Its A Duck

1. Never get into something you can’t get out by the closing bell. Every trade you make, you’re looking for the exit point. Always keep your eye on the exit point.
2. Don’t ever take anything at face value. Because face value is the biggest lie of any market. Nothing is ever priced at its true worth. The key is to figure out the real, intrinsic value and get it for much, much less.
3. On minute, you have your feet on the ground and you’re moving forward. The next minute, the ground is gone and you’re falling. The key is to never land. Keep it in the air as long as you can.
4. You walk into a room with a grenade, and your best-case scenario is walking back out still holding that grenade. Your worst-case scenario is that the grenade explodes, blowing you into little bloody pieces. The moral of the story: don’t make bets with no upside.
5. Don’t overthink. If it looks like a duck and quacks like a duck, it’s a duck.
6. Fear is the greatest motivator. Motivation is what it takes to find profit.
7. The first place to look for a solution is within the problem itself.
8. The ends justify the means, but there’s only one end that really matters. Ending up on a beach with a bottle of champagne.

Supply & Demand

What drives price rises? On the demand side it is mainly low interest rates, low unemployment, rising incomes, increased migration, and expectations of future price appreciation. And on the supply side, new building is constrained by planning and zoning restrictions as well as the time it takes to build. The flaw in the picture though is those five words above, expectations of future price appreciation. In any asset market, whenever price appreciation becomes the main reason for people buying, the market is in danger of becoming a bubble. We must suspect a bubble if homeowners are regarding housing primarily as an investment, rather than as a place to live, and if investors are paying little attention to rental yields and are focused mostly on capital gains.

Trading Systems

Use your creativity. There are a million ways to build a technical trading system. At the end of the day, all technical systems are about two things and two things only. Getting you to pull the trigger to get in a trade and getting you to get out when you are wrong. If your levels and parameters serve that function, then you are shooting well over par.

Model

One model may say one thing and another model may say the exact opposite. It doesn't matter what any model says. The best traders accept the fact that they can be wrong and their models can be wrong. Absolute beliefs in any form are detrimental to mankind. Whether they be in love, politics, religion or trading. Allow yourself the opportunity to be wrong and often. Do this and you will make leaps and bounds in your progress of perfecting your trading system. You lean on your model the same way some lean on God or the government or my husband is only beating me because he loves me so much. Your model is just that, a model. We all have our "models" in life. For some it's code of ethics, it's how we live our lives. For some, their "model" is how they lift weights in the gym. For others their model is something they use to trade with. In any case, a model is only as good as the man that made it. And that man is fallible. All men are fallible. You should accept the fact that the problem with the model could be the guy who is programming it. That is usually the case with all of us. The problem may be "you" as "you" are the one that gives the model life. The model only exists because of you. And just like God, you can take it's life away. The model can only spit out what you put into it. Your model is serving it's purpose. The bigger question is, are you?

Money Management

Pete was the oldest of the three brothers and knew there was a better way, he knew there were people who consistently made money in the markets and that if he did the same things that they did, he too would be profitable. Before opening an account with his broker, Pete spent months studying all of the different topics. He quickly learned that there was much more to being successful than just having good entries. He learned ways to study his trading system and quickly realize if over time it was going to provide a profit or loss based on it's expectancy. He learned about the 2% rule and position sizing, so when he was wrong about the market, (and he was wrong quite often) he would get out quick, without any emotional pain and with very little damage to his trading account. Pete started using limit orders and shopped around for the brokers with the best prices, and learned about slippage and just how big of a hidden cost that is to a trader. Pete was not the smartest of his brothers so he decided to keep his trading system very simple, he was a busy man and didn't have too much time to spend on his trading activities.  Pete than learned that you can apply money management to your entire account and not just each specific trade. He learned that different systems were needed depending if you are using a trend following system or a counter trend system.  Pete had a written plan that he could follow so there was no need to make any decisions along the way, when the position has already been open. He decided he would judge his performance on how well he was able to stick with his trading plan, that way he would be able to create a level of consistency and make improvements along the way.  Once Pete opened his account, he started to put on his trades, right out of the gate he had 5 losses in a row, but looking at his account balance, he felt fine. His losses were controlled and his first winning trade put him ahead. He never felt out of control, as he had a plan set out for every single possibility that could happen.

