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What is options trading?
Options trading is the act of buying and selling options. These are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a set price, if it moves beyond that price within a set timeframe.

For example, let’s say that you expected the price of US crude oil to rise from $50 to $60 a barrel over the next few weeks. You decide to buy a call option that gives you the right to buy the market at $55 a barrel at any time within the next month. The price you pay to buy the option is known as the ‘premium’.

If US crude oil rises above $55 (the ‘strike’ price) before your option expires, you’ll be able to buy the market at a discount. But if it stays below $55, you don’t need to exercise your right and can simply let the option expire. In this scenario, all you’ll have lost is the premium you paid to open your position.

Buying a call option on oil
When you trade options with us, you’ll be using CFDs to speculate on the option’s premium – which will fluctuate as the probability of the option being profitable at expiry changes. CFDs are leveraged products, meaning you’ll pay an initial deposit (called premium) upfront to open a position. Trading options in this way can form an important part of a wider strategy. However, profits and losses are calculated based on the full position size, not your premium size.

Open an account to start trading options today
The essentials of options trading
Take a look at the key types, features and uses of options:

Call options
Put options
Leverage
Hedging
What are call options?
Buying a call option gives you the right, but not the obligation, to buy an underlying market at a set price – called the ‘strike’ – on or before a set date. The more the market value increases, the more profit you can make.

Buying call options

You can also sell call options. As the seller of a call option, you will have the obligation to sell the market at the strike price if the option is executed by the buyer on expiry.

You can also sell call options. As the seller of a call option, you will have the obligation to sell the market at the strike price if the option is executed by the buyer on expiry.

Selling call options
Options are leveraged products much like CFDs; they allow you to speculate on the movement of a market without owning the underlying asset. This means profits can be magnified – as can your losses, if you’re selling options. When buying call options as CFDs with us, you’ll never risk more than your initial payment when buying, just like trading an actual option, but when selling call or put options your risk is potentially unlimited (although your account balance will never fall below zero). Your positions will always be cash-settled at expiry. You’ll never have to deliver, or take delivery of, the underlying.

What are put options?
Buying a put option gives you the right, but not the obligation, to sell a market at the strike price on or before a set date. The more the market value decreases, the more profit you make.

Buying put options

You can also sell put options. As the seller of a put option, you will have the obligation to buy the market at the strike price if the buyer exercises their option on expiry.

Selling put options

Options traders can use CFDs to speculate on options prices – instead of trading them directly. Since CFDs are cash-settled at close, you’ll never have to deliver, or take delivery of, the underlying. However, these are leveraged forms of trading options. This means that you’ll pay a smaller deposit (known as margin) to open your trade but will have your profits or losses calculated based on the full position size. So, you can lose (or gain) substantially more than your initial deposit. Note that when buying call options as CFDs with us, your risk is always limited to the margin you paid to open the position. But when selling call options your risk is potentially unlimited.

What is leverage in options trading?
Options are leveraged products and much like CFDs they allow you to speculate on the movement of a market without ever owning the underlying asset. This means your profits can be magnified – as can your losses, if you’re selling options.

For traders looking for increased leverage, options trading is an attractive choice. By choosing your strike and trade size you get greater control over your leverage than when trading spot markets.

If you’re a trader who’s buying call or put options as CFDs with us, your risk is always limited to the margin you paid to open the position. However, it’s important to remember that when selling call or put options your risk is potentially unlimited, so an effective risk management strategy is important.

How can you hedge with options?
Hedging with options allows traders to limit potential losses on other positions they might have open.

Say you owned stock in a company, but were worried that its price might fall in the near future. You could buy a put option on your stock with a strike price close to its current level. If your stock’s price is down below the strike at your option’s expiry, your losses are limited by the option’s gains. If your stock’s price increases, then you’ve only lost the cost of buying the option in the first place.

How to trade options
Options trading terminology
What moves options prices
Learn the risks
Options trading strategies
Markets to trade
Market movement time frames
Placing an options trade
Monitoring positions
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Understand options trading terminology
Traders use some specific terminology when talking about options. Here’s a rundown of some of the key terms:

Holders and writers: the buyer of an option is known as the holder, while the seller is known as the writer. For a call, the holder has the right to buy the underlying market from the writer. For a put, the holder has the right to sell the underlying market to the writer
Premium: the fee paid by the holder to the writer for the option. When trading CFDs on options with us, you’ll pay a margin that works in a similar way to the premium
Strike price: the price at which the holder can buy (calls) or sell (puts) the underlying market on the option’s expiry
Expiration date/expiry: the date on which the options contract terminates
In the money: when the underlying market’s price is above the strike (for a call) or below the strike (for a put), the option is said to be ‘in the money’ – meaning that if the holder exercised the option, they’d be able to trade at a better price than the current market price
Out of the money: when the underlying market’s price is below the strike (for a call) or above the strike (for a put), the option is said to be ‘out of the money’. If an option is out of the money at expiry, exercising the option will incur a loss
At the money: when the underlying market’s price is equal to the strike, or very close to being equal to the strike, the option is referred to as ‘at the money’
Break-even point: when the underlying market’s price is equal to an option’s strike plus premium (for a call) or strike minus premium (for a put), your trade is at its ‘break-even point’. This means it isn’t making a profit or a loss
Identify what determines an option’s price
There are three main factors affecting the premium, or margin, you pay when you trade options. All these factors work on the same principle: the more likely it is that the underlying market price will be above (calls) or below (puts) an option’s strike price at its expiry, the higher its value will be.

When you trade CFDs on an option with us, you’ll pay a margin that works in a similar way to a traditional option premium.

Level of the underlying market
The further below the underlying a call option’s strike is, or the higher above the underlying a put option’s strike is, the higher their premiums are likely to be as they are ‘in the money’ – there’s more chance of them expiring with value.
Time to expiry
The longer an option has before it expires, the more time the underlying market has to pass the strike price – so an out-of-the-money option will tend to lose value as it nears its expiration date and there’s less chance of it expiring profitably.
Volatility of the underlying market
The more volatile an option’s underlying market is, the more likely it is that it will pass the strike price. So volatility tends to increase an option’s premium.
Learn about the Greeks
The Greeks are measures of the individual risks associated with trading options, each named after a Greek symbol. Understanding how they work can help you calculate the risk involved with each of the variables that affect option prices.

Delta
Delta is a measure of how sensitive an option’s price is to the movement of the underlying market. Assuming all other variables stay the same, you can use delta to work out how much impact market movement will have on the value of your option.
Gamma
A derivative of delta, gamma measures how much an option’s delta moves for every point of movement in the underlying market.
Theta
Theta measures how much an option’s price decays over time. A high theta indicates that the option is close to the expiration date; the closer the option is to expiry, the quicker the time value decays.
Vega
An option’s vega measures its sensitivity to volatility in the underlying market, or how much the option’s value will change for every 1% change in volatility.
Rho
Rho indicates how much interest rate changes will move an option’s price. If the option’s price will go up as a result of interest rate changes, its rho will be positive. If the option’s price will go down, its rho will be negative.
Pick an options trading strategy
There are numerous strategies you can use to achieve different results when you’re trading options. Popular options trading strategies include:

Buying a call option
The simplest options trading strategy involves buying a call option when you expect the underlying market to increase in value. If it does what you expect and the option’s premium rises as a result, you’d be able to profit by selling your option before expiry. Or, if you hold your option until expiry and the underlying market is above the option’s strike price, you’ll be able to exercise your right to buy at the strike and profit in that way.

Buying call options is a popular strategy because you can’t lose more than the premium you pay to open.
Buying call options
Buying a put option
Another simple options trading strategy is to buy a put option when you expect the underlying market to decrease in value. If it does what you expect and the option’s premium rises, you’d be able to profit by selling your option before expiry. You could also hold your option until expiry, and would profit if the underlying market was below the strike price.

Buying puts is popular because you can’t lose more than the premium you pay to open the position.
Buying put options

Hedging your investment
If you own an asset and want to protect it against potential downwards market movement, you could buy a put option on the asset. This is called a married put – if the asset price drops, you would make gains on the put which would help limit your loss.
Hedging your investment

Short calls (selling a call)
A covered call is the simplest short call position – you sell a call option on an asset that you currently own. If the price of the asset doesn’t exceed the strike price of the option you’ve sold, you keep the margin as profit. This strategy is often used to generate some income when you think an asset you hold is going to stay neutral.

Writing a call option when you don’t own the underlying asset is known as an uncovered or naked call. This is a risky strategy, as you could end up having to pay for the full cost of the asset.
Short calls

Spreads
Spreads are when you buy and sell options simultaneously. When you trade with a call spread you buy one call option while selling another with a higher strike price. Your maximum profit is the difference between the two strike prices.
Bull call spread

Straddles
When you place a straddle, you buy or sell a call and a put position simultaneously on the same market at the same strike price. This gives you the potential to profit regardless of whether the market moves up or down, making them a good strategy if you expect market volatility but are unsure which way it will move.

Your break-even levels will be the strike price, plus or minus the sum of the two premiums on either side of the strike. Your maximum risk is still the price you paid to open the positions.

