Aug 08 2008
Dancing with Time
Don’t be a butt head. You know you’re going to lose trades. Not just a few but a bunch. Does that bruise your ego? Consider how trading works. It’s all about the probability of being more correct than not and not about being right. I know it’s mincing words but an option trader must accept the fact that trading is an “educated guessing game.” For traders, all the analysis in the world will rarely reveal the big chaos factor—time. As an options trader, time is the wild card.
So, traders try to use sentiment to gauge the amount of emotional momentum is out there urging the stock to move. But emotion is a fickle beast and good traders can only fathom its intent about 70% of the time. But if those 30% losing trades can be cut short and capital preserved as best it can, the other 70% of successful trades should make more than enough repetitive profits to far outweigh the losses. Option traders can make money even if they are losing 50% of the time. Flip a coin? No, the most influential factor is time and changing sentiment to usually unforeseen events. There is no way to accurately forecast the time an event will happen because it’s in the future and no amount of facts and figures can pin it down exactly-only probably. But, option traders can estimate a high probability of an event happening within a certain period of time. But- at best- it’s just an estimate.
Most investors who try to become option traders don’t make it. And the thing that discourages them the most is the fact that they are wrong too often. Long-term investors cope with time by mostly ignoring it. Stock option traders dance closely with its capriciousness. It’s a different game altogether. That’s why it’s important to learn to accept the losses. A trader deals with probabilities-not certainties.
A trader must develop a system that will produce at least a 65% win-loss ratio. Through paper trading, a system can be tested without the emotional pressure of losing money. After enough trials, a trader will see if the system is capable of recognizing and capturing a high probability trade. Not home runs, mind you, but steady singles and doubles.
To develop a system that will allow a trader to transfer his/her ego to the system takes time. Once a trader knows the fact that over a certain sample of trades that their system can provide a consistent win-loss ratio-at least in the 65% range- the trader will know how to mechanically deploy the system. The trader will know from experience that once a high probability trade is encountered, there is better than chance odds that the system will be correct. What the trader must be aware of is inconsistencies in the implementation of the system. The trader should “plug and chug” and implement the system the same way each time. It should become mechanical and there is nothing artistic or creative about it. Some traders leave the whole process for their computers and special programs to deal with. That would be the ultimate in mechanical trading and maybe someday we will all have a “little blue” on our desks. But by that time, there will be little risk and even smaller reward. But even with super computers, the time factor will probably never be pinned down to an exact function.
In summary, if you want to be a successful options trader, pay your dues: study options and all they can do. Develop a good system that will yield an acceptable win-loss ratio. And most importantly, leave your ego at the door. Keep in mind that there is an extremely high probability you will lose many trades and it’s in the nature of the game.
For more about how to learn the basics to advanced aspects of stock options, I recommend checking out Options University (www.optionsuniversity.com).
Get your free 7 Deadly Sins Report and click here, presented by Options University, and register now for the Forex World Currency Options Class with Greg MaDermott, starting August 18, 2008.
If you are interested in joining Options University’s affliiate program please sign up here.
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