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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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In applying this formula for success in the options market, the first element is simpleTRADING PERFECTIONISM In the trading arena, you will find endless sources of financial achievement and accolades, which often go hand-in-hand. In general, our culture respects achievement. Our daily lives are full of pressures to be better, faster, and more accurate. Of course the ultimate achievement would be to attain total perfection. The logical extension of better is best, and the ultimate best is perfect. Many times we carry this burden of impossible expectations into our trading, where it can be quite detrimental. Knowing and understanding these self-imposed problems might not banish your temptation to seek unrealistic goals, but awareness of forces working on you can help you develop emotional discipline. For example, many people allow others to define their expectations and goalsthe old keeping up with the Joneses syndrome. Many people often care way too much about what others think about their trading. Instead you should spend your time determining your own personal financial goals. Trading is challenging enough without loading it up with this type of emotional baggage. Also, people have widely differing levels of comfort with uncertainty. Some people have no fear and will try just about anything. There are others for whom making decisions without 100 percent certainty is a nightmare. Trading decisions are made emotionally difficult because we: Are keenly aware of our chancy surroundings; Accurately predict that waiting will afford us some additional information; Our precision-dominated world makes us believe a perfect answer might actually exist. So we recoil from decisions in the realization that our odds of less than ideal results are high. It seems we must always fight our aversion to uncertainty and get on with our investment lives as best we can. Which brings us to envy. This major enemy is constantly poised to defeat our trading endeavors. We see the rich and famous and read of the fabulous successes of a very few traders, but we fail to focus on their status as exceptions to the norm. By allowing envy to define the exceptional performance of others as our own standard, we help to defeat ourselves. Such self-imposed frustration leaves us concentrating on the difficulty of our task rather on the task itself. For many traders, for whom no amount of gain is enough, greed is a success killer. Whether by long actual experience or merely by considering the odds, we know that we will not sell at the highest price. And yet we seem to always hold on for that last extra point. Are we greedy in our trading because we think that an even bigger gain will stroke our egos and pad our pockets even more? Do we hold on because this particular stock has treated us well and we are willing to stay in the trade rather than risk selecting another trade? Whatever the reasons for and operating dynamics of our greed, it will defeat us. Greed is merely another way of expressing a driving need for perfectionism. Ego is another key barrier to trading success. We seem to want to be right and be the best even if there are no other observers. Our egos feel better when we are right and worse when we are wrong. So, in thinking about buying, we become frozen into indecision by realizing we might make a mistake, which would in turn injure our egos. When looking at holding versus selling, we subconsciously provide our egos with more chances for stroking and forestall the known immediate pain of an ego injury by doing nothing. That way, our possibilities for further gain, for reducing or recovering a loss, and for avoiding the pain of not selling at the top are left open. Here we have perfectionism again making our ego feel good and urging us to do nothing. Knowing your egos tendency to get in the way, and observing in real time your own behaviors that indicate this is happening, can help you to come to terms with perfectionism. It is probably not totally curable, but can be managed by constant attention. There are some trading tips one can follow to minimize the occurrence of these self-imposed problems. Databases and experts are wonderful sources of financial information. However, the more sources you consult, the higher the likelihood that the information will conflict. Such conflicts will confuse you, allowing information overload to drive up your anxiety level. It is important for you to use as much information as you can easily handle. You need to develop a trading approach that feels comfortable and then stick to it. For example, if you are more attracted to value than growth investing then go for it. If fundamentals make more sense intuitively than technical analysis, so be it, and vice versa. Go with what you can reasonably handle and ignore the latest fundamental or technical tools that come out. As a trader, this will help you to stay focused, follow your plan, and concentrate on making consistent profits. TRADING TIPS FOR SUCCESS Becoming a trader who consistently wins in the options market requires three key elements: 1. A bargain-hunting instinct with the ability to identify undervalued and overvalued options. 2. A sound and well-designed game plan that provides consistent action over time and that prospers in all market conditions. 