Stock Option Trading Millionaire PrinciplesINTRODUCTION

Having been trading stocks and options in the capital markets professionally over theyears, I have seen many ups and downs.I have seen paupers become millionaires overnight…AndI have seen millionaires become paupers overnight…One story told to me by my mentor is still etched in my mind:“Once, there were two Wall Street stock market multi-millionaires. Both were extremelysuccessful and decided to share their insights with others by selling their stock marketforecasts in newsletters. Each charged US$10,000 for their opinions. One trader was socurious to know their views that he spent all of his $20,000 savings to buy both their opinions. His friends were naturally excited about what the two masters had to say aboutthe stock market’s direction. When they asked their friend, he was fuming mad.Confused, they asked their friend about his anger. He said, ‘One said BULLISH and theother said BEARISH!’”The point of this illustration is that it was the trader who was wrong. In today’s stock andoption market, people can have different opinions of future market direction and still profit. The differences lay in the stock picking or options strategyand in the mentalattitude and discipline one uses in implementing that strategy.I share here the basic stock and option trading principles I follow. By holding these principles firmly in your mind, they will guide you consistently to profitability. These principles will help you decrease your risk and allow you to assess both what you aredoing right and what you may be doing wrong.You may have read ideas similar to these before. I and others use them because theywork. And if you memorize and reflect on these principles, your mind can use them toguide you in your stock and options trading.

PRINCIPLE 1

SIMPLICITY IS MASTERYWhen you feel that the stock and options trading method that you are following is toocomple, it is probably not the best.

In all aspects of successful stock and options trading, the simplest approaches oftenemerge victorious. In the heat of a trade, it is easy for our brains to become emotionallyoverloaded. If we have a complex strategy, we cannot keep up with the action. Simpler is better.

PRINCIPLE 2

NOBODY IS OBJECTIVE ENOUGHIf you feel that you have absolute control over your emotions and can be objective evenin the heat of a stock or options trade, you are either a dangerous species or you are aninexperienced trader. No trader can be absolutely objective, especially when market action is unusual or wildlyerratic. Just like the perfect storm can still shake the nerves of the most seasoned sailors,the perfect stock market storm can still unnerve and sink a trader very quickly. Therefore,one must endeavor to automate as many critical aspects of your strategy as possible,especially your profit-taking and stop-loss points.

PRINCIPLE 3

HOLD ON TO YOUR GAINS AND CUT YOUR LOSSESThis is the most important principle.Most stock and options traders do the opposite…They hold on to their losses way too long and watch their equity sink and sink and sink,or they get out of their gains too soon only to see the price go up and up and up. Over time, their gains never cover their losses.This principle takes time to master properly. Reflect upon this principle and review your past stock and options trades. If you have been undisciplined, you will see its truth.

PRINCIPLE 4

BE AFRAID TO LOSE MONEYAre you like most beginners who can’t wait to jump right into the stock and optionsmarket with your money hoping to trade as soon as possible?

On this point, I have found that most unprincipled traders are more afraid of missing outon “the next big trade” than they are afraid of losing money! The key here is STICK TOYOUR STRATEGY! Take stock and options trades when your strategy signals to do soand avoid taking trades when the conditions are not met. Exit trades when your strategysays to do so and leave them alone when the exit conditions are not in place.The point here is to be afraid to throw away your money because you traded needlesslyand without following your stock and options strategy.

PRINCIPLE 5

YOUR NEXT TRADE COULD BE A LOSING TRADEDo you absolutely believe that your next stock or options trade is going to be such a bigwinner that you break your own money management rules and put in everything youhave? Do you remember what usually happens after that? It isn’t pretty, is it? No matter how confident you may be when entering a trade, the stock and options markethas a way of doing the unexpected. Therefore, always stick to your portfolio managementsystem. Do not compound your anticipated wins because you may end up compoundingyour very real losses.

PRINCIPLE 6

GAUGE YOUR EMOTIONAL CAPACITY BEFORE INCREASING CAPITALOUTLAYYou know by now how different paper trading and real stock and options trading is, don’tyou?In the very same way, after you get used to trading real money consistently, you find itextremely different when you increase your capital by ten fold, don’t you?What, then, is the difference? The difference is in the emotional burden that comes withthe possibility of losing more and more real money. This happens when you cross from paper trading to real trading and also when you increase your capital after somesuccesses.After a while, most traders realize their maximum capacity in both dollars and emotion.Are you comfortable trading up to a few thousand or tens of thousands or hundreds of thousands? Know your capacity before committing the funds.