The break-even levels only apply if you leave your option to expire.
Long straddle example

Strangles
A strangle is very similar to the straddle above, however you buy calls and puts at different strike prices. This means that you typically pay less to open the trade, but will need a larger price movement to profit. The trade is still limited-risk.

In the above examples, if you closed your position before expiry, the closing price is affected by a range of factors including time to expiry, market volatility and the price of the underlying market.

You can find out more about options trading strategies in our strategy article.
Long strangle example
Choose a market to trade options on
You can trade options on a huge number of markets with us.

Forex – including majors like EUR/USD, GBP/USD, USD/CHF and EUR/GBP
Shares – including ASX 200 shares and a selection of leading US shares
Stock indices – including the ASX 200 and Wall Street
Commodities – including metals and energies
Open an options trading account with IG
Determine the time frame during which the market is likely to move
Depending on the kind of trade you’re making, you can choose between daily, weekly, monthly or quarterly options to suit your goals.

Daily, weekly, monthly or quarterly options to suit your goals
Use daily and weekly options if you want to take positions on markets quickly, but with greater control over your leverage than when trading other products – such as trading CFDs on spot markets.

If you’re looking at longer-term market movement, monthly and quarterly options mean you can take positions up to three quarters before expiry – plus you’ll know your risk upfront and usually save on funding charges.

Find out more about trading daily and weekly, monthly and quarterly options.

Decide whether to buy or sell, and place your trade
Once you know the timeframe you’re going to trade, you need to determine whether you want to buy or sell a call or put option on the market you’re trading. The type of option you trade, and whether you buy or sell, will depend on whether you want to speculate on the market rising or falling. Remember that buying options is limited-risk, while selling is not.

How to buy or sell call and put options
Once you’ve decided whether to go long or short, you can choose the strike price and premium (or margin) you want to open the position at, and place your trade.

Create a live account to trade options now
Monitor your position
Once you’ve opened a position, you need to keep an eye on market movement and the potential profit or loss of your position.

Monitoring an options trade on USD/JPY

If the option is in the money, you may wish to close it before the expiry to maximise profit. Or if you aren’t in profit you can leave your position open to expiry, and, if it fails to move into profit, only lose the price you paid to open.

Trade options with CFDs
When you trade options with CFDs, your trade mirrors the underlying options trade. A call option to buy $10 per point of the ASX with a strike price 7100 would earn you $10 for every point that the FTSE moves above 7100 – minus the margin you paid to open the position.

You need an account with a leveraged trading provider, like IG, to trade CFDs. Find out more about CFD trading.

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WHY WOULD YOU WANT TO TRADE STOCK OPTIONS IN USA?

Short answer: trading US options can offer more product choice, different liquidity, and potentially different tax rules, but it also comes with higher costs, currency risk, and regulatory/compliance considerations that Aus-based traders must navigate.

Key pros and cons

Access to more US-listed options and strategies

Pro: Broader universe of underlying securities and diverse strategies (e.g., index options, weeklys) that may not be available on ASX. This can expand potential setups if you’re comfortable with US market dynamics.

Con: The expansion is only valuable if you have the expertise to manage US-specific risks (earnings-driven swings, microcap liquidity issues, etc.).

Costs and friction

Pro: Some US brokers offer competitive per-contract fees (often around US$1) and robust platforms. This can be cost-effective if you trade actively.

Con: International trading adds currency conversion fees, wire/settlement costs, and possible inactivity or account-maintenance fees. Tax reporting can also be more complex.

Tax, regulatory, and compliance aspects

Pro: In some cases, you can benefit from favorable tax treatment or bilateral tax treaties, depending on your residency and the country of tax residence.

Con: You’ll be subject to US withholding, IRS reporting, and cross-border tax rules, which can be intricate. You may need professional tax advice to avoid double taxation and to understand any US-specific withholding on options profits.

Tax reporting and currency risk 

Pro: If you manage positions in USD, you can diversify currency exposure for some strategies.

Con: Currency movements can erode gains or magnify losses when profits are converted back to AUD. You’ll also need to track US dollar tax lots and potential withholding.

Operational considerations

Pro: Some brokers support international clients with integrated access to US trading hours and tools, and may offer generous demo or paper-trading environments for practice.

Con: Time-zone challenges (US market hours) can complicate monitoring and risk management from Australia. You may need to place orders pre-market or rely on routing and automation.

Practical steps if you’re considering a move

Assess your experience with US market mechanics: options greeks, margin requirements, assignment risk, and exercising rights.

Compare brokers that support Australian residents trading US options, focusing on:

Fees per contract and any monthly minimums

Currency conversion and funding options

Availability of US options across your preferred strategies

Tax reporting tools and support

Understand regulatory requirements (KYC, suitability assessments) and ensure you meet platform prerequisites for US options trading.

