Given a chance: A different path?
A new member of our forum posted a great question:
“If I had to learn options all over again what would I do differently?”
Boy, that’s the million dollar question isn’t it? Here are my thoughts:
First off, I would have to say that I should have been more patient. In my life I’ve done well being aggressive, tenacious and smart. In trading, those very traits that have made me successful conspire against me. Being aggressive got me real money trading *way* too soon. Being tenacious meant I hung onto my losers long after I should have closed them. Being smart gave me too much confidence, I traded too large and I lost hundreds of thousands of dollars. So, yeah… I should have been more patient. Becoming a great trader is the hardest thing I’ve ever done (and continue to do). Learning the mechanics of options, my broker, and the market is just the beginning. Even with a great mentor (::cough::cough:: MOJO <smile>) I would still plan on it taking two to four years of insanely hard work before it just becomes normal hard work. 
Second, I wished I had listened more and followed more closely the advice of my teachers, partners, and other great traders. Specifically I wished I had stayed in paper trading for at least 6 months of profitable results. I wished I had journaled every trade much sooner than my two year anniversary. I wished I had gotten a single mentor or two, paid my 20K to 30K and really learned the craft. That would have been a bargain compared to the money and time I’ve wasted.
Third, I would have master one or two strategies first and only added additional strategies after I was consistently profitable.
Fourth, I would have been more open to different styles and backgrounds instead of assuming that I was given some sort of “secret” formula that would always work (NOT).
Fifth, I would have asked more questions, paused more presentations, and been more willing to embarrass myself in front of others so that I understood completely what was being said.Sixth, I would have taken advantage of all of the free content that exists on the internet. Not the “come to my 30 minute sales pitch”, but the really great, open, and honest conversations between traders that you can find here and in some of the earlier Yahoo groups.
Seventh, I would have started my public blog and our forum a long time ago. The different styles, open exchanges, mixed experiences, world class caliber traders, and accountability of this community are really fantastic!
I hope this helps and I would love to hear everyone’s comments.
Mojo
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Some excellent thought in here. I will post my "wish I had dones" in a separate post, but a couple of your are huge. The 6 month or so of profitable paper trading is a very interesting one.
The most important one I see above from a tactical perspective is the mastery of one or two strategies. I am mentoring a couple traders formally, and have been an informal coach in the past. The biggest issue I have to overcome with people that have been studying option trading is that they have learned 8 or 15 of the popular trading strategies well enough to be able to roughly discuss the Greeks for each one and the mechanics of the trades. But they don't have a deep intuitive feel for any of them, and they try to use each one when it is optimal.
I honestly think 2 strategies, one for trending markets and one for sideways markets that are mastered is a much better approach. Yes, there are potential advantages of using the optimal strategy - but only if the strategy is used very well! That is why mastery is critical. I know I can out perform a new trader in rising market with my silly diagonals when they are using butterflies or BWBs. This is not because I am smarter, but because I am simply a more experienced trader with a strategy I know extremely well.
I have over 17,000 confirmations that are part of my diagonal trades over the past few years. I am a good diagonal trader. I can now use that to do a pretty good butterfly. But, when I only had a couple thousand trades under my (too large) belt, I tried trading too many strategies and my profits went down.
Anyway, enough rambling,
Thanks for the post, Mojo.
Matt
rjwaugh
Be careful not to get too focused on "% of winning trades". You could create a trading system with a 99% winner rate and still lose a ton of money if the one time you lost you wiped out your account. This was one of mistakes early on that attracted me to the "85% win rate" with Iron Condors. When I lost, I doubled down and went again. Problem was I lost four months in a row and wiped out the account. DOH!
Expectancy is always a balance of winners over losers AND the percent gained or lost each time.
All the best,
Mojo
After following Mojo's posts on a different forum, I followed him over here and started learning with him. The very first thing he told me was to learn one strategy and to stop real money trading. I listened to 1 of the 2...guess which one? Yep, I had to lose some more money before I finally listened.
I am still struggling with the greeks...it is a never ending battle within my brain. Someday it will click but until then I will continuously ask my trading buddies for clarification and then will continuously answer as patiently as possible *fingers crossed*
I am glad I didn't spend the money on advanced training when the opportunity arose because I was not ready at that time in my life. I am still not at an ideal time for full time trading and the amount of work it entails, but that is my future goal. In the meantime I will stick with my couple of strategies and a few trades here and there. The preservation of my capital is the key until I am ready.
I would paper trade differently than I originally did. I used to develop my posture, then select stocks then select a strategy. I was trying to get everything right. The problem was that each step is a different skill totally unrelated to the others. So, I started doing each one independently and I learned a lot more in the same amount of time.
For example. I would do my posture for each geography and market. I do US large cap, small cap, technology, Asia large and small, Europe large and small and financials.
In parallel, I would select representative companies for each geography and industry. I use 10 industries (Energy, Materials, Industrials, Telco services, Information technology, Health care, Utilities, consumer staples, consumer discretionary, and financials).
