I’m coming up on my 2 year anniversary with Investools and trading options. As part of that, I’ve been reviewing all of my trades, trading rules, success rates, and operations. Some very interesting (OK, not ‘that’ interesting but interesting in a ‘Dorky’ kind of way) patterns have emerge from obvious to insightful. For instance:

1) Paper trading did very little for me. My patterns of trading completely changed from paper trading to real trading. What works better for me is to trade a small number of contracts. The pricing on Think or Swim is a huge help and would have saved me thousands of dollars in commissions.

2) The search for the perfect system is a fools errand. It matters very little what system you use, only that you use a system without fail or exception. This is particularly important for me.

3) If I follow my rules I make money. Almost without exception, the only time I ever lost money was when I didn’t follow my rules. Try this yourself…. Sort your trades by largest loss to smallest loss and deconstruct your trade to see in how many of those trades you followed your rules. I bet its less than 10% (mine was less than 5%).

4) Technical analysis gives you an advantage, but is not perfect. In the beginning I was so convinced of the advantage of certain technical indicators (think MACD, STOCH, RSI, candles, etc) that I ignored other less important indicators like price (DOH!). Put it another way, price trumps everything else. In order of importance from price, I would say support and resistance, volume, industry / sector, and overall market. I have my studies divided in two; one set of studies for trending stocks and another set of studies for non-trending stocks. When in doubt I drop to price and volume only.

5) News does not help. Almost all of the great traders are not on Wall Street and maintain a respectful disconnect with news. So I greatly reduced my exposure to news, market reports, and commentary and my trading improved instantly. Even if I got the news right and early, that didn’t mean that it was a reliable predictor of the market’s response.

6) Don’t try to master everything at once. Pick one technique such as conservative credit spreads, iron condors, strangles / straddles, diagonals, etc. and master it. Work it until you are consistently making money month to month and then and only then start mastering a second technique. Today I only use 3 techniques; credit spreads, iron condors, and diagonals. I don’t feel any need to add additional techniques.

7) Be careful of how you treat your winnings. I noticed that I would use my normal techniques to create winnings and then use those winnings to put on higher risk trades that I would never put on with my normal capital. Then if those trades moved against me I would rationalize that I “was using winnings anyway” and it was OK if I lost those funds. Don’t do that. Treat all winnings as capital and hold to it with everything you’ve got.

Trading is not entertainment. Be careful not to trade because you are bored. When you are board get up, go for a walk, read the message boards etc, but don’t trade for entertainment. Good trading is a boring activity akin to working in a factory. (Albeit a high paying factory!!)

9) Its easy to put on a trade, its much harder to exit. Spend at least 70% of your time defending your trades. In times of sudden shifts, trade defensively only.

10) Strive to ride a trade for only 60% of a movement. A great trader is never the first in and never the last out. In a 100% move, trade to capture the move from 20% to 80%.

11)Remember, the holy grail in trading is to become a consistent trader. It’s a lot more important to make 3% a month consistently than to shoot for 10 -15% a month and fail too often. Make your money hitting singles and doubles and you will eventually see occasional home runs.

12) It doesn’t take a lot of time. Once the initial learning is complete (about a year for me) I spend about 10-15 hours a week trading. Any more or less than this and my performance suffers.

I hope this helps others out there!

Good luck and good trading,

Mojo

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