Common trading mistakes to avoid in the London options market
When most people think of trading, they immediately picture the stock market. While there are many similarities between options in the stock market and options in the London options market, there are also some crucial differences that one must be aware of before entering into the world of trading. Fortunately, these mistakes are simple to avoid if one educates themselves before making any trades.
Understanding how assets are priced
Traders often make their first mistake when they leave out an essential trading element—understanding how assets are priced. Most people get this wrong because they think assets are worth whatever someone else will pay for them. If you are buying something, you must believe that the seller has overestimated the asset’s value; otherwise, why would he part with it?
Many factors affect an asset’s intrinsic value, but if one does not understand what drives those factors, they will have no idea what markets to trade in and how much money to risk.
Purchasing an asset when it is experiencing a run-up in price
Buyers often make this mistake when trading different types of financial instruments. They attempt to purchase an asset when experiencing a run-up in price, expecting the momentum to continue for at least another day or two. This allows them to capture additional value from their investment instead of waiting days or weeks for prices to return to where they traded it initially.
Unfortunately, most traders are not successful in this endeavor because they fail to recognize the timeframe of the momentum. Most stocks, currencies, futures, and other financial instruments exhibit short-term price movements that can last anywhere from several hours or days.
It sells an asset when it is experiencing a run down in price.
On the other side of the transaction, they often make their second mistake. Traders will try to sell an asset when it is experiencing a run down in price, expecting that momentum will continue for at least another day or two, thus allowing them to capture additional value from their investment instead of having to wait days or weeks for prices to return up to where they traded it at initially.
It sells an asset before it has had time to reach its peak value.
New traders often make this mistake by trying to sell an asset before it has had time to reach its peak value. Most of this happens due to t ignorance, as traders are unaware that momentum can be sustained over long periods before peaking and then reverting down several days or weeks later.
For example, if one tries to sell an asset before it has reached its price target, they are faced with the difficult decision of what to do next. If one becomes aware that momentum can last for days or even weeks, they will exit their trade-in time well before the asset reaches its endpoint.
I do not understand how to manage risk.
As more people started trading in recent years, so has there been an increase in online brokers offering zero commission trading with no requirements for minimum deposits or monthly fees. These options were designed as marketing gimmicks to attract new traders who may use certain suppliers’ software systems, carry out learning courses or receive news alerts.
Unfortunately, sometimes these traders go in the opposite direction by risking too much money for a given trade. In some cases, they lack sufficient capital to trade in specific markets, but more often than not, when traders have no idea what assets are worth, they will take on way too much risk when trading.
Mastering all of the above aspects is crucial for profitable trading. Without them, you cannot make sound judgments on which assets to buy or sell and when to buy or sell them, nor can you determine your appropriate money management strategy. New traders are advised to contact a reputable online broker from SAxo Bank; for more information, get it here.