We all hear the phrase “options trading isn’t for everyone,” and my guess is that almost everyone thinks of that as a disclaimer, so that traders who lose money do not sue their brokers. One reason that the words in quotes are repeated so often is that they are true.
It is possible for every person who trades options to make money. But that is not going to happen.
It is possible that you will win the lottery. That’s not going to happen either.
Anyone can get lucky and anyone can get unlucky. That goes for options traders as well as for everyone else.
When those words are repeated, you must believe them (please): Options are not for everyone.
There are various reasons why some people cannot succeed when trading options (or anything else). Those who panic easily or are never satisfied with profits and always want more are not likely to do well with options. The nature of the game requires good strategic decision-making, and when emotions play a big role in your everyday life, they are likely to have a large negative effect on your trading results.
That’s why I believe discipline is so important. Other factors are important as well. Some people just cannot grasp the fundamental basics of how options work. We have to understand that. Many times a learning disability prevents the student from learning the lessons. At other times an obstacle must be overcome. But not everyone can learn to do all things.
That brings me to psychology and how important it is on how well a person can trade. The following blog post from Chris at My Simple Quant is so well done that I don’t want to excerpt it.
This is an important story to understand. It is reality. It applies to you. As a new trader you may not be in position to make plans or develop trading systems, but just looking at the big picture is enough to increase your chances of success.
A Drawdown in Emotional Capital
The last few trading weeks have been very difficult, a lot more difficult than they had to be. I am suffering a drawdown. The % drop bothers me but it really isn’t that bad, nothing catastrophic. I am still up on the year, so my finances are not out of whack. But the emotional capital drawdown I’m suffering feels enormous, like 5 times larger than actual monetary drawdown. I feel this way because I did not follow my own trading rules. I don’t mind losing money when I follow the rules, that’s part of the game. But to trade successfully under these rules for 18 months then abandon them, what the hell was I thinking?
Honestly, the threat of nuclear fallout kind of messed me up. The issues in Japan felt different to me. This wasn’t a debt problem or a fat fingered flash crash. This was a 9.0 quake with 7.0 aftershocks; this was a tsunami completely wiping out an entire city; this was 6 nuclear reactors melting out of control. This really was the end of the world! Ahhhh!!!! -exhale, pause- Well, of course it wasn’t.
I think I became the media’s whipping boy. Twitter and Cable TV and the web all got in my head. Maybe it was the gravitational pull of SuperMoon turning me into a certifiable lunatic. My brain ‘went rogue.’ I think it warped some neurons or something. I just wasn’t thinking straight when I decided to liquidate everything the morning of March 15, 2011. I booked a pile of losing trades that would have been net profitable had I followed my rules. I also chose not [to] take many profitable buy signals that morning too. My system is designed to buy fear. I became a system trader to avoid this crap! It is extremely frustrating to know I did the exact opposite of my plan. I buckled under the pressure. I choked. Then of course I did a few revenge trades and lost more money. It was a throwback to my irrational trading days circa 2004 – 2007. It was a step back on my current trading journey. Heck, it’s taken me over a week to get beyond the denial and write about it. So this troubling time has really made me do some introspecting. I think some good lessons have come from it.
- Accept that it is all in the past and there is nothing I can do about that it. Really, it’s over with. Just move on.
- It is only money. I can earn more. I am alive. I do not have radiation poisoning. Stop stressing! Now laugh.
- Step away from the computer more man. I got on Twitter/StockTwits in September 2010 and my addiction has been progressively getting worse. It peaked (or I hit rock bottom) with the Japan quake. I could not step away from the information for more than 5 minutes. It was bad. That definitely contributed to my deluded mindset. Twitter is a powerful trading tool but I was abusing it.
- This touches on the previous point, but: Do not focus so much of after hours futures activity. Monday the 14th really started it all for me. When the Japanese market dropped 17% that night, Twitter seriously flipped out. I flipped out. It was pure PANIC! That was probably the craziest Twitter stream I have ever witnessed. If anyone was online that night, you know what I’m talking about. Even Dr. Phil Pearlman did a Stocktwits.tv episode about the panic. I am really glad he did that show; it really is worth a watch here.
- Work out, get exercise. James Altucher talks about this. It makes sense. I’ve worked out my entire life, but since September 2010, I’ve maybe gone to the gym 5 times. That is not good. Working out releases endorphins and the whole process is a good way to burn out any toxicity in your body. I’ve gone everyday this week, the positive change is significant.
- Beware of trading hubris. Stay humble. Always. I am not a professional yet. I am still prone to make mistakes. I am not perfect.
- Trust yourself. Trust your system.
Trading is such a psychologically challenging profession. Professional athletes need their bodies to be in supreme shape; professional traders need their minds to be in supreme shape. When the body is injured, it needs to be rehabilitated. I pulled my mind muscle; I need to rehab. So I’ve been more cognizant of my mental health. It’s always been a primary concern for me, but I’ve strayed lately from that focus. It’s funny how some of the esoteric, vague $STUDY tweets actually make some sense when you’re in crisis. I know I’m not the only person who’s going through something like this. I will learn from it. I will be a better trader because of it. After all, it’s only money.