Then I would make bull and bear trades for every company, one set according to my posture, and one set counter to my posture.
The advantage of this is that you can get the posture wrong, and have a set of trades that will work. Sometimes you get the posture wrong and both sets of trades work, some times you get the posture right and many of the trades fail, but usually your trades match the posture.
Now you have something you can sink your teeth into. Are there things you need to fix in your posture determination? Are there trade types you rarely do well? Are there trade types you almost always make money on, even when you have the posture wrong?
This little exercise allows you to easily make 5 trades a day, you will have that many good set-ups for what you are trying to do, and many days there will be 10 or 15 trades. After a couple months of this you will have many hundreds of trades to analyze. And the posture will now be history, so you can determine what you need to work on.
If your posture is not a strength, pick strategies that are more tolerant and strengthen posture development. If your stock picking needs work, but the trades are working, and your posture is work is good, then start with ETFs and develop fundamental analysis skills.
Are there trades you just don't like or hate managing, or you don't do well? Throw them away and start focusing on what makes you money.
When I did this I learned a ton about myself and my style and my skill level.
Another thing I would change is getting a trading partner early. I didn't know anyone else that traded for the first 4 years I traded. I had no one to bounce ideas off of. I tried a paid for coach at InvesTools, but the first one was good, he got promoted and the second one sucked, and I never tried again, either for a paid coach or a partner.
I also would start putting myself out there and document what I do, and try to teach earlier. There are things I could do, but not explain well. When I had to explain what I meant to others, it made me solidify what I really thought I knew well.
I would make sure my personal succession plan was defined a lot earlier. I am married with kids. I didn't document for my wife (who thinks trading ought to be illegal what with selling what you don't own...) what to do or who to call if something happened to me. I just never thought of it. I know, dumb. But I talk to others that are making the same mistake, so perhaps there is someone on this site that has not taken care of this.
Matt
I'm not familiar with how you're using the term "posture". Can I assume this is your overall opinion of the direction (or nondirection) in the market or index or the stock?
Great thread,
medowz
I would have started trading with a smaller account. Well, kept trading with a smaller account. I got very excited early on and put too much money on the table while still very early in my learning.
I'm a learn-by-doing kinda guy, so I don't know that more paper trading would have helped much. But less trading, more studying during the first six months would probably have helped.
Posture is we are in a bear market that looks to be deeper than cyclical. It started in the US with discretionary spend dropping in summer of 2007, followed by a credit crises that has hit the financials the hardest. Small caps have fallen the furthest, and financials of he large caps have fallen the furthest, with discretionary next furthest.
Europe has followed the US with worse financial management at the ECB likely leading to a deeper market crash, higher cuts in spending and a deeper recession in the US.
Asia's crash was precipitated by the drop in US buying of discretionary products and the drop off of China purchases. This will hit the Chinese supplier countries the hardest, especially Korea (large supplier to China and US for discretionary supply chain items), Singapore, and Taiwan. Lesser impact on Japanese companies. Infrastructure companies as China was not a major trading partner for those products with Japan.
The rise in the dollar against all but the Yen will hurt exports doubly as volumes of products falls and the dollar value falls faster. This will impact Japanese companies in Discretionary markets, and all other markets across the board as profits stated in dollars falls proportionately to the rise int eh dollar.
That to me as a simple posture that I can now use to search out stocks to trade. This lead to the ABB, BHP, DRYS, SNE, and TM trades directly. It lead to many others through analyzing what the second and third order impacts are.
If your posture is right, the trades are easy. I continually hear tat between 70% and 85% (varies by source) of a stocks move is due to the industry relative move. Another 10-20% is the stock relative to its peers, and the rest is trade selection. If you get everything on the posture and industry right, then even if you do a diagonal instead of a BWB, you will make a lot of money. If your posture is wrong, then picking the perfect trade strategy only cuts your losses a little.
Matt
Thanks for the thoughtful post. In particular I'm interested in the "trading partner" notion. How did you ultimately find one and how do you now work together?
-aw
Matt
I also swap ideas with friends via email.
Matt
I think the issue is that so many people are in awe of your trading acumen...since you have done so well in the past you can't be wrong. I know I wouldn't know enough to even consider telling you something wasn't right. That said, though, I have my own rules and comfort zone which aren't the same as yours soooo....
Happy Trading!
Matt
Matt
Super posting. I started studding two years ago and just started (3 months ago) to trade with my own money. So for so good. If I had to start all over again I will try to find friends to support and help me along the way (I haven't found anyone yet). There so many things out there, it's mind bugging for a new person, you simply don't know where to start and you try to catch what's out there from different trainings and books.
The second things I'll do is like Matt said, focus on one or two strategies going from simple call and put to short vertical than Iron Condor. Paper trade for two months if successful start Chihuahua real money trading (one contract) then make your trade slowly bigger if successful until you reach your comfort zone.
Thanks
Mario
What! We don't count as supportive friends here!?!
Mojo