Getting Started in Options Trading

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Getting Started With Options Trading

This section is essentially a guide through the process of everything a beginner options trader needs to do to actually start trading options. From the initial preparation required, to choosing an online broker, finding trades to make and managing your capital, this guide will help you understand all the necessary steps you need to take.

Although the information contained in this section is specifically targeted towards beginners, we are assuming a certain level of knowledge about options contracts and options trading. If you don’t have a decent grasp of the fundamentals, we would suggest that you take a look through the following sections on this site first.

The information contained in these sections will give you a solid foundation to what options trading is all about, and you can always refer to our Glossary of Terms if you come across any words or phrases you are unfamiliar with.

To get the most benefit out this guide you should read through all the articles in the prescribed order. Most of what is included is relatively straightforward, although there are a few more complex topics included too. Reading it in order should help you make sure that it all makes sense and know there’s nothing that is really too difficult to understand.

All the articles included in this guide are linked in order on the right hand side of this page. For a brief overview of what each one is about, please see below.

Initial Preparation

This article covers the first steps you should take to ensure that you are ready to begin trading options. We talk about the knowledge base that you need and the importance of clearly defining what it is you want to achieve. We also provide details on how to prepare to a trading plan and why a trading plan is an essential tool in options trading.

For the full article please visit the following page – Initial Preparation.

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Choosing a Broker

The easiest way to buy and sell options is through an online broker. Our article on choosing an online broker covers all the different factors that you should consider when you are deciding which of the many available brokers you wish to sign up with. These include the commission rate and the quality of the trading platform. Choosing the right broker really is a big decision and one that you should put some time and effort into.

You can read the full article on the following page – Choosing an Online Broker.

Trading Levels at Options Brokers

Trading levels are essentially the way that options brokers control the risk that their customers are exposed to. Brokers should always have the best interests of their customers in mind, and they are obliged in to ensure that their customers aren’t taking risks that they shouldn’t be. By carrying out risk assessments on all new customers, they can assign them trading levels which reflect the maximum amount of risk they should be taking.

The full article on this subject is on the following page – Trading Levels.

Identifying Trading Opportunities

A key part of options trading is focuses on finding opportunities to make trades. There are a number of ways that you can identify and assess such opportunities, and we have provided information on what is involved in the process. To be successful in your trading, you will have plenty of opportunities for trades, so this is definitely something you will need to commit some time to.

You can read the full article on this particular aspect of trading on the following page – Identifying Trading Opportunities.

Risk & Money Management

Good management of your exposure to risk and your trading capital is absolutely vital in any form of trading if you are able to make money in the long run. There are a number of methods you can use for managing risk and controlling your budget, such as using options spreads and position sizing; our article on risk and money management covers several of the most effective ones. We also offer advice on how to use them.

For the full article, please visit the following page – Risk & Money Management.

Planning Individual Trades

Our article on planning individual options trades is essentially about putting together everything you have learned so far to actually place your orders and make your trades. We provide details of the various steps involved, such as setting your targets for a trade and choosing which trading strategies to use. We also go over the different ways you can exit your trades once you have entered them.

You can read the full article on the following page – Planning Individual Trades.

Monitoring Your Trading

The final article in the guide is about the importance of keeping good trading records and how you can use those records to evaluate your performance and look for ways to improve. Monitoring your options trading can be really useful for finding out what you are doing well and where you might be making mistakes. It’s one of the easiest ways to develop your trading skills and is something any options trader should dedicate their time to.

For the full article, please go to the following page – Monitoring Your Trading.

Getting Started in Forex

The forex (FX) market has many similarities to the equity markets; however, there are some key differences. This article will show you those differences and help you get started in forex trading.

If you’ve decided to take a stab at forex trading, access to currency markets has never been easier with a wide range of online brokerage platforms offering everything from spot trading to futures and CFDs.

Key Takeaways

  • Before you settle on a forex broker, carry out your due diligence and make sure you are choosing the best option for yourself.
  • Look for low spreads and fees from a provider in a well-regulated jurisdiction that offers a suite of tools and access to leverage, among other factors.
  • Once you’ve chosen your broker, study up on basic forex strategies and how to properly analyze currency markets.
  • You may want to start with a demo account to try your strategy out and backtest before risking real money in the market.

Choosing a Forex Broker

There are many forex brokers to choose from, just as in any other market. Here are some things to look for:

Lower spreads save you money!

  • Low Spreads. The spread, calculated in “pips,” is the difference between the price at which a currency can be purchased and the price at which it can be sold at any given point in time. Forex brokers don’t charge a commission, so this difference is how they make money. In comparing brokers, you will find that the difference in spreads in forex is as great as the difference in commissions in the stock arena.

