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Creating a Trading System: Steps to Success

Posted by Pete Stolcers on October 20, 2009

Option Trading Question

How can I be a successful options trader?

Option Trading Answer

Those who are successful in options trading have a system that they follow. This helps them make decisions and while each person has a different system, each one is carefully designed around steps that they have refined and perfected over time. If you are going to be truly good at option trading, you’ll need to develop a trading system, as well.

Step One

Take a look at your history in trading.  Where have you succeeded and where have you failed? What did you do right on the wins? And what did you do wrong with the bad trades? You should begin to see a pattern after a while. It’s a good idea to keep a trade log for this reason. It may take some time, but eventually you will understand where your strong points are and where you could stand to improve.

Step Two

Figure out your trading style. Are you a risk taker or do you prefer to play it as safe as possible in option trading?  It pays to be analytical at this stage, since it will help you refine your techniques later.

Step Three

Learn what you’re missing. If you have a tendency to miss out on specific opportunities, learn what you need to catch them in time. You can develop the tools you need to be successful in option trading. Everyone is quite different in what they need to brush up on, so this is where you’ll need to put your self-analysis from steps one and two to work.

Step Four

Put it into practice. The only way to really make sure that your strategy works is to use it and refine it. It can take years to perfect your trading system, so be patient and keep a log. This will help you make improvements where needed.

Options trading takes time and practice to perfect. Having a trading strategy is the best way to ensure success. While you can certainly use the same strategy as someone else, it rarely works unless you understand all the reasons behind it and exactly how it works. Instead, devise your own option trading system and you’ll be far better off.

Option Trading Comments

  • On 10/28, Ed said:

    Hi Peter,

    I have been investing for about 3 years now and started to look into options trading.  I’ve been following your website for over 1 year now and I’m very thankful of and impressed by your accurate assessment of the market daily, which I think is the most important part of investing in general, not just on the options vehicle.

    As I really want to develop the market instinct and investment acumen as you have, my question is that do you know if there is any books out there that recommend how to analyze / understand the market? If not, what else do you recommend to read / browse in the internet to get a good understanding of the market?

    I know it comes with experience, but without guidance, I’m currently a bit lost as I’m not sure how to evaluate the market and understand the price action without reading your daily post.

    I would greatly appreciate your answer...thanks for being a resourceful and helpful mentor to everyone here.

    Regards,
    Edmund

  • On 10/30, Pete Stolcers said:

    For daily market action, there are many places where you pick up tidbits of information. Stock Traders Almanac (Hirsch) is one of many sources worth reading.

    One of the best tools is rarely used by traers - a trading log. Commit you forecast to paper and write down your rationale. Update your log with what went right or wrong and learn from your experience.

  • On 05/27, Matt said:

    Peter, I agree with what you are saying. You have had 20+ years trading options? That is awesome. There have been plenty of wonderful directional moves during those years to make a fortune on with the last being the 2008 drop (great for puts). It has taken me over 6 years to perfect my trading system. I now day trade options preferring to trade weekley options when available. I use to “swing trade” & the market ate my shorts. I use to “hope & pray” & the market ate my shorts. I thought about trading LEAPs but I desire my reward today not months from now. In this current market with its precarious “mood swings” I have found day trading options to work best for me. Typically I make winning trades with very few losses. I go weeks at a time without any losing trades. This helps to build my account size obviously, but I prefer to stick with the notion of “trading to trade well” & know that if I do so the money will follow. I love following the market & have really enjoyed getting better with technical analysis. I only use 3 indicators & have found that less is truly more for my personality & style of trading. Having a trading system is HUGE, as is making sure you know how & when to exit a losing trade quickly. Capital preservation is a top priority for me. Thankfully my option gains are beginning to pay my bills & I am not having to touch the checks I make each week from my full time job. I love this game. It is full of ups & downs, highs & lows. I agree that most of my trades generate 30% or less with a few bringing home 100%-1000%. I no longer “expect” to make good money in every trade. I now bring a humility to the game & realize that the market will only give me what it wants to. I always have people wanting to learn from me, but to think that I can teach 6 years of option knowledge & have someone grasp it over night is not realistic. Keep up the good work. I like your blog & your honest take on this thing we call the GAME.

  • On 10/12, Scot said:

    My question is on adjusting DC’s and what happens to ITM positions at expiration.  For example, lets say the original position is 5 Put Calendars on SPY at $120 and 5 Call Calendars at $125.  A week later, SPY has moved from $122 to $127, so I add 5 Put Calendars at $124 and 8 Call Calendars at $129.  If SPY holds at $127 at expiration (so $125 calls are ITM), will my broker debit my account by $1/share x 500 shares ($125 Calls are ITM, somewhat protected by 124 Puts)?  Could I have completely protected the original $125 calls with Puts at $125 (instead of $124)? Being clear on how multi-strike DC legs play out at expiration is essential for me and any other sources of info on this topic would be of great interest, as I cannot seem to find a clear answer on the web.  Many thanks in advance.

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