Plan a risk-management framework that accounts for US market volatility, earnings cycles, and currency risk.

Consider starting with a smaller, test-sized allocation or a paper-trading account to build familiarity before committing more capital.

Illustrative example

If you currently trade US stocks via an Australian broker, you might be able to transition to a US options account with similar per-contract fees but need to budget for currency conversion, potential transfer fees, and US tax compliance. This can widen opportunities, but the added complexity should be matched with a solid plan and risk controls.

Would you like me to tailor a checklist comparing specific Australian brokers that offer US options, estimate potential costs for a typical trading plan, or outline a simple transition plan from ASX options to US options that suits your Adelaide-based setup? If you share your typical monthly contract volume and your preferred strategies (e.g., calls, puts, spreads), I can produce a concrete cost estimate and risk notes.

Note: I can provide general guidance and considerations, but for tailored broker recommendations and tax implications, consulting a local financial advisor or tax professional is advisable.

If I changed, I would move to a US based platform like Interactive Brokers

Moving to Interactive Brokers (IBKR) to trade US options is a pretty common path for Australian options traders, and it changes a few things compared with staying on ASX.

Why people move to IBKR for US options

Much larger opportunity set: Thousands of US stocks and ETFs have listed options, plus very liquid index products like SPX, SPY, QQQ, IWM, etc., which simply don’t exist on the ASX in the same depth.

Better liquidity and tighter spreads: US options markets are generally far deeper, so spreads are often one or two ticks wide in liquid names, which matters a lot if you trade actively or use spreads.

Lower per-contract fees on US options: IBKR typically charges around USD 0.65 per contract for US options on standard tiers, versus significantly higher effective per-contract costs on ASX options once local broker commissions and fees are included.

More instruments and expiries: Weekly expiries, multiple strikes around the money, and a broad choice of underlyings make it easier to structure income strategies, hedges, and defined-risk spreads.

What you’d gain versus staying only on ASX

Strategy flexibility:

Easier to run wheel strategies, covered calls, cash-secured puts, verticals, iron condors, etc., on very liquid underlyings.

More expiries means you can fine-tune theta exposure (e.g., 0–7 day trades, earnings plays).

Platform and tools:

IBKR has strong analytics, risk tools, and margin simulation, which are a big upgrade from many Australian retail platforms.

Direct access to US options order routing can improve fills relative to “all-in-one” Aussie brokers.

Cost efficiency for active trading:

If you do decent contract volume, the lower per-contract rates and tighter spreads can more than offset extra friction like FX conversion.

What you’d give up or need to manage

Time-zone pain:

US regular session is overnight in Adelaide, so you either stay up, trade the open/close selectively, or accept that you won’t be watching every tick.

Managing risk around US earnings, macro events, or intraday moves is harder if you’re asleep.

Currency risk:

Your P&L is in USD; AUD/USD moves can boost or reduce your returns when you convert back.

You’ll need a plan (e.g., leave capital in USD, or periodically rebalance) rather than converting in and out constantly.

Tax and admin complexity:

You’re an Australian tax resident trading US products, so you must deal with US forms (e.g., W‑8BEN) and then report everything properly in Australia.

Options are still taxed under Australian rules, but source-country treatment and withholding can be non-trivial, so most serious traders get tax advice.

Product familiarity:

US index options (e.g., SPX) have their own contract specs, settlement styles, and tax characteristics that differ from stock options.

More choice can encourage overtrading if you don’t have a very clear playbook.

IBKR specifically for an Aus-based options trader

ASX and US on one platform: You don’t have to “leave” ASX – you can keep trading ASX ETOs and add US options in the same IBKR account, with comparatively low ASX ETO fees as well.​

Very low headline commissions:

US options: around USD 0.65/contract on typical schedules, with a USD 1 minimum per order, and tiered pricing can go lower at higher volume.

ASX options: IBKR Australia advertises very low per-contract ASX ETO fees (cents per contract) plus exchange fees.​

FX costs: IBKR’s FX spreads are generally tight compared with many Australian brokers, but you still need to think of FX as a trading cost and P&L risk, not a free side-effect.​

Are you “missing out” if you stay on ASX only?

You are missing out on:

The huge US options universe, especially liquid index and ETF options.

Typically tighter spreads and lower commissions per option.

The ability to run more nuanced income and hedging strategies across many sectors and indices.

But staying ASX-only avoids:

Overnight screen time and US event risk while you sleep.

Currency risk and FX admin.

Extra tax and compliance complexity as a cross‑border trader.

A practical way to decide:

Keep your existing ASX setup for now.

