Important Announcement

Options Trading Systems

Options trading systems are made up of much more than simply an option strategy. As I've gone over the various strategies outlined under option 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 of these 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 me.

The system that works for you must be consistent with your personality. I've discovered some things about my personality that have helped me better understand that some strategies are less suited to me than others.

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 profitability?
  • How do I feel when a trade goes against me even by a little bit?
  • 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, including money management, trading rules and a trading plan as the way to record it all.

Two other key components of a trading system in my opinion are a trading journal and trade log. 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.

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