Mastering the Art of Bouncing Back: Expert Tips on Overcoming Losses in Options Trading

Options trading can be a profitable and exciting way to invest in the financial markets. However, it can also be a risky endeavor, especially when you do not have a systematic way to trade in and out of the markets.

One of the biggest reasons why most fail in trading is because they are unable to accept the reality that losses are an inevitable part of the process. As a trader, learning how to handle losses and bounce back from them is crucial to achieving success in options trading.

Here are some expert tips that I paid thousands of dollars on how to overcome losses in options trading and master the art of bouncing back:

1) Embrace the Reality of Losses

To any engineer with a logical mind, we know that trading options is a statistic game where we simply execute trade with the statistics favorable to us. And statistics-wise, it is only natural there losses are part of the game. So, the first step in bouncing back from losses is to accept them as an inevitable part of the trading process. No matter how skilled or experienced a trader is, losses will occur.

Embracing this reality and learning to manage losses effectively is crucial to long-term success.

2) Manage The Trades

One of the most important rules of trading is to manage your trade diligently. If a trade is going against you, it's important to get out of the trade before your losses mount. We need to have a disciplined manner to get in and out of the market. A manner that allows us to cut our trades mercilessly and emotionlessly.

For those who are following me, you will probably know that this is the hardest challenge for any beginner options trade. This is because of the roller coaster volatility of option prices, I usually avoid using automatic stop-loss order, but instead, I manually monitor the trade, limit my losses and prevent them from getting out of control - for example, if a trade is near earnings, I will either buy a "term insurance" protection or close the position.

3) Analyse Your Trade - The Money Is In The Losses

Most people associate a losing trade with a loss of money. But the truth is, the big money is in the losses.

The key idea to success is to, "Do what works well, avoid what does not".

By having losing trades, it gives us opportunity to analyse these trades and identify what went wrong. From there, we take these learning lessons and start to incorporate into our next trade. Over time, your win rate inevitable increases.

Don't let your losses go to waste. Use these lessons to refine your trading strategy and improve your future trades.

4) Stay Discipled - Don't Be Fickle Minded

Staying disciplined to your trading plan is critical to bouncing back from losses. Don't let losses affect your decision making. Maintain a cool head and stay focused on your long-term goals.

For example, there were many times when the market moved against me. However, it has yet to meet my exit rules. Therefore, I continued to held on to my trades. And true enough, the market reversed into my favor and I collected a neat profit.

If you're experiencing significant losses, it can also be helpful to take a break from trading. This can help you clear your mind and approach trading with a fresh perspective. Taking a break can also help you avoid making rash decisions that could exacerbate your losses.

5) Risk Management - The Only Thing You Can Control

One of the most important aspects of options trading is risk management. In fact, it is the only thing that you can every control.

For example, if you sell a vertical spread of 80/75 Put. Then clearly, the maximum that you can ever lost is $500, and nothing more. This is what I mean by risk management. It give you the peace of mind then even if the stock market were to plummet to zero, you will only lose $500.

For me, as I have gained more experienced - I tend to sell naked put and call options instead, and manage my risk through limiting the number of option contracts sold based on my margin requirements.

By managing your risk effectively, you can limit your losses and protect your trading capital. As what my mentor would say, "Live to trade another day". Never ever take a position size so huge, that it is causing you to lose sleep at night. 

In conclusion, mastering the art of bouncing back from losses is critical to achieving success in options trading. By embracing losses as a natural part of the process, cutting losses quickly, analyzing trades, staying disciplined, taking breaks, focusing on risk management, and learning from your mistakes, you can overcome losses and emerge as a stronger and more successful trader.