Become A Better Trader
The Smart Profits Report: Issue #178
Monday, January 24, 2005
Become a Better Trader: Small Changes You Can Make for Big Profits
By Mt. Vernon Research Team
Mt. Vernon Research
One thing about trading options… I’ll never fear stocks again. Stocks are easy in comparison. All you have to do is pick a direction. Either you think it’s going up, and you buy, or you think it’s going down, and short.
Trading short-term options is like playing one of those three-dimensional checkers games where you have to calculate your moves on multiple planes. Suddenly, an easy game is a gut wrencher.
First, you have to decide whether the stock’s going UP OR DOWN… then HOW SOON it will happen, because time runs out on your option. Worse, you also have to know HOW FAR it will go so that it will move enough to overcome the effect of diminishing time value.
That’s a lot to get right… But just by making a couple of changes to your trading approach, you can go from being a so-so trader to becoming a better trader. It starts with taking just a bit of time to evaluate your own trading.
Hey, 50% Ain’t Bad… But You Can Be A Better Trader
With most things in life, if you had a 50/50 track record, it would prove that you might as well throw darts. You’re doing no better than chance.
For short-term options, though, a 50/50 track record probably means you are doing quite a bit right. You are probably getting the direction correct and maybe even how far a stock will go. It’s not enough to quit your day job. But it is close enough to know that with one or two adjustments you could be a better trader…
If you could just figure out what those one or two things are!
Actually, many professional options traders have fine careers, despite being wrong up to 60% of the time, because they take small losses and get enough big winners to pull them out of the fire. You probably don’t want to lose that often or live that dangerously, and neither do I.
In fact, I thought last year was horrible for trading from May through October. The worst. It seemed as though I had to work three times as hard as usual. I ended up with a win ratio of 69% for the year, not quite making my 70% goal. For short-term options, that’s actually very good. But it still means that a lot of trades went wrong.
What do you do when your trades stab you in the back? You could console yourself by remembering that baseball’s power hitters only get three out of 10. Even Barry Bonds never made it to .400 for a full season. So cool down. Missing some is normal for hitters and options traders.
And after you resolve not to beat yourself up… with a clear mind, get to work on your swing.
Making the Jump from 50/50 Trader to “Elite” Trader
What’s critical to becoming a more effective trader is separating the losing trades that weren’t mistakes - the ones that you made for good reason - from the ones where your own habits did you in.
Every trader has weaknesses, even the best. The best just know what theirs are and how to work around them.
I found mine by reviewing the trades that missed. Going into every trade, I write down why I took it, what fundamentals, news or technical signals I used.
How to Profit from the “Trades That Missed”
When one fails, I look back at those notes, review the chart again and see if there was something I misinterpreted… or what changed that I should have paid more attention to. If you do the same, you’ll find certain things turn up as often as a begging dog.
For instance, I always did extremely well in trending markets, hitting 80-85% win rates. But not so well in ranging or flat markets. So I worked on ways to improve that.
- First, I tried some added technical indicators until I found ones that worked with my system. I still don’t hit 85% in ranging markets, but I did 64% this year in the flat period from May to October.
- Second, I’ve learned to take profits sooner in these markets.
Other traders may do well in the ranging markets that bug me, then fall apart in a trending market. Usually, they don’t know their system is based on signals that are inappropriate. Some people don’t do as well in bear markets, and believe it or not, some don’t handle bull markets well.
You should know this much about yourself. Soon, you will be profiting from your winning trades - and your losing ones, too.
Good investing,
Mt. Vernon Research
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Today’s Smart Profits Cribsheet
- Check out the Smart Profits Glossary for definitions of terms like “fundamentals” or “bear market” found in today’s article.
- To learn more about options, swing over to Smart Profits #188, Understanding Options Risk: How to Beat the “Volatility Premium” on Options.
Related Articles:
- Technical Analysis: Two Simple Tools for Spotting a Technical Trend
- Volume: Reading Volume to Find 20% Gains… In 45 Minutes
- Trading Short Term Options - A System for Reading the “Market Weather”
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