Ancient Chinese philosophers realized that with great danger often comes great opportunity. This nexus is further reinforced by the fact that the Chinese character representing both danger and opportunity is the same. Remember that only those who possess and use the necessary skills to survive the period of great danger are in position to profit from great opportunity. Risk control is paramount. - The extrinsic (time) component of the option premium goes to zero at options expiration. Always.
- Although statisticians would argue, the probability of occurrence of an extremely unlikely event is much greater if you “bet the farm” on the event not occurring. Never forget that black swans do exist.
- The human brain is not inherently logical. It evolved for survival and is prone to make erroneous assumptions and draw incorrect associations. To guard against these potentially costly errors, continuously challenge your assumptions.
- Absence of proof does not constitute proof of absence.
- Thinly traded options are usually characterized by egregious B/A spreads. You may be able to negotiate acceptable spreads to enter the trade. You will not be able to do so if you need to exit. It is usually better to stay away from these snares.
- Option orders executed as spreads always receive better fills than individually placed orders.
- Failure to consider current IV in an historic framework for the particular underlying will usually cost money.
- Failure to follow predicted changes in volatility prior to a known event (e.g. earnings) indicates there is some factor of which you know not. When discovered, it usually impacts your position negatively.
- Failure to use and understand option modeling and option modeling software puts you at a significant competitive disadvantage to other participants in the options market. The only thing more expensive than having appropriate tools is not having them.
- It is stunningly easy to “roll more than you can smoke”. It is usually disastrous to attempt to smoke all you rolled if you find yourself in these circumstances. This is another reason to model trades and crisply define risk.
- If you create multi-legged option beasts by manually entering the orders as opposed to entering from a graphical presentation, you will enter positions incorrectly and end up “upside down” and commit other similar errors more often than you thought possible. You must monitor the magnitude of extrinsic value when short options are ITM. Failure to do that and considering your trade plan in light of these developments, will result in unanticipated early assignment at the most inopportune times. Option positions can be easily adjusted to improve their structure only before they enter the ICU.
- Forgetting to honor time stops when holding certain varieties of option beasts can be as costly as forgetting price and/or P/L stops.
- Good traders know what they know; great traders also know what they don’t know. (more…)
Archives of “occurrence” tag
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Ancient Chinese philosophers realized that with great danger often comes great opportunity. This nexus is further reinforced by the fact that the Chinese character representing both danger and opportunity is the same. Remember that only those who possess and use the necessary skills to survive the period of great danger are in position to profit from great opportunity. Risk control is paramount. Mark Douglas Trading Discipline Exercise
Nothing revolutionary about it, but a lot of common sense.
Here’s the exercise with some of my personal observations added:
Pick ONE trading signal. It doesn’t matter, what signal exactly, but it’s important that it should be one you consider reliable and really intend to start your career as a consistently profitable trader with trading this signal (I will explain in some of further posts, why it is so important to start trading with minimal number of different signals). (more…)
Efficiency and Stability in Complex Financial Markets
Efficiency and Stability in Complex Financial Markets
Abstract:
The authors study a simple model of an asset market with informed and non-informed agents. In the absence of non-informed agents, the market becomes information efficient when the number of traders with different private information is large enough. Upon introducing non-informed agents, the authors find that the latter contribute significantly to the trading activity if and only if the market is (nearly) information efficient. This suggests that information efficiency might be a necessary condition for bubble phenomena – induced by the behavior of non-informed traders – or conversely that throwing some sands in the gears of financial markets may curb the occurrence of bubbles.
via Efficiency and Stability in Complex Financial Markets by Fabio Caccioli, Matteo Marsili :: SSRN.
Bull Markets Roll, Bear Markets Spike
There is an old trader’s saying that “bull markets roll, but bear markets spike.” This comes from the characteristic nature of the price action.
