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OptionSIZZLE is created to help you better understand and become more familiar with options and what the professional traders are doing everyday in the market and provide effective options trading strategies to allow you to trade better and trade smarter. We have found over the years some of the... More
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  • Here's Why You’re Not Trading With Confidence 0 comments
    Aug 21, 2014 12:01 PM

    One of the toughest issues option investors face, is sticking to their plan during adverse times. I believe there are a couple of reasons why this may occur.

    Now, before I get into it, keep in my mind that I'm not a trained psychologist…what I'll be sharing from is personal trading experience, coaching and conversations with thousands of option investors over the years.

    First, one of the most important factors to being successful as an option investor is to have a strategy that yields a positive expectancy with a payout that makes statistical sense.

    In the beginning, how will you know what that strategy or strategies will be? Well, for the most part, you won't.

    For instance, many think selling a covered call is safer than selling a put. However, long stock and short call have the same risk profile as being short a put.

    Actually, selling a put with the right criteria provides a better chance of success with less capital.

    You see, as you're introduced to new option strategies, you'll want to test them out and see if they fit your personality, schedule and capital thresholds.

    For example, personality in this respect means what you're comfortable with in regards to execution, risk, trade structure and time allocation.

    Your schedule simply means how much available time you can allocate to your option investing…some strategies require more screen time than others.

    Capital thresholds are the limitations you have with your trading account…some strategies require more capital to execute and adjust. Remember, you need to have enough capital to weather the storm before the sky turns clear again.

    You must keep your position size small…while still taking on risk

    That is the hard & very costly way of trying to figure out what works. For many, they just don't have enough money to do that.

    A lot of investors start out with small amounts of capital. There is nothing wrong with that and some of the best traders started out with small accounts.

    The issue though is that many have unrealistic expectations and push to hard too fast…like I discussed in "What's Your One Best Trade Idea Right Now?"

    We are not born knowing how to invest successfully, but we all can learn.

    A lot of times people think they can just go into it without having experience or knowledge. They may have read a few books and think I'm ready.

    They want to try to learn through trial and error (AKA losses and frustration…) and hopefully they can figure out what works so they don't have to invest into investor education courses.

    I understand there are companies out there prying on investors trying to sell them the unicorn. A lot of them sell theories, which sound sexy, but if you're like me, when you want to learn something, you want to be taught what works.

    I've written some articles pertaining to certain strategies here: Long-Term Options Better for Investing or Trading?, The Ugly Truth about Buying Options & Why I Only Follow Those Who Have Skin in The Game.

    You'll know when you've figured out what style fits pretty quickly. Instead of randomly getting into trades without any rhyme or reason…you'll be focused on specific parameters and set ups.

    Lather…Rinse…Repeat

    It will become second nature, almost mechanical.

    So why do option investors go away from their strategy or don't follow through when they see a set up they like?

    I think some of it can be attributed to lack of confidence. Lack of confidence could come from getting on a losing streak or not having enough experience. In poker, if your play has a positive expectancy, the more you play the less the luck factor is involved.

    Once you have a strategy that works, you play the numbers game, not every outcome will be a winner…but in the long run you should come out on top.

    Too many times when things get sour for some option investors, they'll want to quickly start searching for another strategy that will be "better" or add another element to improve it. Of course, this could backfire. In fact, we can see this on other disciplines as well.

    Some believe if gold legend, Tiger Woods, didn't change his swing (multiple times) after becoming a champion, he'd still be the most dominating figure in the sport.

    Did you know that Kobe Bryant has missed more field goal attempts than any single player in the history of the NBA? It's true, however, his accolades and accomplishments trump this glitch on his resume.

    You're bound to have losing trades…but you've got understand that's part of the game.

    I recently had an opportunity to check out the U.S.N. Blue Angels air show in Chicago. The symmetry, coordination and rhythm that they have is simply breathtaking.

    After watching the show for my balcony, I was intrigued to learn more about how they prepare.

    It turns out, they practice a couple times a week….the same exact way as if they had a live audience. By the time the weekend rolls around….the air show is silky smooth… due to all the work they previously put into it.

    Confidence comes from practicing the right way.

    Now, lack of experience can lead to lack of conviction. If you haven't seen the strategy work enough or understand the probabilities…you could get spooked out of the opportunity or not even get in when you see your ideal set-up.