3. The discipline to follow the game plan. (Plan your trade and trade your plan.) In applying this formula for success in the options market, the first element is simple: You must always seek to buy underpriced options and sell overpriced options. Most option investors do not follow this basic rule of option investing. They spend far too much time studying the underlying stocks and following the market, and base their option purchases only on these factors, ignoring the price and implied volatility of the option. If you do not buy underpriced options or sell overpriced options, you are going to lose eventually. You must also create a good game plan. In the options market, the game plan is far more important than in other markets because things happen so quickly that you must be prepared before you play. Then, you have to follow your game plan. A good trading plan involves a gradual program for investing in the options market versus the elephant approach, where you take all of your money and invest it all at one time, all on one side of the market. In addition, your portfolio must be balanced, investing money in both puts and calls. As you become more familiar with the different trading tactics, you can further diversify among directional, sideways, and delta neutral strategies. Also, be sure to diversify among different sectors over time. Set aside a speculative fund for options, realizing you could lose everything because of the short-term expiring nature of these investment vehicles. Most importantly, this speculative cash must be money you can afford to lose. If you play in the options market with money you cannot afford to lose, your emotions are guaranteed to overwhelm you and you will be forced into bad trading decisions. Finally, the most important part of your game plan is not how many positions to take and when to take them, but once you are in a position when do you take profits and when do you cut losses? Here you must clearly define when to take profits or cut losses before you place the trade, or your emotions will force you to do the wrong thing at the wrong time. Try to be consistent. Dont keep changing the rules of your game plan in the middle of the strategy. The last ingredient to success is ironclad discipline. You may think that this step is the easiest one to implement, but discipline can be difficult to maintain, especially in the midst of the battle when you may be incurring losses and have to make some tough decisions. If you dont have your trading plan written down on paper, and instead decide in your head what moves will be made at each point, your lack of discipline will catch up with you sooner or later. If you find yourself straying from your game plan, you are doomed, and you might as well liquidate all your positions and invest in some Treasury bills. Without discipline, you will simply never win the options game. Options traders lose when they follow the crowd because the crowd feeds on emotions. To profit consistently, you must stand alone and act rationally. In the options markets, this means buying underpriced options/selling overpriced options, and having a well-designed trading planone that shuns your emotions, forces you to be consistent, and keeps you with a balanced, diversified portfolio. THE HEART OF MY TRADING APPROACH: OPTIONETICS Over the years, I have taught my trading approachwhich I call Optioneticsto thousands of people all over the world. The Optionetics philosophy of trading is not just valuable to beginners; long-time professionals benefit as well. Overlaying the Optionetics way of trading with any trading system that trades liquid markets can significantly enhance that systems performance. The Optionetics methodology facilitates the implementation of a systems money management rules using a trading technique worthy of application. To validate this assertion, I want to briefly review the Optionetics philosophy, trading system basics, and money management approaches and conclude with the beneficial impacts the Optionetics philosophy can have on a traders current trading system. So just what do the Optionetics philosophies encompass? The absolute crux of this approach can be classified as a scientific method of analysis that utilizes options as tools to minimize risk exposure. Since risk is directly correlated to a traders number one nemesisstressit stands to reason that if you can get a good handle on risk, your ability to execute your trading plan will accelerate. The Optionetics approach to the markets predefines the risk and reward of each and every trade to determine its feasibility. Once the risk/ reward ratio has been revealed and the maximum loss position is clearly defined, a natural calm comes over the trader that triggers a very pronounced stress level reduction. The results are much better decision making during the trade execution and management phase. Another major benefit of trading the Optionetics way is that it surrounds your core trading or belief system with a flexible investment plan. This flexibility allows the traders to employ a variety of option strategies that best exploit the current market environment. For long-term survival in the trading business, the ability to change directions is absolutely essential. This attribute, which is at the heart of the Optionetics philosophy, turns the naturally dynamic trading environment of the markets into extremely profitable opportunities. Now lets take a look at