Review of My Options Trading Mistakes

After reviewing my past trades including those in my live trading before I started this blog, I came out with a list of the mistakes that I’ve made. This also includes most common mistakes of other options traders.

Do not bear to cut loss
One of the mistakes in options trading is holding on to the losing trades for too long. I shall think that this is not only happen to me but most traders out there. Never hold on to an option in the hope that it will go back up.

Losing 40% is better than losing 100%. I’ve done that once and it has wiped off all my money. I bought calls with the assumption that any pullback will be short lived and the stock will go right back up. But it never happens!

I have to keep reminding myself again: if it's time to sell, take the loss and move on!

Violating rules
At times I tend to violate some of my rules by taking higher risk. For example, if the risk that I can accept is not more than 30% (or an amount in dollar term) but sometime if the pre-calculated risk is 32% I will be very tempting to enter when I see that the potential gain is quite high. Sometime I do gain profit but most of the time not.

Time decay was being ignored
Time decay is one of the factors that options premium depreciates. I always forgot about it and hold on for too long when the stock doesn’t move. I realize that the longer I hold, the nearer the options will be to its expiration date and the value of the options premium will become lesser. I end up losing money even if the stock does move a bit. This is also a very common mistake for those who used to trade stocks as stocks don’t have time decay.

Emotions take over
Don’t trade when you are physically and psychologically not in good conditions, for example, not feeling well, bad mood, confuse etc. Even if there is a good trade popping up in front of you, it is not advisable to enter if you are in the above conditions. You will probably making wrong judgment and end up with a wrong trade.

Adjusting stop loss too soon
Only adjust stop loss after the stock has tested its support/resistance line. Adjusting too soon will get stop out easily.

Tighten stop loss
Stop loss easily gets triggered when it is too tight. Meaning it is too close to the entry price. Do leave some room for the stock to fluctuate.

Perceive a wrong trend
It is better to look at longer period (e.g. 2 years) of historical chart than a shorter period (e.g. 6 months) when deciding a trend. We might see an uptrend in a 6-months daily chart but in fact it is a downtrend when we look at a 2-years chart.

Chasing an increasing price
Never chase the price when you see it is moving towards your directions even it perceives as very good trade. You might end up buying more expensive options and taking much higher risk.

Past trades not being analyzed
More often than not we are blaming the system or the market but not ourselves when we are losing money. By knowing that we are making losses is not enough but rather why are we making those losses. We must analyze it; accepting our mistakes and improve from there. It is essential to perform a quarterly analysis for your past trades if not monthly. List down those mistakes and keep reminding ourselves so that we are not making the same mistakes again. Just like what I did here ;D


I strongly believe that trade to be right is more important than trade just to make money. If you can trade in the right way, have a set of right rules or system and follow through, you will eventually make money and more importantly making money consistently.

Do You Have 6 ‘P’?

After trading for about a year I’ve come out with my own 6 ‘P’ which I think a must have for an Options Trader:

1. Passion
2. Patience
3. Persistence
4. Perseverance
5. Psychologically right
6. Preservation of capital

Passion

First and foremost you had to have the passion for options trading. If you do it just for the sack of money you won’t do it wholeheartedly hence it is difficult to become a successful options trader as you might just gamble away your precious capital.

On the other hand, if you love to trade your focus will not be solely on making money but on learning how to do it right. Besides that working hard and having the determination to improve your trading skill, dealing with the aspect of trading psychology and self discipline are the factors to determine if your trades will be successful and profitable.

You will do it everyday without feeling monotonous. You will keep on learning more and wanting to improve yourself and work harder even though you have failed several times.

I love options trading very much and I treat it as a profession, a business. Learning how to trade is like taking an honours degree course. I do something related to trading everyday and I keep studying, refining and improving.

Patience

Be patience, don’t jump into live trading too soon before you can even gain consistence profit from virtual trading.

It is not wise to just jump into the market just because you have not done anything for the past couple of days or hours and feel like you need to do something to make some money. This can really play havoc to your success.

If there is no trade set-ups just stay out of the market, do something else, go and catch a movie, go to the gym for some workout, etc. You’re here to make money by quality trades but not quantity. It is better to be outside of the market and wanted to go in rather then to be in the market and wanted to go out. We always look for reasons not to enter rather than reasons to enter the market.