Open IBKR, fund it with an amount you’re comfortable treating as a “US options sleeve,” and run your usual strategies in parallel for 3–6 months.

After that, compare:

Net P&L after all fees and FX.

Hours of sleep/stress.

How often liquidity or spreads materially changed your outcomes.

If you tell me roughly what you trade now (covered calls, short puts, spreads, typical contract size per month), I can sketch how your all‑in per-trade cost and practical lifestyle trade‑offs might look on ASX vs IBKR US.

Tax implications for Australians trading US options on IBKR

Australians trading US options on Interactive Brokers (IBKR) face primarily Australian tax obligations, with some US withholding rules, but no US tax return is typically required for non-US residents. Here’s a breakdown based on standard practices for your situation.

Key Tax Forms and Withholding 

Complete and submit a W-8BEN form via IBKR to certify your non-US status. This reduces US dividend withholding from 30% to 15% under the Australia-US tax treaty, though pure options trading (e.g., buying/selling contracts without dividends) usually avoids dividend withholding altogether.

Australian Tax Treatment

All gains and losses from US options are treated as capital gains or losses (CGT events) under Australian rules and must be reported on your ATO tax return as part of worldwide income. Options profits qualify for the 50% CGT discount if held over 12 months, but most options trades are short-term and taxed at your marginal rate; convert all USD amounts to AUD using RBA exchange rates on trade dates. IBKR provides detailed activity statements and tax reports to help with this, covering the Australian financial year (July-June).

US Reporting and Credits

No IRS filing is needed unless you have US-sourced income triggering it (rare for options). Any US withholding (e.g., if options settle into dividend-paying stock) can be claimed as a foreign income tax offset (FITO) on your Australian return to avoid double taxation. Track everything carefully, as FX fluctuations impact CGT calculations.

Potential Pitfalls

Estate tax risk applies if US holdings exceed USD 60,000 at death (options count as US-situs assets), so consider mitigation like trusts. Frequent trading might classify you as a “trader” for ATO purposes, affecting deductions, and foreign asset reporting kicks in over AUD 50,000. Always consult a tax advisor for your specifics.​

Follow-ups

How are options trading profits taxed in Australia

Do US options have withholding tax for Australians

How to report US options capital gains on ATO return

ATO CGT discount for US options trades

Best way to track US options taxes on IBKR

Trading seems so simple. After all, a price can only go up or down so all traders have to do is pick the right direction then sit back and wait for the money to roll in, right? Well, not quite.

The trading world can be full of surprises for those who have big ideas but little in the way of preparation. When ill-prepared traders won’t recognise that mistakes in trading are all a part of the learning process and can actually shape a person into becoming a successful trader.

There’s no doubt, most traders – if not all – will make or are still making the same mistakes.

Making trading mistakes is part of every trader’s journey. Whether someone is completely new to trading or has been trading the markets for decades, chances are they will make some common trading mistakes.

Some of these mistakes are more costly than others. And the fact is there are some mistakes that are hard to accept. For some traders, ignoring a mistake and repeating it over and over again can spell the difference between becoming a successful trader or losing one.

1. Trading without a trading plan

Every trader needs a trading plan. If they don’t have one, it’s time to get one and the best place to start is by thinking about why you’re trading.

Is it because they want to earn a bit of extra money on the side of their regular job?

Do they want to make a career out of tracking the stock market?

Is it just something they’re doing for a challenge?

Whatever the reason may be, the goals will help dictate the way a person trades.

Traders need to think about what they really want to get from trading and then work out how to get it. Consider the amount of time available to dedicate to trading, the types of trades to pursue (e.g. high volume, low profit), and whether the level of knowledge is sufficient or if more time is needed on education.

2. Trading too much, too soon

Due to the potential to earn money from trading the temptation, especially for new traders, is to push limits in the hope of getting greater profits quickly.

But going into trades too enthusiastically – either in volume or value – only serves to raise your level of risk. If you overreach and things go against you, you might bounce yourself out of the market before you’ve even had a chance to settle in. Too many people enter the trading markets with the idea that it’s going to set them on a fast path to millions.

The reality is that trading isn’t the kind of thing where you casually throw in a bit of money and get untold riches in return – it takes a lot of skill and patience to get anywhere near those lofty heights.

Build slowly and steadily. Test things out with a demo trading account first, then once you open a live trading account with real money, invest a small amount and trade in one or two markets to get a feel for things.

Traders can make a profit from forex trading, stock trading, commodity trading, and more, but it rarely gets made on a handful of quick trades.

The more time traders are able to dedicate to trading, the better they become, the easier they find it, and the more trading opportunities reveal themselves.