what constitutes a typical trading system. There are three building blocks in any system: market entry, exit with a profit, and exit with a loss. Identifying these and making decisions about them is a key element in a successful trading system. Before you trade, your system should tell you: Where should I get into the market? Where should I get out with a profit? And where should I get out with a loss? You need to know the answer to all three of these questions before you trade. If you know the answer to only one or two, you do not have a complete trading system. An effective trading system has to clearly delineate the market entry price, the exit with a loss price, and finally the exit with a profit price. Of course, with all sound trading system approaches, the trader must have some complementary money management rules that can be effectively applied. Money management takes the trader past the point of no return. For example, a trader who makes $100,000 over the next two years and then loses the $100,000 during the following two years has a return of zero dollars. Had the trader used proper money management, the $100,000 could have grown to $500,000 at the end of two years. Then, during a large losing period as much as $100,000 could have been protected. After the trader made it to $500,000, the account was in a position to withstand just about any size drawdown, as long as the trader continued to apply money management rules without going back down to zero. This is why money management is so important. There is no need for your account to reach the point of no return. Proper money management discounts all factors that cannot be mathematically proven. In addition, proper money management takes into account both risk and reward. Now lets examine how the Optionetics approach can enhance the implementation of both the trading system being employed as well as the accompanying money management rules that are to be applied. The use of puts and calls to hedge against long and short stock positions offers the following four benefits: 1. Greater protection than stop losses. 2. Protection of stock positions from major losses. 3. Elimination of the risk of receiving a margin call. 4. Low maintenance requirement, allowing you to lock in profits. Given the fact that stop losses are essential components of a good money management system, the Optionetics approach provides a far superior method of protection through the utilization of options. For example, with the distinct possibility of a major gap down or up the traditional stop loss can encounter major slippage. Employing an option as your risk reduction strategy eliminates this negative slippage impact. Also, by clearly delineating the risk and reward picture of every trade, the Optionetics discipline automatically enforces the most important money management rules of them all. When a trading system generates the market entry, market exit with loss, and market exit with profit price levels the Optionetics methodology can really go to work. The approach allows you to apply the optimum options strategy based on the systems forecasted price levels as well as the underlying options current and forecasted volatility. Furthermore, the trader can be as flexible as each trade demands. The Optionetics approach enables traders to make adjustments based on market flow, keep their positions intact by locking in profits, continue to minimize risk, and provide the staying power to see the trade to fruition versus being continually whipsawed in and out of the market. With so many benefits of applying the Optionetics trading philosophy, it behooves the trader to master these trading principles and use them faithfully in conjunction with ones current trading system. The improvementnot only in the systems profitability but also with better risk-toreward profilesmakes it a very worthwhile endeavor indeed. CONCLUSION The markets by their very nature have multiple personalities. Perhaps the only way to beat them is to get to know their personalities and learn how best to use the right tools to help make winning decisions. In order to do well in this business, you need to cultivate patience, pursue knowledge, garner experience, and always persevere. By reading this book, you are opening yourself to a veritable anthology of knowledge that has taken years to accumulate. Just remember, there are a million trades out there every day. Its just you and your trading savvy against the world! The many tools and strategies discussed in this book are your biggest allies. The more you get to know them, the better equipped youll be to profit in the highly volatile markets of the twenty-first century. Perhaps we all have a fear of failure and the ever-pressing need to become successful. Accomplishing these very human goals usually takes a lifetime. Along the way, I have found it absolutely necessary to nourish my self-confidence by cultivating the disciplines that I seek to master. Trading is one of those disciplines. Getting good at it has entailed developing discriminatory good taste as well as impeccable timing when it comes to the buying and selling of options. And yes, timing really is everything in the markets. But getting good at timing is more than an art; its also a sciencethe science of Optioneticsand through it you can develop real trading savvy. All it takes is a lot of practice and a little courage. |
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