Tag Archives | trading psychology

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.

JP

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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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Psychology of Trading Series: Stress

As mentioned previously I've become interested in trader psychology. This is an entirely new field for me, and professionals already blog in this area. I have no credentials to compete, nor do I intend to compete.  However, I believe that discussing some of their ideas can only improve our understanding of how we trade, and thus, improve our results.

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Although no longer an active blog, Dr. Brett's TraderFeed is still my favorite place to find nuggets worth sharing:


What stresses traders out: "When
traders face high levels of emotional stress over time, the result can
be a form of burnout. Overwhelmed by obstacles and challenges, traders
shut down. They stop learning, and they stop taking the actions needed
to move their progress forward."


It's difficult to be trading under stress.  And it's not likely to be a profitable time.  Yet that's when we need to be at our most alert – to defend our assets and be certain that we are not over-trading, trading too much size, or ignoring risk. 

When suffering from burnout, it's easy to get bored and take a 'let's go for it and take my chances' attitude.  When in danger of not performing at your best, it is important to take a break from trading.  You don't have to go on vacation.  Perhaps an afternoon bike ride will be enough to restore your energy.

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Signs of psychological burnout: "Very often, it's
not just the stresses of markets that overload traders; it's also the
stresses that traders can impose upon themselves. It's easy for
achievement-oriented traders to become their own worst enemies when
they're not making money: instead of focusing on constructive
improvements, they beat up on themselves and add self-imposed stress to
trading pressures."

Can you imagine the frustration of someone who is on a losing streak who feels the desperate need to earn a big profit from the next trade?  I hope you are never in that position.  When under stress, if you cannot back off and get away form trading for a short (or longer) time, then it's mandatory to your mental health and future earnings power to cut down on trade size. 

That's the simplest and most direct method for cutting risk and stress when trading.  And when you have less pressure, you are more likely to make good trading decisions.  That's far more important than risking your trading career in an effort to go for one big win.  

Don't undervalue the risk of ruin.  It's difficult for traders to find another stake when they blow out.  When under stress, it's far better to take a break than make a big effort (under even more stress) to recover losses.

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Keep your eye on the ideal: "It is far better to trade less often
and trade exquisitely well than to trade frequently and haphazardly."

There's nothing to disagree with in that statement.

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