Q & A. Improving As a Trader

How does someone doing market neutral trading determine which aspects of his trading need improving?"

That's an excellent question, and I'm forced to reply that I don't know the answer.  This is a vital aspect of trading, but I have never devoted enough time to completely understand this concept.  I'm sure that omission has cost me a substantial sum over the years, and I don't feel qualified to answer.

What I do is help traders understand options, how they work, and how to profitably adopt several option strategies.  But it takes a whole lot more than that to become a successful long-term trader.

In my gut, based on more than 30 years as a professional options trader, I feel that if the individual  trader can get a firm grasp on the psychological factors that can destroy a trading career, then the trader is in position to prevent the vast majority of disasters from occurring.  Preventing those disasters is the key to success.

Being willing to accept the idea that you don't know more than the market; understanding that the market can truly remain irrational longer than you can remain solvent (the words of John Maynard Keynes); recognizing that all positions cannot be transformed into winners if you just hold them long enough.  If you believe these ideas to be true – and I mean really believe them – and trade as if you believe them, you are off to a good start and have a chance to remain in business to develop the skills that make money.

I speak as someone who was overconfident for a long time before finally learning the importance of discipline – and I'm telling you, and all readers, that making money when trading is not the difficult part.  The really hard part is keeping the profits.  To do that, you must have the discipline to accept losses and to accept that you are not infallible as a trader. 

The cardinal sin is to allow a loss to grow so large as to overwhelm profits.  The other major no-no is having positions that are far too large for your bankroll and experience – because large positions can quickly turn into large losses than can hurt you.

Have patience.  Have discipline.  Understand what you are doing before you placing more than small amounts of your money at risk.  You are not competing with your friends to see who can make the most money.  Plan for the long term.  Trade as if your financial future depends on your success, because it does. 

Do these things and you should prosper.

At least, that's what I believe is true.


3 Responses to Q & A. Improving As a Trader

  1. TR 09/03/2008 at 7:09 AM #

    Thanks Mark. This is great advice and an excellent post.

  2. Roland 09/03/2008 at 8:18 AM #

    I was going through Dr. Brett’s book last night and found this statement:
    “Nothing is more common than the notion that you learn to trade by trading. I humbly ask that you check that premise. You would not learn to fly a
    plane by getting in the cockpit and flying a jumbo jet, nor would you learn
    surgery by taking a knife to a patient. Why should trading be any different?
    Every performance field I have researched progresses from knowledge acquisition to skill drilling to simulated performance to real-time rehearsals.”
    You often talk about making trading decisions based on your comfort zone and that it is more art than science. I wonder if perhaps the knowledge and trading skills you possess have become so internalized that to you it is now automatic and unconscious. Therefore you talk in terms of art and comfort zone.
    But for someone who doesn’t have your level of knowledge and skills, their comfort zone will fluctuate based on their hopes and fears and will not lead to successful trading.

  3. Mark 09/03/2008 at 9:05 AM #

    If you practice paper trading, you learn as you go. For example, if you decide to buy 20 iron condors, you may quickly discover that you have too much money at risk and that you are more comfortable buying only 3 or 4 iron condors.
    If the options you sell are one standard deviation OTM (let’s assume that is 50 points OTM), you may find that as soon as the underlying moves 10 points you become very worried about pending losses, and want to close out one of the four iron condors you bought. If that happens to you, then you are selling options that are too near the money and you may be better off trying 1.5 or 2 standard deviations (75 or 100) points OTM.
    As several expirations pass, you should be able to develop a feel for whether you want to try to hold positions to the end (I shudder to even think about that possibility) or close sooner. If sooner – then you learn what it takes for you to be comfortable. Yes, I place a great deal of emphasis on not allowing positions to frighten you with the size of pending losses.
    One warning: DO NOT allow ‘results’ to dictate your CZ. If a position scares you, but you hold anyway – and if it then turns out to be very profitable – do not assume you made the correct decision for long-term success. You made the winning decision for this specific trade – and that’s good. But when trying to discover a methodology that is going to help you turn trading into a useful tool for yourself, a specific win or loss doesn’t matter. That’s now how skills and knowledge to use those skills are accumulated.
    That’s the type of information you must accumulate over time to learn where your comfort zone lies.
    That part doesn’t take a lot of experience. And as you trade, you may discover that the parameters that made you uncomfortable earlier have shifted because your understanding of what you are doing has increased and because you have seen and reacted to a variety of market conditions.
    Developing skills is another matter. Remember that trading is not for everyone and some people lack the willingness to spend time and effort and expect easy money. Those are not good mindsets. Some simply lack discipline to make difficult decisions under pressure. etc.
    Trade small, or better yet, use a practice account, to learn. Learn how to use specific strategies. Learn where your CZ lies. Learn how to manage risk when the market moves against you.
    Don’t be in a hurry to trade with significant amounts of real money when you feel you are still at the beginning stage. You have (as I like to repeat) the rest of your life to trade. Don’t put significant (to you) sums at risk before you are ready.