Staying Real

Have you ever been hit with a string of successes such that you gain so much confidence that you believe you can do anything? This can occur to a baseball player with a month-long .450 batting average. It can happen to the professional golfer, or to the tournament bridge, poker, or backgammon player who wins a lot of cash over a short time.

It can happen to the schoolteacher who tries something new gets through to her students – enough to see the difference.

Those are all happy results, with very little downside.

Trouble

It’s not always so easy for the trader. We all want to do well. We all want winning streaks. But I wonder how many develop a sense of genius, believing it is their skill that makes them win so often? And it may be their skill, honed with much practice. However, are these winners able to recognize when it’s mostly the result of fortunate circumstances? That’s the big question.

At Options for Rookies Premium, I’m working with several newer traders at the moment, and those who are using cash have been doing very well trading iron condors. My abilities as a teacher and strategy coach are going to be tested. I love that they are winning, but wonder if getting their trading careers off to such a good start is a healthy long-term thing.

We talk about position size and study various risk management ideas. That’s good.

We talk about iron condors, we follow specific trades from start to finish, we have live discussions. One of the common topics is profit potential. We admit that the discussion is theoretical, but the long-term profit expectations keep rising. Confidence does that.

The bottom line is always the same from my perspective. It’s easy to make money when trading options Most traders are going to make a lot of money. The problem is that the majority of those traders are going to discover just how easy it is to lose money. as a result, most new traders never find success. Even those who make a lot of money let that cash get away when they fail to take the time to think about risk management.

Getting everyone to have reasonable expectations is the goal. How about you? Are you a realistic trader?

4 Responses to Staying Real

  1. Tiger 05/27/2011 at 9:09 AM #

    One of the worst things that can happen to a novice option trader is to make big profits with their first few trades. This creates the illusion of easy profits, when often times it was mostly luck.

    There are possibilities and probabilities. With iron condors, risk and reward are defined, as are the probabilities. For iron condors, the initial choices as far as how far out and how wide, define the probabilities and the risk. Analysis will indicate the chance of the condor being a loser and the likely cost of the losing trade. Like the rain, losses will come. Eventually there will be a streak of losers with virtually any strategy, even high probability strategies.

    Theoretical is interesting, but most traders have to learn about losing streaks first hand. There are few things like seeing trade after trade turn against you as a learning experience.

    • Mark D Wolfinger 05/27/2011 at 12:24 PM #

      Tiger,

      I have to agree. As a market maker I was waned about risk repeatedly. I ignored all warnings.
      The piper has been paid.

      Thanks

  2. Robert 05/27/2011 at 1:22 PM #

    Mark,

    Your topic is particularly timely, as ICs have been working so well during the current market plateau. It’s easy to forget that the good times won’t last forever.

    Cheers,
    Robert

    • Mark D Wolfinger 05/27/2011 at 10:02 PM #

      Cheers to you as well.