Make sure your broker is backed by regulatory agencies and a reliable institution!

  • Quality Institution.Unlike equity brokers, forex brokers are usually tied to large banks or lending institutions because of the large amounts of capital required (leverage they need to provide). Also, forex brokers should be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). You can find this and other financial information and statistics about a forex brokerage on its website, the website of its parent company or through the Financial Industry Regulatory Authority’s BrokerCheck website.

Get the tools you need to succeed!

  • Extensive Tools and Research. Forex brokers offer many different trading platforms for their clients – just like brokers in other markets. These trading platforms often feature real-time charts, technical analysis tools, real-time news and data and even support for trading systems. Before committing to any broker, be sure to request free trials to test different trading platforms. Brokers usually also provide technical and fundamental information, economic calendars and other research.

Leverage your bets!

  • Wide Range of Leverage Options.Leverage is necessary in forex because the price deviations (the sources of profit) are merely fractions of a cent. Leverage, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means your broker would lend you $100 for every $1 of actual capital. Many brokerages offer as much as 250:1. Remember, lower leverage means lower risk of a margin call, but also lower bang for your buck (and vice-versa).

If you have limited capital, make sure your broker offers high leverage through a margin account. If capital is not a problem, any broker with a wide variety of leverage options should do. A variety of options lets you vary the amount of risk you are willing to take. For example, less leverage (and therefore less risk) may be preferable for highly volatile (exotic) currency pairs.

Make sure your broker uses the proper leverage, tools, and services relative to your amount of capital.

  • Account Types. Many brokers offer two or more types of accounts. The smallest account is known as a mini account and requires you to trade with a minimum of, say, $250, offering a high amount of leverage (which you need in order to make money with this size of initial capital). The standard account lets you trade at a variety of different leverages, but it requires a minimum of $2,000. Finally, premium accounts, which often require significantly higher amounts of capital, let you use different amounts of leverage and often offer additional tools and services.

Broker Actions to Avoid in Forex Trading

  • Sniping or Hunting. Sniping and hunting – defined as prematurely buying or selling near preset points – are inappropriate acts committed by brokers to increase profits. Unfortunately, the only way to determine the brokers that do this and those that do not is to talk to fellow traders. There is no blacklist or organization that reports such activity.
  • Strict Margin Rules. When you are trading with borrowed money, your broker has a say in how much risk you take. As such, your broker can buy or sell at their discretion, which can be a bad thing for you. Let’s say you have a margin account, and your position takes a dive before rebounding to all-time highs. Even if you have enough cash to cover, some brokers will liquidate your position on a margin call at that low. This action on their part can cost you a significant amount of capital.

Be sure to conduct thorough due diligence prior to selecting a broker! Once you’ve decided, signing up for a forex account is similar to getting an equity account. The only major difference is that for forex accounts, you are required to sign a margin agreement. This agreement states that you are trading with borrowed money, and, as such, the brokerage has the right to intervene in your trades to protect its interests. That said, once you sign up and fund your account, you’ll be ready to trade.

Defining a Basic Forex Trading Strategy

Technical analysis and fundamental analysis are two of the oft-used strategies in the forex market. Technical analysis is by far the most common strategy used by individual forex traders, which we’ll explain in further detail below.

Fundamental Analysis

If you think it’s difficult to value one company, try valuing a whole country! Fundamental analysis in the forex market is very complex, and is often used only to predict long-term trends; however, some traders do trade short term strictly on news releases. There are many fundamental indicators of currency values released at many different times such as:

  • Non-farm Payrolls
  • Purchasing Managers Index (PMI)
  • Consumer Price Index (CPI)
  • Retail Sales
  • Durable Goods

These reports are not the only fundamental factors to watch. There are also several meetings where quotes and commentary can affect markets just as much as any report. These meetings are often called to discuss interest rates, inflation, and other issues that affect currency valuations. Even changes in wording when addressing certain issues—the Federal Reserve chairman’s comments on interest rates, for example—can cause market volatility. Therefore, two important meetings for forex traders to watch are the Federal Open Market Committee and Humphrey Hawkins Hearings.

Simply reading the reports and examining the commentary can help forex fundamental analysts gain a better understanding of long-term market trends and allow short-term traders to profit from extraordinary events. If you choose to follow a fundamental strategy, be sure to keep an economic calendar handy at all times so you know when these reports are released. Your broker may also provide real-time access to this type of information.

