Author: Clinton Lee.
This is a
continuation article from Part 1.
You are to be commended for choosing to follow through with the
remaining 6 tenets, to enforce daily trade discipline in your own online
options trading processes. Here,
they are.
7. Doubling down accelerates losses.
Doubling down only accelerates the average cost towards the losses –
known as – “catching a falling
knife”. The breakeven will keep
moving away, as you chase the price.
Trade for profit. Do not
trade for breakeven with odds against you. Only add to a winner, if the entry criteria and Reward to
Risk Ratio repeats the setup of the original winning trade. Limit adjustments – ever tried to
"adjust" the sharpness of a knife?
8. Keep the learning real and thematically
consistent. Counter the fixation with “magic”
tricks of “technical analysis wizards” by learning from trades you have lived
through. Price signals tend to be
the strongest. Add depth to your
insights into the dimensions of price.
Set aside 1%-2% of your portfolio for continual self-education. With whatever you learn, if you
struggle to relate it to some field or function in the trading platform,
unlearn it if you cannot relate what is taught to what you can price in the
platform. You will have to drop
the “L” plates from “L”-earn, to earn.
9. Ditch the software crutches.
Software is not a substitute for critical thinking. Break down the logic in the software
(how, what and why). Black box
software cultivates an addiction for repeatedly mindless subscriptions. Break the habit, trust your logic to
reason – you have profitable trades that you thought through yourself. As you “outsource” the administrative
tasks associated with trading (e.g. record keeping of trades), do not outsource
your brain.
10. Plan trades with business discipline.
Most plans cover Entries, Exits, Stops and Profit Targets. Still, no one enters a business with a
few bullet points. Your trading
plan must address the very defining reason of “Why trade?” What is your
motivation (each day, month and quarter)? E.g. build up the children’s
education fund, pay for household expenses or self-directed retirement? How robust do you want your home
business to be? It’s reflected in the construction of your portfolio and trade
plan.
11. Unrealistic expectations.
Build wealth slowly and consistently. Forget dream chasing home runs.
Trading is a life endeavour. The markets will outlive all of us.
12. Scrooge – cheap is not smart.
Volatility dominates price-performance. Do not make option decisions simply on cost alone. Options are not fairly priced on
bid-ask alone. Options perform
based on what you pay for them.
E.g. buying High(er) Deltas may not be the cheapest but may give the required
directional bias. Rethink for a
set amount of Theta decay, what that buys you. Like in real life, bargain shopping can lead to more junk
than you've got room to store.
Don’t end up with an inventory of junk Calls and Puts in your
portfolio. Get savvy, seek value.
As you exercise
stricter discipline, you should see these characteristics of a more stable
portfolio performance:
❑ Profits should step up gradually,
depending on the size of your account.
If it’s in the tens of thousands, the profits should step up
consistently like a ladder from the low hundreds, to the higher hundreds; then,
move up from the higher hundreds into the thousands. If your account is above $100K, profits should step up from
the high hundreds into the thousands.
❑ Profits that jump from low hundreds
into the thousands signal an over-reliance on gapping plays, which fail to help
you step up consistently profitable results.