“Fear and Greed” are the two most prominent emotions that drive the stock market. If these emotions are controlled in the right way, all that’s going to happen is loss. The fear of losing too much money and the greed of earning more have destroyed many people, and it will continue. This post will ensure you don’t make any mistakes because of these impulses.
This post is for traders who wish to master emotionless option trading and increase their returns. “Emotionless” is a concept where you don’t make impulsive decisions based on your emotions and rationalize your thoughts before making any decision.
Understanding Emotionless Option Trading
Emotionless option trading is where traders make decisions based on logic, strategy, and predetermined goals without letting emotions like fear, greed, or overconfidence dictate their decisions.
This approach helps investors avoid impulse decisions even at times when their mind keeps telling them that they should either stay or pull out. The strategy focuses on data-driven decisions, and to assist the process, traders also use tools like stop-loss orders, automated trading systems, and position sizing to eliminate the impact of their emotions.
READ MORE The 4 Most Effective Option Strategies You Should Know
Why Emotions Can Be Dangerous in Option Trading
1. Fear: Missing Out or Losing Big
Fear is one of the most prominent emotions that have resulted in a loss for many traders. Fear kicks in in two situations. The first is when the market seems to go down against your judgment. When this happens, fear of losing big kicks in, and your impulse pushes you to pull out before you lose too big; even if your research points towards an upward trajectory, watching the lines going down can throw your hardworking research out of the mind.
In the same way, another time when fear kicks in is when the market trajectory is upward, and it goes a little beyond your expectations. The same thing happens in these situations, but instead of pulling out, the fear is that you might miss a big opportunity if you pull out now, leading to a situation where you place your trade on the line for too long, risking loss.
2. Greed: The Desire for More
On the opposite spectrum is the emotion called “greed.” The desire to earn every penny possible from the trade. Greed throws off your plan to stop at a certain point, even if you had researched and ensured to pinpoint and pull out at a certain profit level, if greed kicks in watching the market move up, your plan would just disappear from your mind, and all you can focus is how long till the trade keeps making profit. This often leads back to zero profit or even loss.
3. Overconfidence: The Hidden Trap
And another trap to be aware of is “overconfidence.” This emotion kicks in after a few successful trades, which makes you feel as if you are becoming the master of trading, and every instinct is now per the market, making you feel invincible for a while until the losses kick in. With the feeling of overconfidence, people end up trading more than they planned, which usually leads to more loss.
Key Principles of Emotionless Trading
Discipline
The first and most important thing to remember for emotionless option trading is to stick to your plan no matter what. Even if your gut tells you the prices will go higher than where you decided to pull out, you must stick to your earlier decisions and pull out on time.
Even if every fiber in your body tells you to stay in the trade, you must follow the plan. It doesn’t matter if you missed a hot trade; you had your plan, you followed it, and you earned your plan. These hot trades are once-in-a-while things, but discipline is a long-term game.
Patience
Patience is a crucial aspect of trading, and you have to wait for the perfect timing when the trading prices match your goal to pull out. Watching the prices fluctuate every second makes your heart go up and down, but that’s where patience is important. The ability to handle the pressure of watching the stock market move within seconds till you see the prices close to your predetermined goal.
Risk Management
One of the key things to remember while trading in options is to be aware of your risk capacity. How much can you risk? Use it as a parameter to set your stop-loss tool before you lose more than you can afford.
Consistency
If you are a trader, always remember that small losses are a part of the big game you are playing. Always plan for the big game, and stay disciplined and consistent with your plans to make sure you win the bigger game. Don’t let small losses get you down; remember that strategic planning and research are your base and will help you win in the bigger picture.
READ MORE 5 Things to Know Before The Market Opens – Trader’s Secret
Strategies for Emotionless Option Trading
With all the principles and basics covered, let’s see how these factors are used to create the best strategies for emotionless option trading.
1. Predefined Entry and Exit Points
Deciding when to enter and exit the trade is one of the key strategies that can help you avoid making any impulse decisions. To determine the entry and exit point of the trade, use technical analysis, such as price charts, moving averages, or other indicators. These points will not only act as your assistants but also remind you where you have to stop.
2. Automated Trading Systems
Automated trading systems help traders to ensure that they enter and exit per their predetermined points. These systems don’t require human assistance; they are programmed to exit the trade at the predetermined exit point for loss or profit. These systems can be a great partner for people struggling to stick to their plan.
3. Hedging
Hedding is one of the most popular techniques that helps traders spread their risk by simultaneously buying and selling option contracts. It helps create a protective position that limits losses while allowing gains.
4. Position Sizing
This is a method where traders determine how much capital they should use in each trade. To make an emotionless trade, ensure you don’t risk more than 1%-2% of your money. Proper calculations allow you to avoid big losses and have enough capital to meet your long-term goals.
READ MORE How to Use the GMMA Indicator for Trend Identification and Confirmation
Frequently Asked Questions (FAQs)
What is emotionless options trading?
Emotionless trading is a trading concept where traders make practical decisions based on logic, strategy, and data, without letting emotions like greed, fear, or overconfidence affect them.
How to be emotionless when trading?
For emotionless trading, set certain rules like entry and exit points, and follow your predetermined plan without letting impulse decisions take control.
Are traders emotionless?
No, Traders are human, after all. They have emotions. However, in order to become consistent and successful traders, these people have to learn how to control their emotions and not make impulsive decisions.
Final Statement
Emotionless Option Trading is a trading strategy where traders use practical and logical solutions based on research and avoid making impulse decisions led by emotions. This approach helps to make better decisions for more consistent and long-term profit while avoiding big losses because of impulse decisions.
By implying entry and exit points for your trade, calculating your risk capacity and investment capital, and using various option trading strategies like hedging and spreading, you can ensure a much stronger position for your trades.