- I believe that successful options trading requires a different mindset from the traditional “rules of success” for most directional traders in stocks and futures products.
- First and foremost, I believe you need to take profits early and often. We’ve all been hit over the head ad nausem about the old maxim “cut your losers short and let your winners run.” This is a truth I believe holds true for most directional traders, but I don’t believe it holds any currency with consistently successful options traders.
- Speaking of direction, I believe nobody knows the next direction the instrument you trade will move. Nobody. Plenty have ideas and hunches, and often they’ll be right. But the truth is, a coin flip has nearly identical odds. This is why I trade options positions that either don’t require me to guess a direction, or provide me with plenty of opportunity to make money even when I’m leaning in the wrong direction.
- Immediately contradicting the item above, I believe in fading moves (especially, violent down moves). The best traders and investors are willing to put on positions the majority of market participants find hard to put on due to fear. Since the majority of market participants are net losers, I’ve got to find more opportunities to join the minority.
- I believe in contradictions. I believe in breaking the rules. Rules are guidelines, nothing more. Nobody got ahead in this world by following the rulebook and not daring to make mistakes or look like an ass from time to time.
- I believe in getting paid to wait. Time is money. Wherever possible, I want to have positive theta on my side. The odds are with me whenever this is the case.
- Speaking of odds, I believe in frequent trading. Common wisdom wants you to believe that “over-trading” is the common cause of death for most retail trading accounts as commissions steadily drain your account. In many cases this is true (especially if your commission rate is obnoxious). But for me, I’m putting on trades with the probabilities in my favor. The more instances of opportunity I can get myself into, the more the law of large numbers and favorable probabilities will materialize to my bottom line.
- In order to trade frequently, I believe in trading incredibly small so that I can spread my opportunity across as many instruments as possible, diversifying my risk. Call me “One-lot Seany.” I’ll proudly wear that name tag.
- I believe that volatility retraces from spikes or reverts to the mean much quicker and predictably than most would have you believe. Thus, I believe in selling fear. Fear subsides.
- I don’t believe in stop losses. I believe in adjustments. Options trading gives you, um…. options. When positions go against me, all is not lost. Often times, there will be plenty of opportunity to roll strikes to collect additional credit which improves my odds of success, or roll positions out in time to in effect “buy myself more time” for the trade to play out.
- The reason adjustments work: I seek to enter credit spreads when volatility is elevated (see #9 above). Therefore, if my position is getting tested on the upside, volatility will likely be shrinking which further aids my short volatility position. If I’m getting tested on the downside, volatility is likely remaining high (or increasing!) which gives me more juicy premium to sell into, which then results in collecting more cash and effectively lowers my breakeven points on the downside, thus improving my odds of success.
- I believe in net market neutral exposure for my portfolio.
- To help achieve neutral exposure, I believe I should always have a short delta (but positive theta — paid to wait) position in the general indexes. Since the majority of my individual positions will be short volatility and benefit from a stable or slowly rising market, I need to have short index positions which will benefit when markets are receding and volatilities are rising.
- I believe in making stocks and markets work to beat me. They will win from time to time, but they will have to earn it with outsized moves. If the stock or market is too lazy to come get me, I’ll gladly collect its coin and move on to the next trade.
- I believe the only true edge in any marketplace is Buying Power.*
Archives of “market” tag
rssNaked Truth- Purpose of markets is to redistribute wealth from the many to the few. Markets would cease to exist if not true.
Activity and Inactivity
I’ve noticed that my trading is more and more characterised by periods of doing a lot of trading, followed by periods of doing nothing except watching.
This seems to be a positive thing, as the old days consisted of trading every day no matter what the conditions, where as now I find that the markets will go into a mode that I just do not like the look of. In such cases if I try to force something, to “find a trade”, then I’ll get burned for sure.
To some degree I think this is because I have not yet spent much time on developing my strategies for trading insides large consolidation patterns. Of course it gets easier as they become more developed but by that time they are also getting old, and in the past I start making good trades in them just as they are about to end. The hard parts to trade are the start of trends / end of consolidation, and the end of trends / start of consolidation. These are times when the market is changing its basic mode, and are great places to lose money.
CheckList for Pre-Market -After Market Close
Pre-market
- Am I prepared to trade?
- Have I cleared my mind or meditated prior to trading?
- Have I reviewed my market feeds for any overnight news?
- Have I run my stock selection scans?
- Have I updated my watchlists?
- Have I updated my risk per trade calculations, along with 2ATR measurements and position sizes?
After market close
- Have I carried out my daily review of my trading?
- Have I updated my stops as per my rules?
- Have I logged my results?
- Did I only make logical, rational decisions throughout the market session?
Obviously, any questions that are repeatedly marked with a ‘No’ or an ‘X’ over a period of time will clearly highlight what you need to work on.
Finally, note how these questions make no reference to whether you made a profit or a loss. You can break every trading rule on a given day and make money. You can also trade perfectly on a given day in accordance with your rules and lose money.
The thing is, the more faithful you are to your process, you increase the probabilities of being successful over the long-term. Creating good habits will help you achieve this.
Six Questions Worth Asking at the End of the Trading Day
What opportunities did I miss and what could have alerted me to those opportunities?
* What kind of trades are making me money? Where am I losing my money? What can I do about that?
