Many people believe trading the markets is akin to gambling. This comparison is certainly true a lot of the time, especially when a person throws all caution to the wind.
But it's a gross generalization to say that trading is always like gambling. Because running a successful option trading practice is much like running a business.
For example, as a business owner, you would want to limit your risks, maximize your profits, and cut your losses. And the same is true in option trading.
Minimizing Risk
Naturally, if there is no demand for a product or service, a business owner is not going to try to sell it. That involves a high degree of risk. He will only sell products for which there is already healthy demand.
Similarly, option traders will only consider "trade-able" stocks. If it's not fundamentally sound, or if there's no clear trend, it is to be avoided.
Maximizing Profit
If a business owner discovers that a promotion is working well, he will continue to run it until it starts to fatigue. This way he sells as much of a hot product as possible.
Likewise, if a trader is in a winning trade, he will ride it until the movement runs out of steam. Along the way, he will tighten his stops so he cashes out as soon as the price reverses.
Minimizing Losses
If a businessperson discovers he's got a dog of a product, he'll try to get rid of it, even if that means taking a hit. That's because it's better to cash out than to keep money tied up in inventory.
An option trader will do the same thing if he enters a trade that moves against him. He'll liquidate his position quickly, take the loss, and use the cash to reinvest on another trade.
Just as recklessness can bankrupt a business, so can recklessness bankrupt a trader. But with the proper education, attitude, and preparation, option trading is like running a business. - 16463
But it's a gross generalization to say that trading is always like gambling. Because running a successful option trading practice is much like running a business.
For example, as a business owner, you would want to limit your risks, maximize your profits, and cut your losses. And the same is true in option trading.
Minimizing Risk
Naturally, if there is no demand for a product or service, a business owner is not going to try to sell it. That involves a high degree of risk. He will only sell products for which there is already healthy demand.
Similarly, option traders will only consider "trade-able" stocks. If it's not fundamentally sound, or if there's no clear trend, it is to be avoided.
Maximizing Profit
If a business owner discovers that a promotion is working well, he will continue to run it until it starts to fatigue. This way he sells as much of a hot product as possible.
Likewise, if a trader is in a winning trade, he will ride it until the movement runs out of steam. Along the way, he will tighten his stops so he cashes out as soon as the price reverses.
Minimizing Losses
If a businessperson discovers he's got a dog of a product, he'll try to get rid of it, even if that means taking a hit. That's because it's better to cash out than to keep money tied up in inventory.
An option trader will do the same thing if he enters a trade that moves against him. He'll liquidate his position quickly, take the loss, and use the cash to reinvest on another trade.
Just as recklessness can bankrupt a business, so can recklessness bankrupt a trader. But with the proper education, attitude, and preparation, option trading is like running a business. - 16463
About the Author:
Before you risk another penny in this volatile market, go to A.J. Brown's option trading blog for free tips and strategies. Better yet, join his option trading learning program to discover the science and business of trading.