3. Emotional trading

We’ve all experienced that feeling when you’re on a good run and feel like you can’t do anything wrong. When traders apply that to trading, it’s generally when you experience a sequence of profitable trades and you feel like you’ve mastered it. But all good runs eventually come to an end and it’s crucial to remember this because, ultimately, it’s money at stake.

It’s good to be excited about trading and confidence is always a welcome characteristic, but don’t let emotion dictate trading behavior and push you into positions you wouldn’t normally take.

Try to temper emotional trading mistakes. Before launching into a trade, take half a step back and try to look at it objectively. Does it fit the trading strategy? Are you doing it based on sound information or just a gut feeling? How would you react if the trade went against you?

Come up with a system of cues that will help you protect yourself from too much emotional investment.

4. Guessing

If traders enter into a trade without doing any preparation, they’re not really a trader.

In fact, trading without putting any effort towards education or understanding how the markets work is more like walking into a casino, throwing some money on the roulette table, and hoping for the best. While it’s true that there’s an element of unpredictability and volatility inherent to trading, by spending time learning and observing how the market works, traders can form an idea about the types of trades best suited to them.

Educate yourself and be prepared before every trade.

5. Not using a stop-loss order

Trading without using a stop-loss level is like driving a car without breaks. It’s too dangerous.

But despite that, many traders still trade without using this useful tool. And in most cases, it ends up in painful losses. Unnecessary and avoidable losses.

If you use a stop-loss level properly, you can avoid getting too deep into a losing position.

Whether you want to put a ‘hard’ stop-loss as soon as you enter a trade, or you have a ‘soft’ stop-loss level in front of you as you trade, you will be in a better position if you use this as part of your risk management. Just remember that soft stop-loss levels are more suitable for advanced traders who have experience in these markets.

6. Taking too big positions

There is no doubt the attraction of a big winning trade is on every trader’s mind. And the temptation to take a big position (thinking it will be a winning trade) is always present. Money management for traders is essential to keep them in the markets.

But as proven time and time again, taking too big a position on a trade can be risky. There is no guarantee the trade will go the way you want it to go. So, if you risk 50% of your capital in a single trade and that trade turns against you, it will seriously decrease your trading capital.

And it may also take a big psychological toll on you as a trader. It’s important to learn position sizing techniques to help reduce the amount of risk and develop a sound approach to entering and exiting trades.

7. Taking too many positions

While there are many markets to trade and numerous trading opportunities every day, taking too many positions may also be detrimental to your trading.

Unless you have a robust and automated trading system that automatically places trades for you, monitoring too many positions can be confusing and high-risk, to say the least.

Remember the human brain can only deal with a limited amount of information at a time. And the attention needed for each trade means you have limited time and focus to give each trade.

If you take too many positions at one time without the proper automated systems to monitor them, chances are some of those trades will fail.

So, next time you’re trading, be mindful of the number of trades you’re taking. It is best to focus on a few trades first – enter and exit them – then start again if other trading opportunities arise.

When you have a clearly defined trading strategy, filtering through the trade opportunities that become available and picking the best ones will be a little easier.

8. Overleveraging

The ability to use leverage is one of the main attractions to markets like forex, indices, precious metals, and cryptocurrencies. Leverage allows you to trade a much bigger position even with a smaller amount of trading capital.

But as we all know, leverage can be a double-edged sword. It can amplify both winning and losing trades.

One of the cardinal sins of traders – particularly of those who don’t fully understand how leverage works – is to use a high level of leverage. Some people only see potential wins and ignore potential losses.

If you use a high level of leverage and the trade turns against you, this could result in a total wipe out of your trading capital.

So, the best way to use leverage is to start low. Try using the lowest level of leverage offered by your trading provider. Once you are more comfortable with how leverage works, then you can increase the leverage level if you like.

The thing to remember is that just because there are larger amounts of leverage levels on offer – leverage can range from 10:1, 50:1; 100:1; 200:1, or 400:1 depending on your jurisdiction – it doesn’t mean you have to use the highest level possible.

As the saying goes, you need to walk first before you can run.

9. Revenge trading

Don’t you hate it when you lose? And don’t you just want to get back into the market, take another trade, and prove you can be a winner?

That’s exactly the thinking behind revenge trading. You want to get even. You want to prove you’re a winner.

But most of the time revenge trading can bring more pain than gain.

Consider this for a moment. When you get into a revenge trade, you’re most likely not in the best emotional state. You’re most likely still seething or too stressed out to make a sound trading decision. And most likely you haven’t really analysed the next trade – whether it has good potential or not.

So, the best thing you can do about revenge trading is not to get involved with it at all.

If you have a losing trade or a string of losses, it is better to step back and analyse what went wrong.

Was the market too choppy to trade anyway? What went wrong with your initial analysis?

