Tag Archives | successful trader

This Means You

This article recently appeared at (InvestorPlace).

Best Practices

One of the themes that appears repeatedly in trader blogs is a list of best practices. Such lists include trading rules, trader hints, necessary habits for becoming a successful trader, etc. Some lists are intended for beginners. The true benefit of understanding these ideas is to prevent the formation of bad or careless habits. Other lists are targeted to experienced traders and may contain useful ideas for tweaking the way they trade or handle specific situations.

These lists are generally helpful in that they provide good suggestions and much food for thought. One recent example is the ‘Top ten ways new traders lose money’ by John Forman. (The Essentials of Trading). As is the usual situation, each item on the list does not apply to every trader. However, this is an excellent list because it contains some information/advice that applies to YOU.

The Problem

I approve of such lists and the there’s nothing wrong with reading the suggestions of different traders, each of whom may have some idea that truly applies to you, the person reading the suggestions. That’s the good news.

The bad news for people who take the time to read these lists of mistakes is that the individual reader seldom believes that the list is appropriate for his/her circumstances. A common thought may be:

  • I know that
  • Of course. Big deal; that’s obvious
  • Who would make that mistake?
  • etc.

The truth is that too many trader wannabes discard valuable advice. Why does that happen? My belief is that the new trader doesn’t believe the ideas are relevant. They come from too many different places and sometimes the ideas conflict. It’s true that different traders found different paths to winning the game, and therefore have different advice to offer.

But that’s no reason to discard these ideas. Consider each of them and carefully decide its relevance for yourself. On the list above, #2 is: ‘Unreasonable expectations.’ That’s an important item, not to be discarded as obvious. The truth is that it is not obvious. New traders are far more confident of success than more experienced traders because they have not yet moved past the hype that made them interested in learning to trade in the first place.

Let’s face it, brokers want you to believe it’s easy. Come to them for great investment research, and that’s all it takes to make lots of money. Anyone who buys that idea is bound to expect the game to be easy.

Some of the hype-artist educators claim that their courses are designed to allow you to double your money every year, and if you don’t please come back and take their course again at no cost.

Some advisors want to trade your money, and for ‘only’ half of the profits (and none of the risk) they will turn your investment into a pile of cash.

No wonder that new traders have high expectations. That results in trading more size than is prudent, taking more risk than common sense dictates, and holding onto losing trades because they just know that the market will perform in a manner that gives the new trader his/her well-deserved profit. This is the path to ruin, and if those high expectations are not reduced immediately, chances of losing all your money are high.

More experienced traders fail to heed the messages. It’s far easier for them to believe they already know all they have to know to make money. While it may be true that they are earning profits every year, it’s also true that there are ways to improve their results – if they would just take the time to learn what can be accomplished – and then make the effort do learn how to make them happen.

The point of this post is to alert you to a simple fact: When you read a list of suggestions, don’t dismiss them as useless. There is something on that list that you can do to improve your performance as a trader. Of course, if you don’t want to do the work and don’t want to make the effort, that’s a personal decision.

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Why Traders Fail

I've previously blogged about the Risk of Ruin and why so many new traders go broke before having a chance to learn much about the business. 

It's not always about going broke.  Many traders try to make money for a long period of time before giving up.  It's not easy to become a profitable trader.  In addition to learning that which must be learned, there's the perpetual problem of fighting bad habits or allowing certain personality traits to get in the way of making sound trade decisions.

Basically, there's a lot of things that can go wrong which destroy a person's chance to become a successful trader.

In a recent interview with independent trader and blogger, Mark Miniervini, Charles Kirk (The Kirk Report), Charles asked this important question, and received a very helpful answer:


Kirk:  Why do you think most traders fail?

Mark Minervini:  Here are 6 reasons:

  1. Poor selection criteria; usually based on personal opinion, theory or tips and bad advice

  2. They don’t stick to and commit to an approach; style drift

  3. Don’t cut losses (#1 mistake made by virtually all investors)

  4. Don’t know the truth about their trading – they fail to conduct in-depth post analysis

  5. Treat trading as a hobby and not a business

  6. Want too much too fast; learning a skill takes time


There's a lot of important meat in those few lines of text.  We all recognize that it's not easy to cut losses, but I firmly believe that this results in more grief for traders than anything else.  What causes a trader to suffer a big hit?  I believe that it's the unwilligness to accept that a trade is not working, and that it's not likely to get any better if held longer.  Under those conditions, losses mount.  The only way to prevent that big loss is to cut it off at its knees – and the time to do that occurs when it's a much smaller loss.The difficulty with that is sacrificing the possibility that the trade would turn profitable.  My advice:  Get over it.  Many trades will be unprofitable.  That's a fact of life for a trader.

