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This chapter is from the book

Chapter 1 Major Learning Points

Remember the six major prerequisites:

  • Patience
  • Perseverance
  • Knowledge
  • Honesty
  • Pre-planning
  • Discipline

Start to build a plan. The plan should encompass the following:

  1. What stocks or other assets should I be considering for successful trading? Do what feels comfortable. I tend to stick with stocks, CFDs, and stock options.
  2. What direction do I feel comfortable trading in (up or down)? Could I consider trading put options if a stock or the market falls?
  3. Have I checked the news items for the particular asset I am trading? Are quarterly or other results out soon? Is there a major announcement from the government coming out soon? Could these announcements affect my trade? Can I use them to enhance my position, or shall I wait until the announcements are made?
  4. Do I want to check whether this company actually makes money and is growing its earnings?
  5. Have I checked the graphs and done any technical analysis? Am I missing something obvious like a basic double top chart pattern?
  6. What strategy and risk profile do I feel comfortable with trading?
  7. For each trade, what is my entry point and exit point?
  8. Do I know my risk, reward, and breakeven levels for my options trades?
  9. What price am I looking for to execute my trade?
  10. Where do I take my profits, and where is my STOP LOSS?

We’ll review this list as we go along every chapter. So far, the main questions you should start to consider are those in bold. By the end of the book, you’ll be able to answer all of them and begin to build your own plan.

You have now learned what the essential risk profiles look like and what they mean to you in terms of maximum risk and reward.

Profile

Description

Risk

Reward

Breakeven

026fig01.jpg

Buy stock

Purchase price

Unlimited

Purchase price

026fig01a.jpg

Sell stock

Unlimited

Short sale price

Short sale price

026fig02.jpg

Buy call

Call premium

Unlimited

Strike price plus call premium paid

026fig02a.jpg

Sell call

Unlimited

Limited to the call premium received

Strike price plus call premium paid

026fig03.jpg

Buy put

Put premium

Strike Price less put premium paid

Strike price less put premium paid

026fig03a.jpg

Sell put

Strike price less put premium received

Limited to the put premium received

Strike price less put premium paid

We can now progress to Chapter 2, “Into the Marketplace,” where we start to explore the reality of trading options with real numbers.

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