How to Monitor Your Trades
When you start trading options, you might just find that you have a natural aptitude for it, and you could begin making decent money right from the very start. Unfortunately, this is fairly rare and for most people it takes a while until they are getting the kind of profits they want to.
The reality is that when you start, you'll probably still have a lot to learn and you will need to gain some experience before you are able to achieve your goals. This is nothing to worry about because, it's only natural that it will take some time before you really know what you are doing. It does, however, highlight just how important it is to give yourself every chance you can to be successful.
There is plenty that you can do to increase your chances of success. Although the basics of options trading are relatively simple to grasp, the subject has several more complex levels, and the more you can learn about it the better your chances will be. Putting in the time and effort to study the subject and assimilate all that you possibly can is just one way to improve though. Examining the financial markets and working out how and why they move is another.
Perhaps the best way, though, is simply to analyze your own performance and try and learn from your experiences. On this page, we look at how you can improve as an options trader by monitoring the trades you make.
- Keeping Records
- Evaluating your Options Trades
- Optimizing your Options Trading
In order to analyze your performance, it's absolutely vital that you have accurate records to study. This is actually a whole lot easier than it used to be because, most modern day online options brokers automatically keep a history of all your activity so that you can check back through and see what transactions you made, when you made them, and what the result was.
However, not all brokers offer this service, so you may need to keep your own manual records of this information. Some form of manual records is necessary anyway because, there is other information about your trades that your broker definitely won’t have.
A simple record of what transactions you have made and the results can only tell you so much, and it certainly doesn’t tell you enough. Your records should also include information on what led you to make your trades. For example it might explain why you chose a particular underlying security, why you believed it was going to move up or down in price, why you chose the strategy you did, and what expectations you had.
With accurate and detailed records containing all that information, you can then measure how successful each trade was. You can then spend some time analyzing the records and assessing your trading performance.
Evaluating your Options Trades
Evaluating your options trades should involve more than just looking at your profits and your losses; you need to try and understand why your profitable trades turned out well and why your losing ones didn’t. Basically, you need to focus on what you are doing right and change what you are doing wrong.
This isn't necessarily easy to do, but if you keep the detailed records we have mentioned above, you'll have a much better chance. The key is to look at what your losing trades have in common and what your winning trades have in common. If the ones that lose you money all have one aspect that is the same, then there is a good chance that is where you are going wrong. On the same note, if all your profitable ones are similar in some way it should be fairly easy to spot what you are getting right.
For example, let’s imagine you were trading using a range of different types of options. You might be buying and selling a selection of simple stock options, some forex options, and a few customized exotic options. If you looked through your records and discovered that most of your stock options trades hit the profit targets then you should be pretty confident that you knew what you were doing with stock options. If you also noticed that most of your losing trades involved forex options and exotic options, then that would imply that something was wrong with your strategies for them.
You might also be using a selection of different strategies. If you went through your records and found that you were particularly successful using a specific strategy, but tended to lose money when using another, then you could get a fairly clear idea of what was working out for you and what wasn’t so that you can make the necessary changes.
These are fairly straightforward examples, but they should help you see what evaluating your options trades is all about. It's essentially about looking for patterns and finding links between your profitable trades and links between your losing trades.
The patterns you are looking for could be in a variety of different components of how you make your transactions, and we’ve already mentioned a couple of them. You could also find patterns in how you are identifying opportunities, or in what market conditions you are making trades. You might be doing well with your low risk transactions and badly with your high risk transactions, or vice versa. If you can’t find any valid reasons for why some of your trades are profitable and some are not, then it may be that you don’t have a big enough sample size.
Sample size is an important aspect of monitoring your performance. In order to gain any kind of insight into what you are doing right or wrong, you need to have a decent amount of information to work with. If you have only completed a handful of transactions, then you won’t really be able to learn anything meaningful by analyzing them. That isn't to say that it's not worth doing, but your analysis will be a lot more useful once you have a larger amount of transactions to study.
You should also consider sample size when you are highlighting patterns in your records. For example, you might have made hundreds of trades overall or made just a couple using a specific strategy. If those two trades worked out particularly well or particularly badly, that doesn’t necessarily tell you a lot. You would need to make several more transactions using that strategy to get a clear idea of whether there was a real pattern emerging.
Optimizing your Options Trading
Once you have carried out some analysis of your history, you can use any information that you gain from that process to try and improve your overall performance. In very simple terms, you can optimize your options trading by repeating whatever it is that is giving you good results and avoiding whatever it is that is giving you bad results.
In practice it isn't that straightforward, but that is essentially the general idea of monitoring what you are doing. You want to do more of what you are doing right and less of what you are doing wrong.
The whole process needs to be as fluid as possible because, the financial markets are constantly changing and other external factors can impact the circumstances you are trading in. You might be doing really well out of a relatively neutral market for example, but start to struggle if the market turns volatile. If something like that happens, you might have to completely re-evaluate your trading plan and make some adjustments to the strategies you are using. This also may be true if there are major changes in the economy that dramatically affect some of the areas you are trading in.
In summary, you really need to be attentive to your own performance, general market conditions, and other factors that can affect what you are doing. You should keep your trading plan under constant review, and you should always be prepared to make changes to it when necessary. You should always strive to improve any part of your trading when possible, even if things are going really well.
The path to successfully trading options isnt a particularly short or easy one, but the more effort you put in to your endeavors, the more you will ultimately achieve.
This brings our guide to getting started to an end. Hopefully you have found it very useful, and will use what you have learned to make some decent profits from trading options. Please remember though, there's still a lot more to learn. You may want to look at the next section on our site – Improving Your Options Trading Skills & Knowledge.