Options education series, continued:
For some rookie traders, making that first trade using real money can be a psychological ordeal. There is no doubt that most beginners are anxious to trade, and many begin before they are ready. But there are also traders who live at the other end of the fear spectrum. They are careful people who want to be certain they understand enough about any activity before getting started.
Trading is personal. It requires some knowledge upfront. How much is the undecided question. Yesterday, I blogged about sufficient and insufficient knowledge. There is no ‘proper’ curriculum that the student must master because much depends on the needs/skills of the individual. However, one thing that must be understood is that the education process continues throughout a trading career.
Know who you are
Understanding your strengths and weaknesses is a big advantage. The problem is knowing which of those is important to the trader. That’s why education is so personal. Certain traits can destroy a trading career – impulsiveness, for example. This is very different from having the skill to make a good decision quickly – especially when under pressure.
If you are impulsive and must get started NOW, even if not ready, this does not have to turn out to be a poor decision. However, that impulsiveness cannot be given free rein. It must be controlled. If you trade a small position, understand the strategy, and avoid impulsive behavior at critical times (when making trade decisions), then the experience may be rewarding.
However, if that trait gets the better of you, don’t make the mistake of believing that you will be in control next time. This problem does not go away, and you may (eventually) require a coach or psychologist to find an answer.
One possibility is to lay out a detailed trade plan and update it frequently. That assures a plan will be ready and no impulsive decisions need be made. This requires using the plan and not making a spur-of-the-moment decision to go in an other direction.
Trading is not for everyone, and the inability to get over certain habits can doom a trading career.
Learn First, Trade Later
You never know how much you must understand before making that first trade. There is no test. However, if overwhelmed, stressed, or uncomfortable, exit the trade and understand that you are not yet ready.
NOTE: Making a profit does not mean that you are ready, and taking a loss does not suggest unpreparedness. Luck is always a factor when trading. This is a game of statistics and probabilities. Do not draw conclusions based on a few examples.
You are ready when you:
- Know how to use the strategy being tested
- Know whether gains and losses are open-ended, or limited
- Can calculate the maximum profit and loss for the trade
- Know how to establish a profit target, and have done so
- Know how to establish a maximum loss
- This is less than the maximum possible loss
- It is the maximum acceptable loss
- If that loss occurs, you have the discipline to exit the position and lock in that loss
- The loss and profit limits are well within your comfort range
- You do not have too much at risk. In other words, there will be no reason to panic
- You do not have to be skilled at managing risk (yet)
- You must understand that ‘fixing’ positions is part of trading
If you believe the items on the checklist can be handled, then you are ready to begin trading. However, do not discontinue the education process. You have barely begun.