Options trading is the most rewardful, yet most dangerous form of trading. According to the circular provided by SEBI and the disclaimer shown by most trading platforms, 9 out of 10 individual traders in the equity Futures and Options Segment, incurred net losses. Moreover, on average, loss makers registered net trading losses close to ₹50,000.
But why do most newbie options traders lose money? Today, we’ll try to answer that question. We’ll look into the three most common but biggest mistakes by newbie options traders that result them in huge losses.
Biggest Mistakes by Newbie Options Traders
Here are three of the Biggest Mistakes by Newbie Options Traders
1. Buying Put or Call just at the start of the day
Many newbie traders simply buy Put or Call positions at 9:15 AM (the start of the trading day) because they strongly believe that the market will fall or go high on that day. However, most of it results in big losses.
Even experienced traders cannot definitely say where the market will go at the start of the day and they generally make their plan of action according to how the market opens or reacts. Moreover, most of the time, they have to make adjustments to their strategies.
Beginners are simply recommended to start trading after 9:30 AM and give the market sufficient time to settle, instead of simply gambling at the start of the day.
2. Wrong Risk and Reward
Most beginner traders will be okay to have a loss of Rs 5,000 but will book the profit even if they see Rs 1,000 on their screen. They are comfortable taking a Stop Loss (SL), but not able to hold the trade till the target price. Wrong risk to reward mathematically doesn’t add up and will never result in profitability.
Always try to maintain a risk-to-reward of at least 1:1 or better if you want to achieve profitability. The best scenario will be if you aim for a risk-to-reward of 1:2 to higher.
3. Wrong Position Sizing
Even with any experience in options trading, many beginners trade with 1000 quantities or higher. If the trade goes 10 points in their favor, they’ll make a profit of Rs 10k, however, if it goes 10 points against them, they’ll lose Rs 10k too.
After one wrong trade, generally, revenge psychology kicks in and beginners will over-trade and lose even higher amounts. While learning options trading, always assume that the trade may go wrong and calculate the losses in case your SL hits. Always look into how much are you comfortable losing before making any trade.
It would have been better if they had traded with only 100 quantities and lost just Rs 1k on that trade, which they might have been comfortable with.
There are the three most common types of Mistakes by Newbie Options Traders. Do comment below and let us know which mistake you have made the most while learning options trading.
Have a great day and happy trading.