Most of the time, if not all the time, it’s best to avoid revenge trades at all costs.

10. Letting profitable trades turn into losses

If you’re making this mistake, you’re not alone. Even the big guns are guilty of this common trading mistake.

How many times have you perfectly timed your entry, seen a nice paper profit, only to see it vaporised by a sharp reversal? I’m going to bet more than once.

Letting a good trade go bad is the first major mistake you can make trading the financial markets, but there is light at the end of the tunnel.

The best way to correct this mistake is planning. You should know when you are going to exit before you enter into the trade. And you should have multiple reasons to exit.

Traders need to develop their own trading exit strategies that allow them to achieve an objective from the trade – even if it does not go exactly as they might have hoped. This can include a combination of:

Profit target(s)

Wide trailing stop (for trending markets)
Tight trailing stop (for fast exhaustion moves)
Risk/reward stop (for when you get close to your profit target)
You can also scale out of your trade. Take a bit of your position off when the market makes some available, take a bit more as the move progresses, and leave some on for the big wins. This type of approach will help you to smooth out your equity curve.

Finger pointing at a trading chart that is going down

11. Not tracking trades in a trading journal

Using a trading journal is a very critical part of becoming a successful trader. It isn’t as simple as recording your entry and exits for profitable trades, it requires a bit more information and attention.

Your trading journal should include all trades, good, bad, and even really bad ones.

Some types of information that should be recorded in a trading journal include:

Date and time of trade
What instrument is being traded
Screenshots of the chart setup when trade was entered
Position size
Your thoughts and reasoning for entering the trade
By having a trade journal available to you, you’re able to go back and review your successful trades and trades that weren’t so successful to highlight opportunities in your trading strategy where you can improve.

12. Don’t forget about your investment time horizon

Investing without a time horizon in mind can set you up for failure. This is because all investments are either long-term or short-term, and they will have different rates of return depending on the length of your investment.

For example, stocks that perform well over long periods but not so much during shorter ones may make sense to hold onto when considering retirement savings.

When you understand your time horizon, you can better match the right investments to your portfolio.

13. Being able to accept losses

Many traders are under the impression that they can’t make mistakes like investment professionals, but this is simply not true.

If you jumped into a trade without doing your due diligence or you’re a long-time earner and your portfolio has suddenly taken a dive, it’s important to accept what happened and move on instead of letting your pride control your trading style, and hold onto those losers longer.

There is always going to be another day and another trading opportunity. Learn from those previous losses to continue improving your skill set on the way to becoming a successful trader.

14. Following the crowd

Following the crowd is a common trading mistake where inexperienced traders blindly follow the herd mentality, finding themselves in detrimental trades.

It’s important for novice traders to think about their own trading style when making decisions so that they don’t jump into trends without conducting their own research and without understanding why it might work out better for them. If you enter into a trade by following someone else without performing any technical or fundamental analysis and a trade loses, you only have yourself to blame.

Group of business men looking in the same direction

15. Trading in multiple markets at once

Inexperienced traders may jump from market to market – from forex to indices and cryptocurrency to commodities. This is a common mistake and it can lead to over-trading and significant losses.

Getting a better understanding of a market is important for traders of all levels so that trading decisions are based on facts instead of gut feelings or emotions. Before branching out, it is wise to come to grips with one market and gain valuable trading experience before jumping into multiple markets at once.

16. Chasing markets with strong past performance

It’s common for many traders to select a particular asset or market that has seen strong past performance over the past couple of years. This ‘Fear Of Missing Out’ mentality has probably caused more negative investment decisions than positive ones.

The market that has been performing well for those few years may well be nearing its end, with all the smart money being moved out and the traders making the mistake (the dumb money) pouring in.

Traders need to understand the best time to have invested in that market was three or four years ago, not now.

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This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. We make no representation and assume no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.

identify upcoming stock splits

A stock split takes place when a company decides to increase share outstanding by issuing more shares to active stakeholders.

When a company is concerned about its share price and finds that the price is too low or high, it can go for a stock split. It’s a popular way of increasing the number of shares and many globally-led companies have been following the same.

Along with increasing the number of shares, a company can attract new investors. The stock split neither changes the value of the stakeholder’s stock nor the market capitalization of the company. We can say that it’s an effective process of making the share affordable for a lot of people who prefer to invest in the stock market.
Table of Contents

“`
The definition: What is a stock split?
How does stock split work?
Types of stock splits?
What is a Reverse stock split?
How to identify when a company is going to activate a stock split?
Psychology
Increase stock liquidity
Pros and cons of stock splits
Benefits of a stock split for a common investor
Concluding to
“`

The definition: What is a stock split?

