must master because much depends on the needs/skills of the individual. However, one thing that must be understood is that the education process continues throughout a trading career and believing that you know enough and are skilled enough so that your money will never be lost is the thought process of someone who will eventually have a disaster that may wipe out a lifetime of savings. 

Know who you are

Understanding your strengths and weaknesses is a necessity. It provides a big advantage because it allows you to steer clear of situations in which you made poor decisions in the past. For example, traders lacking the discipline to cut losses must be extra careful about position size when initiating positions

That’s why education/training is so personal. It must accommodate you personal traits by concentrating on lessons that allow negative habits to be 'cured.' Certain traits (impulsiveness or greed) can destroy a trading career. The ability to make good decisions quickly – especially when under pressure -- is important for the trader (not so much for the long-term investor).

If you are impatient and must get started NOW, just to 'get a feel' for trading, that is likely to be a poor, but not a career-wrecking decision. However, that impulsiveness cannot be given free rein. It must be controlled. If you trade a small position, understand the strategy being traded, and avoid making decisions that resemble gambling (doubling position size in an attempt to get even), then this trait may not harm you. 

However, if that trait gets the better of you, don’t make the mistake of believing that you will be in control next time. This problem does not go away, and you may (eventually) require a trading coach or psychologist to get a handle on your own personality.

One possibility is to lay out a detailed trade plan and update it frequently. That plan leaves you well placed to act at appropriate times. That includes, knowing when to shed a bad position, lock in profits, or make an adjustment. Using the plan allows a trader to avoid poor spur-of-the-moment decisions. 

Remember that trading is not for everyone, even with investment tools that make it much easier to manage risk. Bad habits can doom a trading career.

Learn First, Trade Later

You never know how much you must understand about options before making that first trade.

There is no test. However, if overwhelmed, stressed, or uncomfortable, exit the trade and understand that you are not yet ready.

NOTE: Making a profit does not mean that you were ready, and taking a loss does not suggest unpreparedness. Luck is always a factor when trading. This is a game of statistics and probabilities. Do not draw conclusions based on a few examples.

You are ready if you:

  • Understand how to manage positions for the  strategy being used
  • Know whether gains and losses are open-ended, or limited.
  • Can calculate the maximum profit and loss for the trade.
  • Know how to establish a profit target, and have done so with success.
  • Know how to set a maximum loss and will not make an adjustment that increases the limit. 
  • Size the trade properly.
  • The loss and profit limits are well within your comfort range.
  • Do not have too much at risk. In other words, there will be no reason to panic
  • Understand that you may have to make a trade adjustment to manage risk
  • Do not yet have to be skilled at managing risk, but you must be aware of its importance.
  • Must understand that adjusting positions is part of trading when using options

If you believe the items on the checklist can be handled, then you are ready to begin. However, do not discontinue the education process. You have barely begun.