Obviously as traders the market is full of surprises; bad earnings, global economic problems, natural disasters, a number of things. It's impossible to avoid losses with all the variables out there that can torpedo a trade.
To defend against surprise events you need to have sound money management, especially when you are trading options. With the leverage that options have, its very possible for you to lose control of a trade and take a big loss.
We all have emotions and that is enemy number one when we trade. We get fearful, greedy, anxious, nervous, elated, jumpy. We go through a whole gambit of emotions as a trade unfolds. To combat emotions you have to have a good game plan for a trade, and first and foremost, you should know what you are willing to risk.
Having a game plan answers questions like, When should I get in? Where is my exit if I am losing? Where is my exit if I am winning? These have to be worked out a head a time, but these will not work if you don't have the discipline to follow your game plan!
The interesting thing is even when you follow your game plan you will still lose on trades. The key is money management. You have to know how much you are going to lose. I never start a trade by saying this, "How much I am going to make?" I always ask, "How much could I lose? With this in mind, regardless of whether the trade is profitable, or not, I have successfully managed my money. A good rule I use is not to risk any more than 1% to 2% of my account on one trade.
Options provide a very good way to risk a small amount, and at the same time leverage the move.
By risking such a small amount, it shouldn't matter if you have a
losing trade. Move on to the next trade. Treat every trade as an individual event, because that is what it is; as you become better at trade analysis you will be able to make the money back again.
Their have been times where I have bought a few contracts for $10 a contract and have seen it rise to over a $1.00, but I always know that if the trade doesn't pan out, I lose only what I am willing to risk.
To manage losses you can use trailing stops, stop losses, position sizing. The key in trading is money management, that is what it comes down to. If you have good money management rules and you are able to follow your game plan, and take the emotion out of the trade, you will have the ability to master trading.
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Disclaimer: This article is intended to be informative and does
not constitute a buy, hold, or sell recommendation., and should
not be construed as personalized advice as it does not take
into account your specific situation or objectives
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