I used to be very greedy and take what ever set-ups I saw and end up entered many trades with a few difference strategies at once. I realized that it is hard to manage and very confusing. Some times I even forget which trade is with which strategy.

All the great traders have the patience to wait for losing periods to end and for profits to emerge and to only take signals that are consistent with their methodology.

You can’t force profits in timescales you just need to be patient. Period.

Persistence

Don’t ever give up! I have seen many traders who gave up after having a few losses. They felt disappointed and don’t believe in trading anymore. You must understand that losing is part of the game as long as it is well managed. Take small loses and maximize the profit and you will be fine.

Don’t stop learning. Learn or do something related to options trading everyday. I’m not saying that you should keep learning new strategy or system. Just stick to maximum 3 strategies that you believe in. A decent system with 55% success rate will give you consistent income in the long run.

It is essential to review and revise your past trades especially those losing one. Learn from your mistakes, refining and improving from there. It has been a great help by keeping a journal like what I am doing with this blog.

Perseverance

Would you be able to continue trading if your money was totally wiped out several times? Many successful traders will because they have the perseverance to continue and that will lead them to path of success.

Believe it or not I have actually lost all my capital (real money) twice in 6 months when I first started options trading. I would have give up if I don’t have the perseverance to move on.

Losing all your money is not pleasant, for sure, but a necessary experience for many to eventually succeed.

Psychologically right

To have a right mindset and right psychological aspect is very important. Believe in yourself and the system that you have chosen.

Many options trading courses teach us how to trade but not on handling our emotion. How are we going to overcome our fear (of losing) and greed (of taking more profit)? We tend to hold on a losing trade and hope that it will make a reversal one day; cut the profit short before it reaches our target. This is the most common mistake that many options traders usually make.

We must try to trade like a machine without emotion involved as much as possible. Be discipline, follow the rules strictly. I know it is hard but it is not impossible. You can do it by practicing using virtual trading until you developed such a habit of following the rules of your system.

The real reason so few succeed in trading is because the traits required for success are almost exclusively psychological.(Gary Smith)

Preservation of capital

This is part of money management. Preserve your capital is essential, keep your losses minimum and capture greater profits. Don’t use all your capital to trade at any one time. I always use half of my capital to put into positions and leave another half as cash. This is to prevent from stop out of the market too soon.

Focus more on managing risk. Playing great defense is as important as playing great offense.

Most traders fail because they don’t know how to tale calculated risks. Poor money management is one of the major reasons novice traders lose.

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Remember, it is not the system or the strategy of trading but you yourself that lead to your trading success.

How you can reduce the effects of emotion and negative psychology?

The answer is discipline! Without it you will lose.


Discipline in the following three areas of trading will ultimately determine your trading success.

Training

The successful trader never rests on past successes, or believes that his trading ability has peaked.

He is always learning, practicing his decision-making skills and honing them until they become second nature. Then he can react faster than a speeding bullet, but with the benefit of superior human judgment.

Trading Rules

The successful trader develops a set of trading rules - a plan - that he follows religiously. This guides his decision-making at all times. If a trader`s plan dictates that it is time to exit a stock, the trader will exit that trade and not wait a minute longer.

Self-Control

Successful traders display an extraordinary amount of self control.

Keeping emotions constantly in check, the disciplined trader is immune to the highs and lows that attend large market swings, whether panic, in a downturn, or of euphoria. I will show you how to learn the secrets of discipline.

These components may seem like a tall order. But that is exactly the point; trading is difficult work and serious business, demanding time, patience and a great deal of hard work. Master these components and you are on your way to success. Step off the straight-and-narrow path of discipline you will meet certain financial ruin.

The key message about discipline is that without it you will lose. It is that simple. You may think, "I understand and I will be disciplined in my trading." Nevertheless, this is where fear and greed enter into the picture. Shortly after this, an emotional rollercoaster ensures the stability of your character.

Can Discipline Be Learned?

The big question here is this: Can you develop the discipline you do not have naturally? I believe the answer is "yes, you can," but you must have the necessary commitment to do so.
Clearly, discipline can be developed. You only need to look at an army training program for confirmation of this fact.

