Options trading presents a highly rewarding yet perilous venture. As per SEBI’s circular and the disclaimers issued by most trading platforms, a staggering 90% of individual traders in the equity Futures and Options Segment find themselves incurring net losses. On average, those who end up on the losing side face trading deficits amounting to approximately ₹50,000.
But why do most novice options traders find themselves in this predicament? Today, we aim to shed light on the matter by delving into the three most prevalent but detrimental mistakes made by beginners in options trading, which lead to substantial losses.
Common Errors Committed by Novice Options Traders
Let’s dissect the three most prominent blunders committed by newbie options traders:
1. Hasty Morning Positioning
A prevalent misstep among inexperienced traders is impulsively purchasing Put or Call options at the market’s opening, around 9:15 AM. The belief that the market will either plummet or surge on a particular day often drives this impulsive behavior. However, this practice frequently results in significant losses.
Even seasoned traders refrain from making concrete predictions about the market’s initial direction. They typically formulate their strategies based on how the market unfolds and responds. Frequently, they need to make adjustments to their plans.
For beginners, it is advisable to commence trading after 9:30 AM, allowing the market ample time to stabilize, rather than indulging in speculative trading at the start of the day.
2. Misjudging Risk and Reward
Many novice traders are willing to accept a loss of ₹5,000 but hastily lock in profits as soon as they see ₹1,000 on their screens. They might be comfortable with setting a Stop Loss (SL) but lack the patience to hold a trade until it reaches the target price.
This skewed risk-to-reward ratio is not conducive to sustainable profitability. To increase the odds of success, always aim for a risk-to-reward ratio of at least 1:1 or, ideally, 1:2 or higher.
3. Poor Position Sizing
Even traders with very little experience in options often engage in trades involving 1000 quantities or more. If a trade moves 10 points in their favor, they make a profit of ₹10,000, but if it goes against them by 10 points, they incur a ₹10,000 loss. Following a single unsuccessful trade, the dangerous “revenge psychology” may kick in, leading beginners to overtrade and suffer even greater losses.
When learning options trading, it’s essential to anticipate the possibility of a trade going awry and calculate potential losses if the Stop Loss is triggered. Always consider how much you are comfortable losing before entering any trade. Trading with smaller quantities, like 50 or 100, can help mitigate these risks.
These are the three most prevalent errors made by novice options traders. We invite you to share which mistake you’ve encountered most frequently while learning options trading. Wishing you a successful and prosperous trading journey.
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