Technical Analysis

Technical analysts of the forex analyze price trends, similar to their counterparts in the equity markets. The only key difference between technical analysis in forex and technical analysis in equities is the timeframe, as forex markets are open 24 hours a day. As a result, some forms of technical analysis that factor in time must be modified to factor in the 24-hour forex market. These are some of the most common forms of technical analysis used in forex:

Many technical analysts combine these studies to make more accurate predictions. (i.e., the common practice of combining the Fibonacci studies with Elliott Waves.) Others create trading systems to repeatedly locate similar buying and selling conditions.

Finding Your Forex Trading Strategy

Most successful traders develop a strategy and perfect it over time. Some focus on one particular study or calculation, while others use broad spectrum analysis to determine their trades.

Most experts suggest trying a combination of both fundamental and technical analysis in order to make long-term projections and determine entry and exit points. That said, it is the individual trader who needs to decide what works best for him or her (most often through trial and error) in the end.

Forex Trading Considerations to Remember

  • Open a demo account and paper trade until you can make a consistent profit. Many people jump into the forex market and quickly lose a lot of money due to taking on too much leverage. It is important to take your time and learn to trade properly before committing capital.
  • Trade without emotion. Don’t keep “mental” stop-loss points if you don’t have the ability to execute them on time. Always set your stop-loss and take-profit points to execute automatically, and don’t change them unless absolutely necessary.
  • The trend can be your friend. If you go against the trend, make sure you have a good reason. That’s because you have a higher chance of success in trading with the trend because the forex market tends to move in that direction than the other.

The Bottom Line

The forex market is the largest market in the world, and individuals are becoming increasingly interested in plying their trade in FX. However, there are multiple considerations to take into account before you begin trading, such as being sure your broker meets certain criteria and understanding a trading strategy that works best for you. One way to learn to trade forex is to open up a demo account and try it out.

Options Trading Strategies: A Guide for Beginners

Options are conditional derivative contracts that allow buyers of the contracts (option holders) to buy or sell a security at a chosen price. Option buyers are charged an amount called a “premium” by the sellers for such a right. Should market prices be unfavorable for option holders, they will let the option expire worthless, thus ensuring the losses are not higher than the premium. In contrast, option sellers (option writers) assume greater risk than the option buyers, which is why they demand this premium.

Options are divided into “call” and “put” options. With a call option, the buyer of the contract purchases the right to buy the underlying asset in the future at a predetermined price, called exercise price or strike price. With a put option, the buyer acquires the right to sell the underlying asset in the future at the predetermined price.

Why Trade Options Rather Than a Direct Asset?

There are some advantages to trading options. The Chicago Board of Options Exchange (CBOE) is the largest such exchange in the world, offering options on a wide variety of single stocks, ETFs and indexes. Traders can construct option strategies ranging from buying or selling a single option to very complex ones that involve multiple simultaneous option positions.

The following are basic option strategies for beginners.

Buying Calls (Long Call)

This is the preferred strategy for traders who:

  • Are “bullish” or confident on a particular stock, ETF or index and want to limit risk
  • Want to utilize leverage to take advantage of rising prices

Options are leveraged instruments, i.e., they allow traders to amplify the benefit by risking smaller amounts than would otherwise be required if trading the underlying asset itself. A standard option contract on a stock controls 100 shares of the underlying security.

Suppose a trader wants to invest $5,000 in Apple (AAPL), trading around $165 per share. With this amount, he or she can purchase 30 shares for $4,950. Suppose then that the price of the stock increases by 10% to $181.50 over the next month. Ignoring any brokerage, commission or transaction fees, the trader’s portfolio will rise to $5,445, leaving the trader with a net dollar return of $495, or 10% on the capital invested.

Now, let’s say a call option on the stock with a strike price of $165 that expires about a month from now costs $5.50 per share or $550 per contract. Given the trader’s available investment budget, he or she can buy nine options for a cost of $4,950. Because the option contract controls 100 shares, the trader is effectively making a deal on 900 shares. If the stock price increases 10% to $181.50 at expiration, the option will expire in the money and be worth $16.50 per share ($181.50-$165 strike), or $14,850 on 900 shares. That’s a net dollar return of $9,990, or 200% on the capital invested, a much larger return compared to trading the underlying asset directly. (For related reading, see “Should an Investor Hold or Exercise an Option?”)

Risk/Reward: The trader’s potential loss from a long call is limited to the premium paid. Potential profit is unlimited, as the option payoff will increase along with the underlying asset price until expiration, and there is theoretically no limit to how high it can go.

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