Pete didn't get very much emotional satisfaction from trading, he felt it was almost boring, it was a very mechanical procedure with nothing left to chance. Pretty soon he was almost able to predict how his account would look at the end of the year with it's up's and down's. He had to look to other areas of his life for thrills. Pete's account continued to grow, he would then increase his position size appropriately and it would grow some more. Pete kept extremely organized records of his trading and was able to identify if anything seemed to be out of the normal flow. When it was he made adjustments to his trading plan and continued. One day Pete's Broker asked him, "How is it that you can trade these crazy markets and make money each year?" Pete replied, "In a nutshell, you must learn how to control your risk based on your personality, and account, then you must have a system that can be followed and executed at all times, additionally you must let you profits run." "I know all that!" said the broker, "I tell my clients that sort of stuff all the time, but almost all of them still get sent to the slaughter house." Knowing something, and understanding something are two completely different things. said Pete, "everyone knows that an engine is what allows a car to accelerate and take you where ever you want to go. But how many people understand exactly how it works and why? This understanding will take you to a new level and allow you to be successful regardless of outside conditions, because you will be able to adapt your engine to the current conditions." His broker agreed and now takes out Pete out every 2nd Tuesday to play golf while learning more about money management. Pete's money management was made of brick. 

Emotional Control

1. Emotional control is at the heart of good trading. Controlling yourself allows the ability to think clearly at each moment, resulting in success as a trader.
2. Cut losses with the most strict discipline. We must preserve capital at all times. Losing is part of trading, but opportunity cost is to be considered when hoping for a losing position to reverse course. If your trade reverses and violates support, get out and be willing to re-enter. This will save you from big losses and you can always re-enter if the stock crosses the entry price again.
3. Make good decisions and winning will take care of itself. Focus on how you play the game and not on the scoreboard. Trade with discipline and follow your game plan.
4. When you lose, don’t lose the lesson! Forget the names but remember the events. Those who don’t remember the past are doomed to repeat it. Make mistakes with composure and character, without blaming others, and don’t dwell on mistakes.
5. When in doubt, get out. Scrutinize your positions at all times, each day, and you will not be left holding a stock without reason. Be willing to change direction at any time, because your flexibility as an individual investor is a big advantage which should be embraced!
6. Keep your risk/reward profile in check. Profits can exceed losses even if the number of losing trades is greater than the number of winning trades. Always properly manage money, size positions accordingly, obey stops, and protect profits. This will keep you in the game!
7. Avoid scheduled news. We are unable to foresee breaking news, but scheduled news we can step aside from. Scheduled news includes interest rate announcements, corporate earnings announcements, and various daily economic releases. Remember to trade only when you’ve got the best of conditions.
8. Consider your account size for appropriate trading. An account that is too small magnifies the effects of each trade, which keeps us from thinking rationally. Trade with the attitude that the next trade will simply be 1 of the next 1000 trades you will make.
9. Get a charting program that allows you to build watch lists, sort stocks, and draw trendlines. This is essential to learning. Price action and volume are vitally important in finding good chart patterns.
10. Scale out of winning positions as they work for you. This achieves two goals: taking some off the table and keeping you in the game. If your trade reverses, you took some profit at good spots. If the move continues, you are still on board for the ride.
11. Don’t dig yourself into a hole early in the day or in your career. Be willing to observe the market and make an informed decision. Missed money is better than lost money, so wait patiently for the best opportunities to arrive.
12. Trade with a blend of anticipation and confirmation. Balancing these two will mean that you adopt a system of “if this happens, I will do that.” Wait for your pitch!
13. Beware of your trading process following a winning streak. After a win streak, be extra disciplined! Many will make money in the market, but discipline is required to KEEP it. Stay on your guard at all times!
14. Evaluate your results at least monthly. Monitor your P&L, your win/loss ratio, and the relationship between your biggest wins and worst losses. Reviewing these results helps you continually improve your understanding of the markets and yourself.
15. Finally (perhaps most important), always be patient. Long-term patience will keep your confidence and optimism high, and short-term patience will help you wait for the best trades. Success doesn’t come easy, and rarely are fortunes made overnight. Be willing to pay your dues and put in the work in order to achieve your goals.

Traffic

When you use standard stuff that everyone is using or watching, it creates traffic. It means obvious entries in the market are going to generate lots of stops in that area which means the market is likely to test that area and stop you out. This is the problem of making obvious trades. The idea is to find a part of the highway where there is little to no traffic. This means there will be a minimal amount of stops there and more likely you will be able to stay in the position. Telling everyone where my stops are is like putting a sign out on where I'm entering the highway thereby creating more traffic or noise. It would be better if you found your own quiet spot to enter trades.

Hope

It's just as stupid to give back all your profits as it is to hold on to a losing position. Both are equally stupid. Don't say to yourself "stay committed to the position and hope for it to recover for even higher highs." No good trader ever "hopes" for an outcome. The second that word is muttered, the battle has been lost.

Be Original

Burry did not think investing could be reduced to a formula or learned from any one role model. The more he studied Buffett, the less he thought Buffett could be copied; indeed, the lesson of Buffett was: To succeed in a spectacular fashion you had to be spectacularly unusual. "If you are going to be a great investor, you have to fit the style to who you are," Burry said. "At one point I recognized that Warren Buffett, though he had every advantage in learning from Ben Graham, did not copy Ben Graham, but rather set out on his own path, and ran money his way, by his own rules.... I also immediately internalized the idea that no school could teach someone how to be a great investor. If it were true, it'd be the most popular school in the world, with an impossibly high tuition. So it must not be true."

