Take Your Own Financial and Strategic Pulse - dummies

Take Your Own Financial and Strategic Pulse

By Joe Duarte

There is a difference between trading and investing, especially in terms of time frames. Investing is all about using the power of time and the benefits of compounding to build wealth over long periods. Before you start any kind of trading or investing program, it’s a good idea to know three things:

  • Your risk profile

  • Your financial situation

  • Your time commitment possibilities

Any time you add a new trading strategy, only one thing is certain: the early stages will be challenging and will require a fair amount of your attention, or you will lose money, often in a hurry.

As you prepare to become an options trader, here are some simple steps to consider in order giving yourself a good start. Even if you are experienced in other forms of investing, or have experience with options, you should still stop and consider the following:

  • Check your financial balance sheet. Before you start trading, go over your living expenses, review your life and health insurances, and put together a financial net worth statement. Make sure it’s healthy before you take extraordinary risks.

  • Set realistic goals. Don’t trade beyond your experience levels, and don’t risk too much money in any one trade.

  • Know your willingness to take risks. If you are a cautious person who thinks that mutual funds are risky, you may not be a good options trader. But you shouldn’t count yourself out either. There are many options strategies that could suit you, especially once you understand the built‐in safety nets that make some of them really decrease your risk.

  • Become a good analyst. If you like to roll the dice without doing your homework, you could get in trouble with options pretty rapidly. In order to maximize your chances of trading options successfully, place a high priority on improving your technical and fundamental analysis skills. You should do this both for the entire market and for the underlying securities that are the basis for your options.

  • Don’t be afraid to test your strategies before deploying them. Doing some paper trading on options strategies before you take real‐life risks is a good idea.

  • Never trade with money that you aren’t willing to lose. Even though options are risk‐management vehicles, you can still lose money trading them. And as you progress to more sophisticated and riskier strategies, your losses could be significant. Bottom line: Don’t trade options with your car payment or your rent money.