Bad habits to break
to improve your option trading
Why Traders Fail
It’s a common question – Why do so many new option traders go bust before they even learn the business?
It’s not easy to become a profitable trader. In addition to learning
that which must be learned, there’s the perpetual problem of fighting
bad habits or allowing certain personality traits to get in the way of
making sound trade decisions.
Basically, there are a lot of things that
can go wrong which destroy a person’s chance to become a successful
trader.
Independent
trader and blogger Mark Minervini recently spelled out to Charles Kirk
of The Kirk Report why many option traders never find success.
Kirk: Why do you think most traders fail?
Mark Minervini: Here are six reasons:
#1. Poor selection criteria; usually based on personal opinion, theory or tips and bad advice
#2. They don’t stick to and commit to an approach; style drift
#3. They don’t cut their losses – the top mistake made by virtually all investors
#4. Don’t know the truth about their trading – they fail to conduct in-depth post analysis of their trade results
#5. Treat trading as a hobby and not a business
#6. Want too much too fast; learning a skill takes time
There’s a lot of important meat in those few lines of text.
We all recognize that it’s not easy to cut losses, but I firmly
believe that this results in more grief for traders than anything
else.
What causes a trader to suffer a big hit?
I believe that it’s the
unwillingness to accept that a trade is not working, and that it’s not
likely to get any better if held longer.
Under those conditions, losses
mount.
The only way to prevent that big loss is to cut it off at its
knees — and the time to do that occurs when it’s a much smaller loss.
The difficulty is sacrificing the possibility that the trade would turn
profitable.
My advice: Get over it. Many trades will be unprofitable.
That’s a fact of life for a trader.
I understand that on a rare occasion a gap opening may do irreparable
damage, and not provide an opportunity to take the small loss. However,
that’s also a preventable occurrence.
If the damage is too great, then
the position was too large. It’s that simple.
Mark Minervini’s tips and my comments may seem simple. That’s because
they are simple — and that simplicity makes people doubt their
importance.
How many of us look at trades after the position is closed?
How many
dissect the entire trade in an attempt to find out what was done
correctly and what mistakes were made? Very few.
A mistake is not a trade that loses money.
A mistake is making a
decision that was clearly incorrect at the time, but the trader was
unable to see it.
Another mistake is avoiding a trading plan and not
doing postmortems on your trades.
Admittedly, that takes time. However,
if you take trading seriously, and do not consider it to be a hobby, you
must recognize there’s work to be done.
Mistakes are part of the game. Making the same mistake repeatedly is
not. At least it’s not part of any successful trader’s game.
Mark Wolfinger has been a professional options trader since
1977. He was a CBOE market maker from 1977 through 2000 and has been an
author and educator since 2000. Mark has written four books and writes
the Options for Rookies blog.