How to Stop Losing Day Trading Options Contracts


The title of this post is one of the most common questions we get from traders – How Can I Stop Losing? If you are a retail Options Day Trader, it can definitely seem like the market is always working against you, and in some respects that is true. Options trading can be tough when you are new to trading, and especially when you don’t really understand how options move.

As an Options Day Trader, I have experienced all the pitfalls that lead to losing trades. Our own psychology, poor entries and exits, wrong direction, lack of discipline, lack of rules… really the list of forces working against us can feel endless. But, we can actually have some control over this game if we focus on a few things. And it is a simple list: Patience, Trade Plan, Respecting Rules, Managing Risk and Expectations.

Patience is the most important skill in my opinion. You need patience to wait for the trade to come to us, for the stars to align, to nail your entries and exits, and to maximize your profits. Let’s say you have a Trade Plan that AAPL will go from $142 down to $138, so you are watching the $140 Put Option wondering when to enter. You want to have the patience to wait for the trend to start to form, to wait for confirmation the trend is established and going to work. As Options Traders the majority of our time is waiting for our signals to take the trade, and then waiting for the trade to unfold. That is why patience is paramount.

A good Trade Plan is next on the list, and this is something that many new traders lose sight of while Day Trading. Every trade should be preplanned with triggers to enter and exit, even with specific price points on the Options Contract. In order to build a great Trade Plan, I have a few key tips I would like to share to help you with forming your daily Trade Plan. Start from a Macro view by using higher timeframe Technical Analysis (TA) to identify trends and patterns on the Monthly, Weekly, Daily charts. Then go down to a closer timeframe to analyze current price action to understand if the Macro trend will continue or is starting to show signs of reversal on a 5 minute, 15 minute, 30 minute, 1 hour, or 4 hour chart. On the Macro timeframes and the Intraday timeframes, I also try to identify Key Levels. This can be daily candle highs near reversals, weekly candle opens and closes, Fibonacci retracements, or it can be levels of Supply and Demand. There are many tools one can use during TA, but I like to say having Key Levels to help provide a Roadmap for where the trade can go. If you think AAPL is going from 142 to 138, that is because you identified Key Levels that it should reject to get down there. Also, Trend is your friend, your Trade Plan should be in line with whatever the current trend of your ticker and what the market is doing. If SPY is going up and you are betting AAPL is going down, it can happen, but it is going to require some strong rotation around the Sectors. Point being, don’t fight trend, don’t keep buying Calls while AAPL is falling or keep buying Puts while AAPL is going up.

This is a good segway into establishing Rules to Respect for your trade. These can be Rules around what has to happen on the AAPL chart for you to enter the trade, what the market has to be doing, Rules that would tell you to get out of the trade, sometimes even Rules around what time of day to take the trade or not. Each trade you take should meet your Trade Plan and check off all your Rules to Respect.

That takes us to Managing Risk and Expectations. Everyone is going to be different in how they can tolerate and manage the money they are risking for every trade. When it comes to small accounts and Options Trading, you HAVE to have Rules for Managing your Risk. For example, if you have only $1000 in your account, you should NOT be trading SPX, you should not be buying Options Contracts worth $500 per Contract. When you enter a trade, you should always have a defined amount you are willing to lose on that trade. You should also have a timeframe in mind for the trade to play out, will this be a trade that last minutes, hours, or days? And are your Expectations for the trade reasonable? If you are looking for your Options contract to go 10x, that is going to require a good amount of energy, momentum, and volume. So make sure your expectations are in line with just how much potential the move might have.

Overall, to stop losing in Options Trading, I like to teach the old adage “Plan the Work, and Work the Plan”. Don’t show up simply wanting to trade and throwing money around. Develop a Trade Plan for every scenario that might unfold on the day, so that you are ready to react when it happens.  Be sure to have Rules in place to manage your trade, whether it is a winner or a loser. And make sure you understand the Risk in each trade so you can manage your expectations. Above all, remember to be patient and wait for the trade to check all your boxes.
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