I understand that on a rare occasion a gap opening may do irreparable damage, and not provide an opportunity to take the small loss.  However, that's also a preventable occurrence.  If the damage is too great, then the position was too large.  It really is as simple as that. 

Mark's tips above and my comments may seem simple.  That's because they are simple – and that simplicity makes people doubt their importance.

How many of us look at trades after the position is closed?  How many dissect the entire trade in an attempt to find out what was done correctly and what mistakes were made?  Very few. 

A mistake is not a trade that loses money.  A mistake is making a decision that was clearly incorrect at the time, but the trader was unable to see that.  Another mistake is avoiding a trading plan and not doing postmortems on  your trades.  It all takes so much time.  However, if you take trading seriously, and do not consider it to be a hobby, there's work to be done.

Mistakes are part of the game.  Making the same mistake repeatedly is not.  At least it's not part of any successful trader's game.



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Becoming ‘Good’ at Options Trading

Hi Mark, 

I've studied your books as well as books written by other Options experts. I was wondering if you could give me your take on this article: 13 Unlucky Reasons Not To Trade Stock Options.



Excerpts from the article, along with my comments, are below.  The entire article is available via the link above.


1985 was when my two year, 12 hour a day, 7 days a week adventure began. I read books, subscribed to options quote, charting, and valuation services, studied the Black-Scholes option valuation formula, wrote computer programs to do calculations, and joined CompuServe's Investor's Forum where amateur and professional traders exchanged ideas and discussed strategies. I made theoretical trades on paper, and, when it seemed like I might be getting the hang of it, started trading for real.

My goal was to "become good at options trading OR prove that it cannot be done".

MDW: This experiment appears to be a decent idea, but he began with this attitude:  If I cannot do it, then no one can.  The ego required to make that statement should be sufficient to convince readers to ignore the remainder of the article.  But I owe it to JP to proceed.

Almost every step in the 'education' process was based on a poor decision. Then the author takes the poor results – to be expected when making bad decisions – and jumps to the conclusion that 'no one' can make money trading options.  There is no limit to some people's irrationality.

Goal: Unreasonable and unrealistic.  Many people lack the talent, or the discipline required to develop that talent, to reach certain goals.  Many aspire to being a professional athlete or movie star, but few meet success.  That does not mean it is impooisble.   You did not become 'good at options trading' because your focus was on all the wrong items.  You paid no attention to developing necessary skills or knowledge.  In fact, most of your methodology is exactly what an aspiring trader should not do.

Reading books: A good way to get started.  Nothing wrong with that idea.

Subscribed to quotes:  Totally unnecessary.  You had a broker if you traded.  Why didn't that broker supply free quotes?

Subscribed to charting services:  Bad idea,  One has to be proficient when attempting to use charts to predict the markets.  Paying someone else to read the charts and make recommendations is a fruitless endeavor. 

Subscribed to valuation services: Bad idea.  This sounds to me as if the author (apparently anonymous) paid someone to suggest 'over-valued' options and then he sold them.  Perhaps he did the opposite and bought options recommended by the service.  There is nothing sound, reasonable, practical, or intelligent about doing this.  One does not simply make a directional play on a given stock without having a very good reason for doing so.  Taking advice from an untested, unproven valuation service is the height of folly.

Studied B-S formula. Not bad.  But no mention of how he used what he learned from the studies.  This is identical to name-dropping.  I suppose that he impressed himself with the fact that he used this tool, although he makes no mention of what it was that he expected to learn, or did learn.

Wrote computer programs. Calculations may be helpful, but only when they are accurate.  But more than that, what does any of this have to do with trading options?  Nothing.

