Options Trading Systems
Options trading systems are made up of much more than simply
strategy. As I've gone over the various strategies outlined
basics and option
trading strategies, I've included many of the key components
of a trading system.
I want to take some time here to be more specific about some
components because it is here that successful options trading happens.
The key components of a trading system
- What underlying to trade (Stock, ETF, index)
- What option strategy to use
- How to select the right option (or options)
- Rules for entry
- Rules for exit/trade management
- Rules for money management
- Expectation of overall success
- Routines (daily, weekly, etc)
In order to be successful, it is important to define these in written
form called a trading plan. The trading plan will include not only what
to trade, but how to trade. It will include rules for money
management and trading rules for entry and exit. I have a
trading plan for each of my core strategies.
Defining the a trading system that works
It may seem arbitrary to be told that my trading system won't
necessarily be your trading system. Part of the reason for this has to
do with the way we are all wired. My system has been a work
in progress as I've tuned it and optimized it based on what works for
The system that works for you must be consistent with your
I've discovered some things about my personality that have helped me
better understand that some strategies are less suited to me than
The best way to start developing a trading system that works
is to ask
yourself questions to better understand your personality.
Here's some questions I've asked myself:
- Do I have the ability to take a longer term focus?
- Am I motivated by daily fluctuations up or down in my
- How do I feel when a trade goes against me even by a little
- Do I need constant action?
- Am I attracted by large potential gains?
- Do I prefer slower more steady and consistent gains?
- Do I like to follow rules explicitly?
Once you understand what makes you tick, you can then turn your
attention to the major aspects of options trading systems,
and a trading
as the way to record it all.
Two other key components of a trading system in my opinion are a trading
. A trade journal allows me to track details of
each trade so I can go back and analyze what I did right and where I
may have made mistakes. A trade log is what I use to help me
track overall success of my strategy.
Putting all these things together helps me create and maintain an
option trading system that can evolve over time. It helps me
maintain and improve my success rate with the strategy.