How to start options trading as a beginner in 5 steps
I want to preface this by saying, that entering into options trading or forex trading, as a way to make money is no beginner's task. The financial industry is run by multibillion-dollar firms, firms that have hundreds of billions of dollars invested with a promise to earn a return on that money. As a result of those promises, these firms have employed a series of tactics, software, and inter-industry collaborations to ensure that they meet their goals for their investor. Therefore the most important thing to know as you enter the finance industry is that it is a zero-sum game; for one person to win, someone else has to lose, and there is no other way around it.
The second most important thing to know when entering this field as a beginner is that you have to be OK with the fact that you will lose a lot more than you win in the beginning. There is a learning curve that no amount of education can help you with because the learning curve doesn’t have to do with the material itself. Trading psychology of the culprit; it’s the most important thing you will encounter on the journey because you will be the biggest obstacle in your way. You come into trading options or Forex as you are all of your life, experience, mental health, emotional state, discipline, or lack thereof, you come into this industry as you are so, if you have not done any work to build discipline in yourself or healed some of your troubled past Then a lot of that will come out in the way that you trade. Therefore, I want you to be aware of those areas as you embark on this journey.
Now that the housekeeping is out of the way, let’s get started on the steps that you need to take to become an options trader as a beginner.
1. FIND A BROKER
Learning how to become an options trader as a beginner the first step I recommend is to find a broker that will best serve you as a newbie in the trading industry. All brokers are not created equal because of things like the fees they charge per contract traded, the asset classes that you can trade, the amount of margin that they’ll give you access to and the speed of payouts when you decide to cash out. All of those things factor into being able to trade and be profitable once you catch your stride as an options trader.
The broker trading platform I recommend for beginners to options trading is Thinkorswim; formally owned by TD Ameritrade, but now owned by Charles Schwab, it’s a platform that can be run on a Windows PC or a MacBook and the setup and executions are simple and consistent. They also have some of the lowest fees for options contracts which ultimately means you get to keep more of your profits.
2. PUT UP YOUR STARTING CAPITAL
The next thing I recommend that you do as you get started on the journey to becoming a beginner options trader is putting up your trading capital ahead of time. I am going to be frank with you in the kindest way possible. Entering into the financial markets and becoming an options trader is not for people who need money. Trading options is an excess game. It is an industry for those who have leisure money and will not need access to that money at any point soon. Therefore, they can afford to employ their dollars to work for them instead of having it sit up in a bank account earning next to nothing.
Therefore, I recommend that you put the money that you are going to trade with away in your brokerage account before you begin learning as the second step because it needs to be money you’ll be okay with losing in the market if a trade goes against you. The goal is to create an emotional detachment to that money to trade without pressure and focus entirely on becoming a skilled options trader.
A mentality of out of sight, out of mind, and free of emotion.
If you don’t have access to capital to learn how to trade or the money you do have is currently already assigned to different areas of life then I highly recommend starting a zero-cost side hustle to give you the extra cash flow to pour into this, potentially high income generating skill that could set you up for life. Click here to learn about my favorite side hustle.
3. GET OPTIONS TRADING EDUCATION
Learning how to trade options requires a three-part education to be successful in the long run. What are the three parts of the education you ask?
The three parts of education you need to be a successful options trader are fundamental analysis, technical analysis, and a personal/intimate understanding of the product you are trading.
As an options trader multiple components make up the value of an options contract as well as how and when the underlying stock, ETF, or index will move. Fundamental analysis covers the domestic economic information and financials of companies. Technical analysis is the ability to analyze the information in the stock charts which is the summary of fundamental data represented in price movements on the screen.
To become an effective and profitable trader, you need trading education that is going to give you a holistic understanding of the financial markets starting with learning how to analyze companies and understanding the economics of the financial markets and how public policy can affect private & public equity and Vice versa. But also learning how to synthesize the information to its most basic parts to be able to make an informed decision about the trade you’re going to take.
It isn’t a two-sided coin but instead, a three-sided pyramid that all needs to be scaled to get the money machine going.
4. PAPER TRADE & JOURNAL
I Recommend paper trading not for the reasons that most people say you should paper trade. The trading community recommends paper trading as a way to get a handle on the stock you’re trading.
However, the reality of the paper trading environment in my experience is that you usually don’t get access to real-time live information, and therefore when trading you’re making decisions based on delayed information. In addition to that, trading platforms are notorious for providing lagging reactions on trade executions thereby giving you false expectations of the live environment that lead to losses. It also makes it difficult to test your various trading styles to see what works for you in the event you want to be a scalper for example.
Platforms like TradingView will give you live trading information. However, if you're executing trades on a platform like Thinkorswim’s paper trading environment, that is a recipe for frustration and missed trades or unnecessary “losses” because of engrained bad habits from, trying to work with lagged information.
I recommend paper trading for the sole purposes of understanding the platform that you have decided to use to execute your trades, testing your trading strategy, and building a habit of enforcing risk management. Depending on your style of trading, it’s important to know how to get in and out of the trade quickly because any piece of information that enters the market during a session can send your options contract price sky high or sink it into the abyss.
Once you figure out paper trading, it’s important to get into the habit of documenting your trades immediately. This is the number one way to hold yourself accountable and to catch bad habits early. Journaling your trades is in effect a psychological tool to bring your trading habits out into the 3D world, out of your brain to help you see where you need work in real time. You’ll find that seeing the documentation of your wins, losses, and why, will reinforce good habits but will also cause you enough pain to correct the bad habits. As your experience compounds, the frustration of making the same mistake, documented, will force you to correct your habits or you’ll quit trading altogether.
5. START LIVE TRADING
Once you’ve gotten a hold of your strategy, have created a habit of documenting your trades, found consistency with your winning trades and kept your losses small because your risk management muscle has consistently been exercised in the paper trading environment, now It’s time to jump in to live pool.
I want to note that the primary difference that you’ll experience when switching from paper trading to the live environment, has nothing to do with the information that you learned if you’ve received quality training and have a solid strategy. The biggest change that you will experience is a heightened sense of emotion. It’s like a light switch goes off once you know that you have real tangible money on the line. if you are not aware of this, it can easily become the driving force behind you taking massive losses. Therefore I highly recommend that you are in tune with yourself to recognize when this happens and lean heavily on your education and screen time.
Lastly, be aware that things move incredibly fast when live trading. In the live environment, you’re not only dealing with other retail traders like yourself but you also have hedge funds, private equity, and investment banks (aka institutional investors or smart money) with access to billions of dollars to trade and trading algorithms to make sure that they meet their profit targets and that loosely translates to, take your money.
As a result, my top 3 tips for staying profitable as an options trader are not allowing fear to trick you out of a profitable trade position, remaining aware of any news entering the market, and identifying your profit targets so that you do not overstay your welcome. If you’re struggling with figuring out when you should get into a trade or want a Headstart on figuring out your strategy, look no further, because I’ve created a free five-step checklist that details what you to look for when entering a trade; in addition to that, I’ve included a free trading journal Notion template to help you get started on building healthy trading habits so that you become the profitable options trader you’ve always dreamed of.
HEY, I’M EVIE…
Hello and welcome to my world at Lane to Leisure! I am a millennial black woman, a Haitian-American, and the passionate voice behind this blog. My journey from Miami to Thailand, from a career as an Independent claims adjuster to living my dream as an expat options trader, is a story of transformation, resilience, and pursuit of freedom.
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