Protect Your Capital

Traders get paid on price, not on opinions or fundamentals. They trade price. Traders have a fiduciary responsibility to themselves and their family that they protect their capital first and make money second. This business is full or very bright people who are broke and destitute because they failed to protect their capital. This should be the primary concern, not where the fair value of the market is.

Free Lunch

To make money at anything, you are going to have to pay one way or another. Pay with losses, pay with time, pay with frustration, lost marriages, stress, etc. Make no mistake about it, we all pay one way or another. You may think you can buy the knowledge for free, but it will cost you somewhere else.

Pick A Direction

Iron condors are sold to people as a way for them to never have to actually make a trading decision. If you don't want to trade, then go plant a garden. It's analogous to people who go to fancy gyms to simply sit on nice equipment. You go to a gym to lift, not read a newspaper. If you want to trade, pick a direction. Don't take I-trade-iron-condors-because-I-don't-want-to-make-any-decisions approach.

Trading Is The Simplest Thing

At the very beginning, you need to pick one strategy, one setup and learn to master it. The reason being is that it will be much easier for you to grade yourself and identify what you are doing wrong. When you have too many moving parts, at the end of the day, it's going to be very difficult to identify exactly what went wrong and how to change it. When you have one strategy that you do over and over again, it will be the opposite. It will be very easy to see what you are doing wrong and how you should fix it. If you can't master one strategy, you won't be able to master 5. Keep it simple. Trading is actually one of the easier things you can do in life. The complications come from the complexity that we add to it, not the market.

Long Run

Since most small to moderate profits tend to vanish, the market teaches you to cash them in before they get away. Since the market spends more time in consolidations than in trends, it teaches you to buy dips and sell rallies. Since the market trades through the same prices again and again and seems, if only you wait long enough to return to prices it has visited before, it teaches you to hold on to bad trades. The market likes to lull you into false security of high success rate techniques, which often lose disastrously in the long run. The general idea is that what works most of the time is nearly the opposite of what works in the long run.

Drawdowns

Most traders really don’t have the personality to trade the mechanical system. It is not easy taking large losses when the market moves against you as is necessary when one trades any long-term trend-following system. Unless you can stomach large drawdowns, you should not trade a long-term trend-following method. Unless you have experienced some large drawdowns, you won’t know if you can handle those drawdowns. Most people overestimate their tolerance for the pain of watching profits and capital erode.

Ego

Traders are different; they know that they are going to lose money on a significant portion of their trades, for some traders, even most of the time. They understand that the uncertainty that underlies each trade keeps them from being able to win all the time. So for traders, losing is a normal part of the process. They don’t expect each trade to be successful. The best traders know that uncertainty can bite hard at times, so they focus on controlling risk and keeping the downsides of market uncertainty to a minimum. They focus on containing the negative outcomes. Traders are pragmatic realists. Rather than thinking about how much money they are going to make on a particular trade, they think about all of the ways that a trade can go wrong and how to minimize their losses when the unhoped for happens. Traders think defensively because they know that capital preservation is critical. In fact, even before they buy, all good traders have a price in mind at which point they will exit the losing trade. Since they expect to lose, they suffer minimal emotional pain when their trade hits an exit point and they have to get out of the loser. Traders have their ego invested in their strategies, not any particular trade. They are concerned with the long run, what happens over the course of many trades. They change course easily on any given trade because that is what enables them to continue trading.

Simple Things Are Not Easy

Success in one sphere of business does not guarantee success in trading. People do not realize that although trading is simple, it is not easy. It takes a lot of time and study before one realizes just how simple trading is, but it takes many years of failure before most traders come to grips with how hard it can be to keep things simple and not lose sight of the basics.

Primary Goal

The primary goal of trading should be to stay in the game. Time is on your side. A system or method with positive expectation eventually will make you rich, sometimes beyond your wildest dreams. This can happen only if you can continue trading. For traders, death comes in two forms: a slow painful death that causes traders to stop out of anguish and frustration and a spectacular rapid death we refer to as a blowup.

Odds

Unfortunately for traders, there are no indicators that work all the time, no secret formulas that lead to an easy fortune. The best we can do is find tools that help us identify times when the odds that a trend has started or ended have improved. This is sufficient for our purposes since it is possible to make good returns even when the odds are only slightly in your favor.

Listen, Learn & Wait

Instead of reacting to market rumors, anecdotes or advice with a healthy dose of skepticism, many people not only believe, but also act on what they hear, supremely confident that they are able to discern fact from fiction. Thinking that they know more than they do, they express their opinion as fact on subjects they actually know little about. Because admitting you don't know something is considered a sign of ignorance, people would rather pretend to be confident and live with the consequences of being wrong. Instead of listening, they talk. Instead of learning, they lecture. Instead of waiting patiently, they act speculatively.