A stock split happens when a company decides to issue more shares to its current shareholders without affecting the value of its stakes. It effectively increases the number of shares outstanding and reduces the value of the individual value of each share.  

For example, if you have one share of the ABC company worth $ 1000, after the stock split you will have 2 shares of $500.

There are a lot of investors who cannot afford a $1000 share but they can easily buy a share of $500. It’s all about redesigning the cost of a share along with boosting the effort of attracting new investors.
How does stock split work?

The value of a firm increases when it launches new products and enables share repurchases. At a time, the quoted market value of particular stocks increases and becomes too expensive. As a result, the company fails to attract new investors.

When a company fails to get new investors, it badly affects the market liquidity. Multi-billion dollar blue-chip stock enables stock split quite more often.
Types of stock splits?

The traditional stock split is the most popular type. Here, the stock split can happen in:

“`
2-for-1
3-for-1
3-for-2 manner
“`

According to a 2-for-1 stock split, a shareholder will get 2 shares after the split instead of one. The total share value will remain the same as the previous one.

In the 3-for-1, the shareholder will receive 3 shares instead of one. And in a 3-for-2 manner, the shareholder will receive 3 shares instead of the previous 2 shares.
What is a Reverse stock split?

It’s just the opposite of what we know about the common stock split. In a reverse stock split process, a firm reduces its total share outstanding.

More simply, if a person has 10 shares of a particular firm, and the firm has enabled reverse 2-for-1 reverse stock split, that person will have 5 shares of stock. But the total value will remain the same.

A stock market professional or a trader has stock market analysis capabilities. And he/she can predict probably when a company is going to announce a stock split or reverse stock split.
How to identify when a company is going to activate a stock split?

No fixed rule or guideline determines when a firm will go for a stock split. Joining an online trading academy can help you in having an advanced understanding of stock split (or a trading watchlist). There are a wide variety of reasons for which firms enable stock splits.
Psychology

Among all reasons, the first one is psychology. If the price of stock keeps increasing higher and higher, a lot of small investors will find it unaffordable and invest somewhere else. This is not a welcoming thing at all as it directly affects the liquidity of a company.

At such a time, a firm can enable the split. Stock splitting helps in reducing the price and making the stock more affordable for small and medium investors.

For example, we can mention that in June 2014, Apple split its shares. Before the stock split, its shares were trading above $600. After the 7-for-1 stock split, its shares traded around $90.

Every investor received 6 additional shares. The liquidity of the Apple stock increased. Before the split, Apple had a share outstanding of 860 million but after the split, it gained 6 billion shares outstanding.

The actual value of the stock remains unchanged. But the lower stock price affects the manner a stock is perceived along with attracting a lot of new investors. It also informs active shareholders that now they have more shares of a company than before. It’s a way of making them more connected with the company. If the price rises shortly, shareholders will have more stock to trade.
Increase stock liquidity

The second logical reason is that companies use stock splits when they plan to increase the stock liquidity. As you know the stock liquidity increases with the outstanding stock number.

There are a lot of stocks that trade more than a hundred dollars per share and it can result in a large bid or ask spreads. For example, we can mention Warren Buffett’s Berkshire Hathaway. It had never enabled a stock split and its ask spread often gets over $100. According to March 2020, the class A shares have traded above $257,000/share.

A finance processor may not agree with this theory. According to many finance professors, stock splits do not hold any value or are irrelevant. Still, you will find that many globally-led firms are doing it now and then.
Pros and cons of stock splits

Pros

“`
It effectively improves liquidity
Portfolio rebalancing is way easier with stock splits
It often results in increased share price
It also makes selling put options more affordable for all types of investors
“`

Cons

“`
It comes with the risk of increasing the volatility
There is no evidence that all stock splits result in the share price increase
“`

Benefits of a stock split for a common investor

There are many contradictory theories over whether a stock split helps or hurts a common investor. A group of investors and finance professionals says a stock split is a sign that a company is doing well and the share price is going to increase soon.

But we can see that a stock split does not come with any instant change in the fundamental value of a stock. So, there can be no short-term benefit of a stock split for a common investor.

But many successful professionals keep a record of which stocks are going to split in the coming days. Below, a screenshot is attached that contains a quick list of firms that have announced stock split for February 2022-
Source: https://eresearch.fidelity.com/eresearch/conferenceCalls.jhtml?tab=splits
Concluding to

After exploring a lot of things about the stock split, it’s evident that a stock split is not the ultimate reason to buy a company’s stock. There should be proper portfolio analysis before buying a stock.

One can take the help of finance professionals. Or for self-research, it will include hours and hours of study, market analysis, following published expert opinions, and preferably a degree in the same field.