Limitless options: A common mistake

Sunday August 15th 2:18 PM Posted in: Trading Tips

In the 10+ years Options-Intelligence has been offering trade recommendations we have noticed a single mistake traders continually make over and over again. It is a simple but terrible error made in defiance of charts, statistics, historical prices, and logic which often leads to detrimental effects on account balances and morale.  So what is the dastardly slip up so many traders make?  They fail to utilize sound limit orders.

All too often traders enter positions and immediately proceed to set stops to guard against unfavorable market activity but fail to take the same action on the upside.  They choose to play for gains manually rather than utilizing reasonable limit orders for their exit strategy.

Fear often compels traders to guard against losses with stop orders but it is greed that prevents them from setting sound limit orders.  Greed is why so many traders try to play the upside by using the ill-regarded “seat-of-your-pants” method for exiting positions.  Utilizing this method, traders attempt to follow the market in hopes that they can chase the big, triple digit winners that riddle our performance data.  Unfortunately, chasing the big gains more often than not leaves traders with big losses monetarily and emotionally.  Why?  First, the market is volatile and never moves linearly.  Second, playing options greatly compounds the volatility of the market.

Even on the best of days, any trader not utilizing limit orders is constantly faced with a bevy of questions as the market trudges on:  What is going to happen next?  How much higher will it go?  Should I sell or wait?

As you can tell these are all questions guised at helping the trader react to the market thus putting the trader in a defensive position.  Traders should instead be proactive with their exit strategies.  To do this they must utilize sound limit orders to lock in profits.

In the past, choosing where to set a limit order could be an arduous process involving considerable time looking at historical prices.  Fortunately, with the advent of our performance calculator, those days are officially over.  Now, any trader can easily set the parameters in the performance calculator for the position they are considering and quickly find the winning history (historical, statistical probability to achieve the specified gain) for that specific type of play at the exact level of return they are seeking. With this powerful tool, deciding where to set limit orders is merely a function of knowing one's tolerance for risk.

Next month we will reveal some of the research we have found using this very tool and provide some examples that show traders reasonable limit orders for different levels of risk.


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