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§3.1 Basic principles of creating trading strategies

Основы для создания торговой стратегии

As previously stated, options trading is quite a simple thing from a technical point of view. This is because there are only two types of options – Call and Put.

  • If you think a price will end higher than the current price at a specified time then you should select a Call option.
  • If you think a price end lower than the current price at a specified time then you should select a Put option.

Now let’s find out how to make forecasts and what you should focus on so that your forecasts are as accurate as possible.

Of course it is not so easy. But the statistics show that good traders can master the art of making a profit from trades in more than half of the cases which is the key to success. As in any other business, you will acquire skills gradually in the course of trading and any knowledge in this field will grow into practical skills only when you develop it, even on a demo account. However, there are basic principles that allow you to make fewer mistakes from the very beginning and win many more trades. This is what we will discuss now.

A trader’s best friend is his trading strategy. It helps make trading consistently profitable. That’s why each trader should trade according to his strategy and shouldn’t make random trades.  Any deviance from the strategy is a sign of impulsiveness or excitement which will eventually lead to losses. The sooner that you will create your trading strategy, the earlier you will start your professional career as a trader. If you trade without a trading strategy then you will play a game of chance or lottery but the most important thing here is that when you trade without a strategy you won’t learn anything or gain any expertise. So you should pay very close attention to creating a trading strategy.

What is a trading strategy?

In fact a trading strategy is a set of rules for trader. To lay down its basic principles you should answer next questions for yourself:

  • What you are going to trade or what kind of underlying assets you will use?

что будет базовым активом

This is far from being an idle inquiry because all the currencies, commodities, shares, indexes have their own unique features and a chart of each underlying asset differs in its own peculiarities,  is more or less subject to changes and price movement (called volatility), reacts strongly to some events and weakly to another ones. Besides there are days of the week and hours when each chart or asset is the most volatile. You need to pay attention to all these details including the time when you are going to trade options. Will you trade everyday from morning until night or only at night? In the latter case it is desirable to select an underlying asset which is the most volatile at this particular time.

Finally, select an asset which you understand fully and whose dynamics you predict more easily. You can find the asset experimentally by trading on a demo account. No matter how many assets you experiment with, you should begin trading one or two assets at the most. It is the easiest way to become knowledgeable on all of the characteristics of every currency (share, commodity) which give you additional chances to win.

What is the price of options?

As a rule a trader is enabled to select the value of an option at his own discretion. The option maybe both very cheap (cost a few dollars) or very expensive (costs hundreds of dollars). Of course it is better for a novice trader to set a low price for an option and to increase it gradually in the course of his professional development in order to earn more money with little effort and few trades. When selecting the value of each option it is worth focusing on what has been said above about balance management and, in particular, risk minimization. The basic principle is to secure your deposit safety even if potential profit is not large yet.

How many options can you buy during a day?

It would seem that the more the better. But experience has shown that it is worth limiting your trading activity to a small number of options not exceeding 5, especially for a novice trader. If you allow yourself to make trades on a regular basis then there could be no doubt at all that they are not very reasonable and the result are proportional to it. To suppress an insatiable desire to buy something else, allow yourself to buy no more than 1-2 options per day for a time. When you know that you are going to buy one option only it will make you feel relaxed and plan it out well before making a trade. And this is the key to success.

  • A trading strategy also regulates
  • A trading strategy also regulates how many hours you may spend on trading so that you are not tired and can keep your concentration, what percentage profits you may withdraw from your trading account. It is recommended that you think it over in advance so that you do not make such decisions spontaneously.
  • Every trading strategy must have its “internal security department” which applies the introductory principles or modifications of them. Decisions about modification of a trading strategy must be taken outside of the trading process so that newly created principles don’t reflect immediate desires to buy something.

Such issues should be taken into account so that you can develop a robust trading strategy. That’s why you should pay much attention to these points. Traders and trader’s guides often neglect this issue, however, most of the problems of a novice trader are hidden in the fact that the principles listed above are not followed or developed appropriately.

Only after you give answers to these questions does it make sense to move forward and start to develop principles relevant to trading, namely, principles that help you to decide what time and the type of options you should select to buy.

§ 3.2 How to select an underlying asset→