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There are 4 stages to any option trading system: selecting the stocks, option selection, and the entry and exit procedures. Option trading can be approached either as a discretionary or a mechanical trader.The discretionary option trading system doesn’t follow any particular rules. The trader is reliant on their gut, doing whatever they feel is right at that time. They prefer a trade, and decide when to enter and exit based on their own understanding and experience.
A mechanical trader follows a pre-determined process using all their skills to build an objective set of rules to control all levels of trading, from selecting stocks to entry and exit. These rules are often laid down in a computer application that can make the task as automated as it can be. Mechanical style traders eliminate the influence of human emotion on their task, thus reducing human mistake. As a way to create a mechanical system, all phases of the task require to be cautiously considered.
First you need to make a list of all the quantifiable requirements that enable you to decide whether a stock would be a good choice for options trading. They have to be quantifiable to be able to chart them on the computer, granting all qualified stocks to be automatically analyzed each day. This could drastically reduce how much time it takes to identify qualifying stocks. Utilising quantifiable features also prevents you against counting on your own judgment. The sort of key elements you should look at include a last close that is at least 10 dollars, last price rising during the last 3 days and having a PE that’s positive. Using the requirements is how you would consider which stocks to watch.
The second stage is to determine which options will qualify for your trading system. This will depend on what you need to base your system on. You could utilize ITM or OTM options, or base it on bearish or bullish spreads. Whatever you choose is the way you will choose the option to buy for the stock chosen in the first step.
3rd, you will need to determine the conditions under which you will actually buy. There are actually a number of different entry procedures that can be used. You may come to a decision that it’s best for you to purchase at the beginning of the market, or that you require a more complex procedure which could require watching the movement of underlying stock for a specified period of time before it matches the circumstances for entry. Design a process that matches with your own trading style. This process is how you will use to decide when to buy.
It is always best to find out as much as you can before jumping in. Start little while you get the feel of trading. That lets you minimize losses over the learning curve.
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