Why is psychology important in option trading?

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It is very important to understand the psychology behind your trades if you are trading options. Trying to time the market is one of the most difficult things in option trading. It will be impossible for you to stay on your game when you’re being whipsawed in and out of trades.

So if you want to be successful with options trading, you need to know exactly how to deal with your emotions. If you do not have the proper mindset, you will likely lose money. Here are five common psychological pitfalls that can derail a trading career:

Overconfidence in option trading

When discussing trading psychology, we often encounter people who feel they need to become arrogant, positive thinkers to succeed. In fact, the opposite is true. Confidence without humility leads to overconfidence and unrealistic expectations. A realistic assessment of your strengths and weaknesses will help you make better decisions, avoid overtrading and keep risk under control.

Overconfidence leads to unrealistic expectations about how much money you can make. This is a sure path to disaster since even the most successful traders have losing streaks. If you’re confident but humble, you’ll be able to weather those losing periods and come out stronger on the other side.

Overthinking or “paralysis by analysis.”

Analytical paralysis is a condition in which a trader becomes so concerned with making sure he’s covered all his bases that he ends up taking no action at all. One of the biggest mistakes new traders make is that they don’t know what to do, so they don’t do anything, which can be just as bad as doing the wrong thing.

The psychology of trading ranges from basic intuitive analysis to elaborate mathematical analysis. When a trader has the help of another person, the task becomes easier, and the chances of success increase. So those who have option trading alerts that come in handy will do better.

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Inability to take losses

We’ve all heard the saying, “cut your losses and let your winners ride.” Unfortunately, many traders are unable to do this. They feel compelled to hold on to every position, no matter how far it falls below their original investment.

The problem is that they never learn from their mistakes and, in turn, repeat them over and over again. The majority of successful traders will tell you that they have lost more than they’ve won. They can cut their losses when the trade goes against them.

Lack of patience

Like every other type of trading, options trading requires a high level of patience. Options traders have a limited time frame to place orders. If you don’t have the patience to wait out that time frame, you’ll likely end up placing orders prematurely and losing money.

Fear of missing out

Fear of missing out (FOMO) is a big problem for people who aren’t experienced trading binary options. As soon as an opportunity appears, or before it’s even possible for a chance to show up, these traders will click on their trades and lose money because they were too eager.

This is the most dangerous pitfall for beginners because there’s no way around it other than gaining experience and becoming more familiar with the market.

Lack of discipline in option trading

Many people think that they have discipline until they start trading with real money. They often find themselves making trades impulsively or trading outside of their system just because a particular stock looks interesting at the moment. Without a set strategy, there’s no way to know if a specific trade will make or lose money in the long run. If you don’t plan which stocks you want to buy and sell, you’re better off not trading at all.

Takeaway

Psychology is important in options trading. The psychology related to options trading includes fear, greed, self-confidence, and knowledge. These elements of psychology can determine the success of a trade and the ruin of a trader. Trading should always be a game of probability and statistics.

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DISCLAIMER: – we are not a SEBI research analyst. Views posted here only for educational purposes. There is no liability whatsoever for any loss arising from the use of this product or its contents. This product is not a recommendation to buy or sell, but rather a guideline to interpreting specified analysis methods.  This information should only be used by investors and traders who are aware of the risk inherent in securities trading.


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Sachin Sival is the founder and CEO of Replete Equities, an options trading company that specializes in delta hedging. A self-taught trader, Sachin has a passion for volatility trading and stock trading. Sachin loves to hone his skills by reading up on new strategies and techniques as well as taking part in industry events. In addition to being a successful entrepreneur, Sachin also takes pleasure in photography - as a hobby.

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