Joined an investor forum:  This is by far the biggest mistake of all.  Finding a useful forum is difficult, but they do exist.  Most serve the purpose of allowing braggarts and liars to make their claims.  Few forums are worthwhile for learning anything useful.

He began using real money when it 'seemed like he might be getting the hang of it'?  Might?  Surely this is a joke.  He thought that it was possible that he has some small idea of how option trading works and then used real money to make trades.  And he is surprised that he did not succeed?  And he believes this is proof that no one can do it?  He has completely ignored risk management.  He ignores money management.  This guy knew almost zero about options and claims that 'no one' can succeed.

He goes on to present 'proof' for his conclusions, but when the premise is invalid, then none of the conclusions drawn have any validity.  Some may be true, but if so, the author had no proof for any of them.

The 2 year effort was a difficult intellectual failure and a stinging financial one. I not only failed to become good at options trading; I failed to improve. I'd learned the jargon, was practiced at the mechanics of placing orders for different types of trades, and was knowledgeable enough to be comfortable discussing issues with other traders, but in fact I had not acquired any skills that made it possible to make a profit.

MDW: You learned the jargon?  How did that help you decide which options to buy or sell or which strategy to adopt?

You learned how to place orders?  You ignored position size.  You spent zero time learning which orders to enter.  You must place good, intelligent orders, not merely learn to hit the 'enter order' button.

Comfortable discussing trades on a forum?  Discussing trades?  What does that have to do with becoming a good options trader?  Answer: absolutely nothing.

You did not acquire any skills:  No kidding.  You did not make any attempt to learn anything useful.  You did not improve?  Of course not.  You made no effort to gain an options education.  Do you believe that if I talk about football, Eli Manning will step aside and I'll take his job?

So I quit, and made my trading halt permanent.

MDW:  Finally.  A good decision.

Conclusion. I couldn't do it, but no one can. The rest of this article summarizes the evidence that pointed toward that conclusion. It is a personal view of the options markets, not intended as an academic reference. Some of the information, from 1987, is dated, but in a brief online review of the "situation" today in the option markets, it didn't look like the most important aspects have changed. If you believe any statement is in error, your comments are welcome.

 MDW: Looking at some of his comments in the 'proof' section, I find:

Example:  He says this: "The brokerage firms that I'm familiar with require that an account be specially approved for options trading. They require a minimum balance, and, to make sure you understand the risk of loss, they send you a risk disclosure document. If brokerage firms believed options to be a viable route to profits, why would they impose these requirements before allowing you to start trading?"

Is this beyond belief?  The Options Clearing Corporation requires such documents be given to everyone who applies to trade options, and that everyone must apply.  No one is allowed to just trade options.  This is a good thing.  It's designed to prevent just what happned with our author: Trading on ignorace.  Alas, he considered himself to be 'a smart guy" and thought this would be an easy trip.  Overconfidence based on who knows what.

Then he draws this conclusion: "Nobody knows anything about successful options trading strategies."   

He asks: "If this works so great, why aren't you doing it?"  There is nothing wrong with both 'doing it' and helping others to do the same.  Many professional athletes give lessons.  They cannot compete at the highest level, but still have skills to transfer to others.  Many great coaches were never great athletes, but they have the skills to teach.

Traders who make millions have no need to teach.  But they may want to help others find the same path they found.  Maybe they want to help ordinary investors from falling into the 'options are easy' trap.  Just as with being a great athlete, there is more to being a winning trader than having a perfect understanding of strategies and how to apply them.  All the psychological factors and skills that are so important to success may be lacking in some traders.  The world's best trader may fail simply because overconfidence results in the trader ignoring risk.  

This author is angry that the trade recommendations he accepted turned out badly and concludes that the 'teacher' who sold those ideas is a hack.  These are not your typical, successful teachers.  Providing a list of trades does not help the student.

This is not someone who makes arguments to which a response is possible.  I leave you to read his article for yourselves, and if anyone finds points worthy of discussion, please post and we can continue the conversation.

My favorite on his list is that 'technical analysis doesn't work.'  And he blames options for that.

JP:  My take on this article is that the writer has no clue of which he writes.  But understand this: Options trading is not for everyone.  Success requires knowledge of options and the strategies, skill as a trader, discipline and a true understanding of how to manage risk.  One needs ALL these to be a consistent winner.


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