Trading Options And Derivatives: A Handbook For Novice Traders

Options and futures trading always excite novice and beginner traders. Though there is nothing wrong with trading derivatives, they should be traded with apt knowledge and research. The mantra of quick gains always attracts novice trades and gets them trapped in the loop of quick losses.
As easy as it takes to explain, derivatives trading is way more riskier and complicated than cash trading. But, beginners always blur their vision by seeing quick gains and ignoring immense hard work, detailed research, and quick losses.

But, there are a lot of traders who are soaring high in derivatives trading, especially in options. Let's break down the strategy they follow for having an excellent derivatives trading career.

Be an Expert in Basics

The foremost step in the derivatives handbook is to grasp the basics like an expert. It includes what derivatives are, what are its types, how their prices are regulated and what is their actual use. Understanding the basics is an important step for all novice or beginners. Before opting for any course the trader should know the fundamentals of derivatives trading like put, call, buy, sell, expiry, etc.

Risk Management Strategies

More than focusing on how to make profits, novice traders or beginners should focus on how not to end up in losses. Losses are inevitable in the stock market, but the trader should know how to minimize them to an extent. Appropriate risk management strategies in derivatives trading should be learned. It will help in maximizing gains. These risk management strategies can include hedging, portfolio diversification, putting appropriate stop loss, and leveraging volatility to their advantage.

Do your Own Practical Research

In the tech-driven era, many online courses can enlighten you with the concepts and strategies of technical derivatives trading. But, the trader needs to prioritize practice. Regular practice in actual trading sessions helps in applying the learned concepts in the real market. Fluctuations in the market stimulate various emotions in the traders and sometimes trigger the wrong decisions. It is important for a trader to analyze and apply their concepts wisely in real-time trading.

A trader should always focus on a practical and dynamic approach rather than solely relying on definite concepts. With increased practice sessions and research, the accuracy of a novice trader will increase.

Market Analysis Techniques

Currently, there are a plethora of candlestick chart analysis that have been introduced. Some rely on conventional patterns, some on price action, some on trends, and various other factors. A derivatives trader needs to learn and stick to a certain strategy. Mixing up different strategies is never a good option. It might give you gains in the initial days, but it will eventually turn your mind into a mess. Stick to your trade plan study and make the most out of it.

Know When to Sell and When to Buy

Out of all the above-mentioned things, make sure you keep your mind strong enough to identify apt buying and selling situations. Buying options might seem a good deal as it requires less capital, but it is riskier in the bigger picture. Whereas, selling options requires a good amount of capital but is also less riskier compared to buying options. Focus on research and analysis and know when to sell and buy the options of the stock based on its price movement.

Tips for Novice Traders

Reading is an excellent career, but only if you have good knowledge and hold of the stock market. Learn to know the market before diving into it with your hard-earned money. Here are some valuable tips that might help you in your journey:

Start Small: After completion of your course and a few practice sessions, the confidence boost might provoke you to enter into big trades. But, at this moment stop yourself and remind yourself that you are in the initial stage and start your journey with small capital by putting a minimal stop loss.

Portfolio Diversification: Never get into the loop of trading in one option or future by putting all your money in one place, especially for recovering losses. Maintain a diverse portfolio, because remember not all traders are going to end up in a profitable direction. The diverse portfolio helps compensate for the loss of one trade with the profits of another.

Finally, options and derivatives are powerful financial products that can be used to control risk, speculate, and diversify a portfolio. To traverse the complexities and potentially benefit from these tools in their investment journey, novices entering this field should focus on education, start small, and prioritize risk management.

The views and opinions stated in the content belong to Arun Singh Tanwar, Founder and CEO, Get Together Finance (GTF).

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.