When a market is in bull mode, the majority of participants are happy and content (as the vast majority of investors are “long only”). The bull market thus “rolls” along, like undulating waves of grain, as more bullish investment capital flows into the market and positions are added to.
When a market is in bear mode, however, the majority of participants are annoyed or upset (because, again, those willing to go short are relatively few, while all the world is comfortable being long). The result is much more of a rough, jagged, against-the-grain type profile, in which extended declines are interspersed with surprisingly vicious rallies of short duration.
These mini-rallies are made even more vicious by the forced activity of “short covering,” in which bearish traders caught napping get “squeezed” out of their positions by the fighting spirit of the bulls.
Lying in wait at the top of a salmon-rich waterfall, then, is akin to waiting for that “spike” to occur before putting out a new bearish line. How do you identify such an occurrence? Simple:
- Wait for your intended market to confirm a new downtrend (or break key support).
- Wait for a countertrend rally – one that takes prices higher, but does not “clear” the bearish trend.
- Enter upon reasonable evidence that the countertrend rally (or spike) has run its course.
Trading Secret
“The most important warrior secret of all: Your level of success in the world of financial markets is entirely up to you and has nothing to do with what the markets are doing. There will always be bull markets and bear markets. The occurrence of good or bad luck, if luck exists at all, evens out over time. Great success and the attaining of warrior trader status come about as a result of commitment, a never-ending willingness to learn, steadfast determination, and that rare ingredient, a touch of humility. Throughout the ages, all great warriors have had these same characteristics.”
4 Types of Trades
Stock trading consists of 4 major types of trades.
The range-bound trade: the stock is tied in a range and will remain there until there is a significant change in the supply/demand dynamics. For this trade you fade any move to the boundaries of the range with a tight stop a little bit below/above the range. If the range is broken, you will lose small amount. It is good for scalpers with shorter trading horizon.
The breakout trade: in order to break from a range, a stock needs to experience a major shift in supply/demand. A dramatic occurrence. News or expectation of news. The news doesn’t have to be connected with the individual stock. It might be something that impacts the whole industry or market. Sudden change in participants’ confidence. Not every breakout will be caused by clear news. Often it will happen at no news at all. In any case, volume should be your tell how genuine the move is. Buy several cents above the range with a stop several cents into the range. (more…)
Why do you think most traders fail?
- Poor selection criteria; usually based on personal opinion, theory or tips and bad advice
They don’t stick to and commit to an approach; style drift
Don’t cut losses (#1 mistake made by virtually all investors)
Don’t know the truth about their trading – they fail to conduct in-depth post analysis
Treat trading as a hobby and not a business
- Want too much too fast; learning a skill takes time
There’s a lot of important meat in those few lines of text. We all recognize that it’s not easy to cut losses, but I firmly believe that this results in more grief for traders than anything else. What causes a trader to suffer a big hit? I believe that it’s the unwilligness to accept that a trade is not working, and that it’s not likely to get any better if held longer. Under those conditions, losses mount. The only way to prevent that big loss is to cut it off at its knees – and the time to do that occurs when it’s a much smaller loss.The difficulty with that is sacrificing the possibility that the trade would turn profitable. My advice: Get over it. Many trades will be unprofitable. That’s a fact of life for a trader.
I understand that on a rare occasion a gap opening may do irreparable damage, and not provide an opportunity to take the small loss. However, that’s also a preventable occurrence. If the damage is too great, then the position was too large. It really is as simple as that.
How many of us look at trades after the position is closed? How many dissect the entire trade in an attempt to find out what was done correctly and what mistakes were made? Very few.
A mistake is not a trade that loses money. A mistake is making a decision that was clearly incorrect at the time, but the trader was unable to see that. Another mistake is avoiding a trading plan and not doing postmortems on your trades. It all takes so much time. However, if you take trading seriously, and do not consider it to be a hobby, there’s work to be done.
Mistakes are part of the game. Making the same mistake repeatedly is not. At least it’s not part of any successful trader’s game.