Trade What You See

Here is a terrific piece of information from Charles Kirk, author of The Kirk Report.

Remember this – in trading it isn’t about who is right or wrong. Instead it is all about who can make money and take advantage of the most opportunities in the present.

Opinions are terrific things, but in most cases, you would be wise to set them aside and trade the market you see rather than the market you think you should or want to see.

That pretty well describes the right attitude for a trader. Don't be stubborn.  Don't try to outsmart the market.  Trade what you see.  For short-term traders, this advice is not only 'good' but it is easy to follow.  If it turns out that what you thought you saw is inaccurate, it's no big deal to exit the trade (yes, with a loss).

Making money from current opportunities is how successful short-term traders play the game.

The problem for me, and other option traders who own positions that take a few weeks (or months) to play out, is that it's not so easy to reverse direction.  Sure, we can exit trades when our market view changes, but the whole idea behind market-neutral trading is to avoid having a market view and thus,  avoid trading what we see (or think we see).

I do agree with Charles' comments.  However, not every trader can adopt that philosophy.  Why wouldn't everyone 'trade what they see'?  I can think of two good reasons

a) When I own a position than I plan to hold for two months, I fully understand that 'what I see' may change several times during that holding period.  Trading in and out of iron condor positions is commission intensive, but more than that, slippage (overcoming bid/ask differentials) is expensive and is something to avoid.  If I want to make a short-term trade, the iron condor would never be the trade of choice. Thus, if I already own the condor, I'm not anxious to alter the trade when the position is well within my comfort zone.

b) It's not always easy to interpret what you see.  If it were, no short-term traders would ever go broke and the failure rate among new traders would be closer to five percent than 95 percent.

Note: Nothing prevents me from buying a call or put spread (or even naked options) as a market play, but when my primary trading style is to own positions that take more time to come to fruition, I cannot pretend that I am a day or swing trader.  I'm as much of an 'investor' as a trader when dealing wth iron condors.

 

Should You Trade What You See?

How can these two trading schools be reconciled.  Or can they?  In my opinion, traders fall into two distinct camps.  It's based on how long a position is held.  In other words, day traders and swing traders represent one group and those who hold positions longer represent another. 

Traders with a bias do trade what they see.  Investors do the same, but they are not going to be changing their minds too often.  In fact, one of the biggest problems for investors is refusing to pay attention to what they see and they continue to hold positions that clearly should be closed.

From my perspective, there is a separate and distinct class of traders. We neither trade with a directional bias nor go in and out of positions quickly.  I classify myself as an options trader, and not simply a 'trader.'  By that I mean that I work to earn money by adopting option strategies that work over time, rather than in looking for strategies that pay off when the underlying makes a predicted move.

I concede that these option plays do have a market bias.  But that bias is 'neutral,'  That's another way of saying that I have no clue what the market is going to do next and I'm taking the position that nothing major is going to happen.  I do trade what I see.  However, I don't see anything.  I see a strong trend, but never know whether it's going to continue or reverse direction.

Thus, people like me trade strategies that prosper when time passes and the markets do not make big moves.  We may buy insurance as protection against monster moves, but that insurance is bought as a protection play, not as a prediction play.

If I thought I could do as Charles suggests and trade what I see, I would do so.  But I know I cannot see well enough to find success that way and accept the fact that to earn money, I must be an active risk manager and control risk as time passes.  This methodology must lose money part of the time.  However, if the trader is careful and especially when the trader is not stubborn, profits easily outdistance losses over any extended period of time. 

 

Psychological factors

There have been times when I was disappointed by losses. The best way to achieve a more satisfactory result is to find a better strategy for the current market.  It may be a good idea to exit any existing iron condors – but that's not the point to emphasize.  Begin to trade what you believe you see.  If it feels like a bull or bear market, you are not required to go along for the ride.  However, there is no reason not to modify your methods to account for the market that you see in front of you.  That may be as simple as modifying your usual strategy to sell more put spreads or (better) fewer call spreads.  It may work to select farther OTM call strike prices.  Don't fight the market.  If you don't want to embrace 'what you see,' at least make some concession to it.

Trading what we see is not easy for the rookie options trader, nor is it that easy for me. I've been a market-neutral, don't-trade-your-opinion trader for more than three decades, and it's not easy to trade what I believe I see.  However, it's easy to set a stop loss and exit any trade.

This is just one additional example how psychological factors play a big role when trading.  It's a real choice: go with your favorite strategy, or recognize that this is not the right time for that play and find another. Find a trade that does well under current market conditions.  It seems perfectly obvious to do that, but it requires the ability to break what would have been referred to as 'discipline' if you depart from strict market neutrality.  Don't force yourself.  No single idea works well for everyone.  In fact, when in doubt about how to proceed, sitting on the sidelines is never a bad idea, as long as it does not become a permanent habit. 

As always, it's ok to cut position size or paper trade to experiment with specific ideas when uncertain about using your preferred methods at any given time.

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