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* When I took heat on trades, what could I have done to enter at better prices?
* Was the level of risk that I took in trades commensurate with my conviction in the trade ideas?
* What were the themes and markets driving prices today that I should be alert for tomorrow?
* What are the themes, economic reports, and markets that might drive prices overnight that I should be alert for in the morning?
To Be Successful Trader-U Must Have These 5 Qualities
1) Capacity for Prudent Risk-Taking – Successful young traders are neither impulsive nor risk-averse. They are not afraid to go after markets aggressively when they perceive opportunity;
2) Capacity for Rule Governance – Successful young traders have the self-control needed to follow rules in the heat of battle, including rules of position sizing and risk management;
3) Capacity for Sustained Effort – Successful young traders can be identified by the productive time they spend on trading–research, preparation, work on themselves–outside of market hours;
4) Capacity for Emotional Resilience – All young traders will lose money early in their development and experience multiple frustrations. The successful ones will not be quick to lose self-confidence and motivation in the face of loss and frustration;
5) Capacity for Sound Reasoning – Successful young traders exhibit an ability to make sense of markets by synthesizing data and generating market and trading views. They display patience in collecting information and do not jump to conclusions based on superficial reasoning or limited data.
Finally, I would say that successful developing traders approach their work with a kind of humility. They don’t know it all and they don’t pretend to know it all. They absorb wisdom from mentors and markets, and they are quick to acknowledge when they’re wrong, so that they can get out of bad positions and learn from their experience. Show me a stubborn young trader with a defensive ego, and I’ll show you one who will fight his or her learning curve every step of the way, with predictably poor results.
The two best predictors of long-term trading success are
1) Originality – Traders who develop their own, unique approach to markets are more likely to succeed that traders that employ generic methods. My common impression when I meet a promising trader is, “Wow…why didn’t I think of that?” I quickly recognize that the trader has achieved an insight that others have not. That original thinking is more likely to generate distinctive results than run-of-the-mill thinking you could hear from any of a dozen market participants.
2) Flexibility – The worst traders I know are perma-bulls or perma-bears. They fit markets to their own thinking, rather than adapt to changing markets. The best traders work with a kind of anti-confirmation bias: they actively scan for information that does not fit with their views. That enables them to be flexible and adapt quickly to new market conditions.
If I were to place these two predictors of success under one umbrella, it would be “real-time creativity.” The successful trader sees and approaches markets in fresh ways–and continually refreshes those perceptions and methods.
Focus On What You Can Control
- You can control what stock to buy.
- You can control how much money you put behind the idea.
- You can control which markets you trade in.
- You can control how much you are willing to risk per trade.
- You can control what type of stocks you buy, big caps, only small caps, only over Rs 50 only under Rs 10, etc.,
- You can control what kind of set ups you buy.
- You can control when you get in or out, barring a halt.
- You can control when to trade or when not to trade.
- You can’t control the outcome of the trade.
- You can’t control how the market will react to the news.
Don’t fret over what you can’t control, shake it off, once you put the trade in what the market decides to do is out of your control.
A Psychological Checklist for Traders
Here is a checklist that might be useful for self-evaluation:
1) Have you experienced one or more recent large losses in markets that shook you emotionally?
2) Have you experienced a recent painful loss in your personal life that has left you feeling more vulnerable in your finances and/or your personal sense of security?
3) Have you experienced a recent threat to personal safety that shook you emotionally, such as a violent attack or a serious accident?
4) Do you find yourself emotionally “overreacting” to what should be normal trading stresses and losses? Are you experiencing significant anxiety, frustration, anger, or depressed feelings when trades don’t work out?
5) Do you find yourself “overreacting” in your trading behaviors during what should be times of normal stress? Are you freezing up and not acting on your ideas or impulsively lurching into trades after losing periods in markets?
6) Do you look back on your trading and feel confusion, shame, or puzzlement over actions that you took that run completely contrary to your plans for the day?
7) Have you tried to reduce your emotional and/or behavioral reactivity to markets, only to see the same destructive patterns return during times of stress? (more…)
Process and Strategy
The first step, assuming you have plan, to out perform a strategy is to have an extremely efficient process.
What a process provides:
Clearer mind: There are many things in trading that are repetitive. Clean up as many as possible. Find a better use of your time. Traders are some of the hardest workers I know, they work long hours, but my question is why? Think of it like making a phone call. Some traders have to go to the bank to get quarters, then walk two blocks to a pay phone, call the operator for the phone number, and then make the phone call. Some traders hit one button and reach the person. I am not saying you should not work hard, just work more efficiently.
Focus: Once all of the little things are taken care of you can now focus on what is important, the market. This will dramatically improve your execution. You can only execute well over time if it is you and the market. You can take more intelligent risks because you have more of the RIGHT information. Have you ever been in a trade, then when you go back to review a trade, you realize you missed something important? More than likely that is a process problem. It is important to accurately attribute the importance of that information and realize that hindsight is a horrible recorder. I would rather make that decision when I can do something about it. This takes trial and error but a pattern will develop and once it does it is your responsibility to constantly monitor it for change.
Anticipation: Anticipation is key in trading because the market is always leaving cues to what it is going to do next or that what it is going to do next is not tradeable. We teach our traders to have a progression, much like a quarterback would. Anything can happen and having a progression will help you to take advantage of it. (more…)