However, it is one thing to have a vast and experienced organization bearing down on you and being prepared to do whatever it takes to make its point. It is quite another thing to do it yourself in the comfort of your own home, with all of the distractions of daily life.
Clearly, self-discipline is a requirement even to start this process.

Ultimately, undisciplined behavior is going to be punished by the market, either by direct losses or by the loss of profits which otherwise have been available.

Private traders who persevere do have external stimuli that will help the process. However, the market does not help as much as it might, because of the principle of random reinforcement. It is the market`s tendency to reward bad behavior from time to time.

This crucial fact is one of the reasons why it takes so long to learn how to trade. You need to realize there is no point in having a system if you are not going to follow it.

To speed up the process of learned discipline, you can read the book Dr. Alexander Elder, author of "Trading for a Living".

Trading Psychology

Have you ever wondered, as I have, what makes this kind of difference in people`s trading? It is not always a native intelligence, talent or dedication. It is not that one person wants success and the other does not.

The difference lies within your psychology. Your psychological mindset is likely to play a larger role in your trading career than your chosen technique or any other details associated with your day-to-day practice.

Now, I am not the only one to discover this... In his book, Trade Your Way to Financial Freedom,



the renowned American psychologist Dr. Van Tharp discusses the role psychology plays in your trading success. He divides trading into three "Ingredients of Trading." In his pie chart, System is 10%, Money Management is 30%, and psychology is 60%. He discovered that the trader`s psychology has more to do with his success than anything else does.

What exactly is your psychology?

In short, your psychology refers to your emotional responses to a given situation... In trading, fear, greed, vanity, pride, hope, jealousy, and denial can all affect investment decisions. Although your aim in the market is to maximize your profit and minimize your risk, emotions often make this easier said than done.

For example, traders who react emotionally make the wrong decisions, such as the common mistake of holding a losing position in the belief that someday it will become a winner.

This classic mistake is called loss aversion. Loss aversion refers to the tendency for people strongly to prefer avoiding losses than acquiring gains. Some studies suggest that losses are as much as twice as psychologically powerful as than gains. Loss aversion compels most traders to hold a losing stock while it plummets downward. This clouded judgment clearly contradicts the trading adage "cut your losses."

These investors also engage in other forms of irrational behavior, like attributing success to skill and losses to bad luck. Worst of all, this is just the tip of the iceberg when talking about the other devastating effects of trading using your emotions.

The truth of the matter is, without controlling your emotions, most new traders lose all their money very quickly in the markets. In fact, most are completely wiped out within the first year of trading. So, as you can see, your emotions do play a big part in determining whether you fail or succeed...

Creating and Managing a Trading Journal

I saw this article from Toni Hansen's Online Trading Blog.

It is about Creating and Managing a Trading Journal, below are a few points that I think I can use it for my journal here and be able to improve on.

• It is a great deal more constructive to use charts in your trading journal.On the top of the chart in the corner I write what the pattern I traded was. I also write the symbol, sector, entry time, price, exit time, price and gain or loss there.

• Then on one side of the chart I write my pros and on the other I write my cons. On the chart itself I mark all relevant info: support and resistance, trend lines, volume, etc. so that when I look back at my chart, I automatically focus in on the main points that helped me decide to take the trade. Then, under my chart on one side I write the things that I did correctly and on the other I write down things I could have improved upon. I then organize my journal according to patterns.

• At the front of each section I then have a list of pros for that pattern and cons for that pattern which builds on itself as I learn. I also have a sheet that lists things I constantly do correctly on that pattern and my most common mistakes. Organization is essential. Your journal must be something you can actually learn from. If you want, you can add equity curves. These can help you narrow down times of the day or week where you trade better and even times of the year. On an equity curve I'd suggest marking significant life events as well.

• One review method that works really well following a trade is to cover up the outcome and walk through it bar by bar as it develops to help cement that progression into my mind. It allows me to focus more clearly on the key points as a pattern develops that I might not have seen initially. That way I can recognize it more quickly the next time you see the same action forming.

After reading Toni's article, I'm happy that I do practice keeping this journal and it is easier to discover a trading pattern. By just a click I can see what I've done right or wrong for the same strategy in the past. I really love blogging, it is very organize and systematic.