    I notice this with a lot with of our readers and clients on strategies that involve selling premium. They understand they have a high chance of success, but still don't understand that there position will get tested or even end up as a loss.

    That is why I tell them they can't use stop losses on trades like that, which I discussed in "Greater Profits In Less Time On Your Option Trades"

    Sometimes, I'm managing a trade to minimize the loss or opening another to provide myself more time for the odds to come back in my favor.

    I know I can't win them all. So it might take me 5, 6 or even 7 trades to make back that loss and square up to where I was.

    If you believe in paper trading, I would put on trades I know that would not work and start to work yourself out of them. The other thing you can use right now is thinkorswim's thinkBack function. This provides end of day prices going back many years.

    You can put positions on and test them much more quickly than live trades. You've got to do something…just watching and cursing that you didn't follow your game plan is not enough.

    Building confidence in your strategy and executing is essential if you want to follow your game plan.

    Lack of experience also correlates with lack of knowledge. Again, it's important to trade small, back test and paper trade until you have a feel of what works or doesn't.

    The stuff that I teach to my client's flat out works in the long run. I'm not saying this to brag,however, I am proud because I did a lot of things wrong in the beginning before I reached this level of awareness.

    It's not going to be easy. The market can and will test you…sometimes even push you into your max pain threshold. Of course, this is another reason why believing in your process is so important.

    A good way to prepare yourself for the test you'll receive from the market is visualization. By simply visualizing yourself putting on positions, how you'll react if it works against or for you.

    Visualize the conditions of the market or stock you'll be in…what will happen to the bid/ask spreads? Will they be tight or wide?

    How does it look if you lost on that trade? Probably not as bad as you think it is….

    The goal would be try to make the visualization as real as possible…that will best prepare you for the challenges ahead. I discuss this more in depth in, "4 Steps to Having a Profitable Trading Mindset"

    It's not the strategy…. It's me!

    Hey I understand I feel like that at times as well. Recently I asked what worried people the most on Twitter and Facebook. A lot responded with things that were out of their control.

    There is always a risk when being in the market… and the reason why options are so advantageous to the individual investors like you and I.

    You're emotions will get the best of you, it's part of being human. Understand you will miss entries or exits… some will benefit you while others would've avoided losses. I see them as washing each other out.

    You're always going to have emotions whenever you invest, like it or not. The key is really to have a handle on them by understanding they are there.

    No one knows if a trade is going to work, even if you believe there's an edge.

    When I wrote, "Why Size Matters; Especially In Options Trading" , it focused on how bad position sizing can kill a good strategy.

    In "3 Ways To Keep More Profits & Know When To Sell" & "How to Avoid Frequent Trading Losses & Panic Selling", I laid out my mechanics and process on when to exit a trade.

    It may or not work for you…the key is to have something in place… so when the time comes, your making calculated decisions when your emotions are running wild.

    As you can see, we are pretty stacked with a ton useful information on improving mechanics like: When to Stop Out of a Trade and Take a Loss

    Of course, you can always refer to, "5 Steps to Better Options Trading" & "Trading Goals: Yours Could Be Hurting Your Options Trading"

    Get a trading buddy or group

    You'll benefit greatly from being around or talking with fellow option investors like yourself. It's important to know that you're not alone and that we all go through the same ups and downs. Sometimes speaking to someone who's gone through the same frustrations… can lead to a real boost in morale. You want to know that there are others like you.

    In fact, we're currently working on having a bigger OptionSIZZLE community. A place where option investors and traders can share, talk and learn from each other. If you're like me, my significant other doesn't want to hear about my trading. That's why I want to set up a weekly call…where you can collaborate with others…and even ask me questions live.

    Now it's on you

    In the end, the goal is to execute a strategy that works and understand confidence comes from understanding you will have losses, while not letting our emotions get the best of us. Easier said than done…I know. I'd be lying if I said it didn't happen to some of the best traders I know.

    It's about staying the course for the long term and getting yourself back in the game as fast as possible.

    Hopefully you found this information useful. By the way, when was the last time this ever happened to you? Seen the set-up you liked…but was too gun shy to take the trade?

    If so, I'd love to hear your story. I'll be hanging out in the comments section below.

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