Risk

Playing it safe is dangerous. Far more often than you would realize, the real risk in life turns out to be the refusal to take a risk. In other words, the truly most threatening dangers usually arise when you shrink from confronting what only appear to be the most threatening dangers. What is widely regarded as playing it safe turns out not to be safe at all. Most of us have come to believe that nothing endures but change, but its consequences still deserve some reflection. Obviously, if change is the fundamental rule of life, then resistance to change is folly -- doomed to defeat. Just as obviously, if change is our constant, then uncertainty is an inescapable part of our lives. Uncertainty is unavoidable. Life is unpredictable. The very essence of life is the unexpected and the unintended, the unanticipated turns that we may metaphorically ascribe to Fate or Destiny or Providence. Risk only looks like reckless endangerment. For those who understand reality, risk is actually the safest way to cope with a changing, uncertain world.

Its Hard To Be Consistently Wrong

Perform this exercise. Try to go one month where you make a directional trade every day with the intention of being right. Then the following month make a trade every day for a month with the intention of being wrong. You will discover that it's just as hard to be consistently wrong about the market as it is to be consistently right. Betting on what you think the score will not be is just as hard as betting on what it will be.

Easy Money

There is no such thing as easy money. Anyone that trades options for a living knows that making a living trading options is the hardest thing in the world. Whenever people say things like easy money, it's only because they haven't traded a contract in their life. Professional traders never never never use the phrase easy money. There are three types of edges for the most part. One is a commission/technology edge. These are guys that can trade at lower costs then other guys. They also have the technology to trade faster and more efficiently. This can be regarded as an edge since everyone is not on a level playing field. The second edge is order flow. This is mostly for guys on the floor but can also involve guys at trading desks at big banks that get order flow info. Order flow info can be a huge edge. And again, since we all don't have access to it, those that do are trading at an advantage. The third edge is guys on the floor or OTC dealers that earn a spread for making a market. Sometimes they are able to complete a risk free arb with the order flow they get, other times they are simply earning the bid/ask on the trade. These edges are real and they are legitimate. They are true edges because not everyone has the ability to trade with them. Now you hear people talking about edge this and edge that. Hell, people even say that their discipline is an edge.

Now does that mean that one can't trade profitably without these edges? Of course not. No more then it means that those with these edges can't lose. In fact most of them do, even with the edges. Why? They are bad traders. A bad trader will offset and positive edge he has to begin with. Great traders can make money without an edge. The same way a great athlete can be successful in a sport even if he is smaller or shorter or slower than the other guys. But an edge is not required to make a living trading. All the successful traders are successful because they are built differently than most people. They have a complete emotional detachment to money. They are incredibly disciplined. And they work very hard. And when they come to the fork in the road and they have to make a decision, they usually make a very logical and intelligent decision based on the risk/reward and follow that up with stone cold discipline. I wish there were a secret. A secret software program, a secret method, strategy. But there isn't. This will piss off a lot of people. Many people already know this. It really doesn't matter. The only thing that matters at the end of the day is your p&l statement. You can call it whatever you want. If you want to tell people you have an edge, more power to you. Sometimes men tell that to their wives so they won't leave them after they have gone though all their savings trading. Other guys tell that to themselves to help them sleep at night or to keep themselves from slitting their wrist. In the end, we tell ourselves what we have to, in order to move on. If it helps to believe you have an edge, then so be it. As the saying goes, if you believe it is so, it is so.

Buying v/s Selling

It makes no difference if you buy a 20 delta option or sell a 20 delta option, the expectancy is EXACTLY the same. There is no edge in SELLING an option with the same delta over BUYING that same option. Theta is not an edge. It's a function of volatility. Volatility is a function of delta. Delta is a function of price. The delta of any given option is priced very efficiently as to not favor the buyer or the seller. If you say that selling a 20 delta option has some sort of implicit edge. That would mean one could sell any given option and buy it's synthetic counterpart for a risk free profit. Obviously according to put-to-call parity this is not possible. Many people believe, wrongly so, that there is an implicit edge in selling any given option over buying that option. This of course is mathematically impossible. The only way one can realize true theoretical edge in any given option is through conversions and reversals as it locks in any kind of pricing discrepancy. Albeit at the cost of pin risk. Now there are many people who sell options for the purpose of either speculating that back month implieds will drop in the future creating vega gains, or through a drop in spot volatility. However, one does not gain this edge by simply selling an option, but rather being correct on his/her assessment of future implied volty or spot vol. If he/she is wrong on the future of implied vol or spot vol, they will lose money. The answer is much more complicated than that.

Now the grey area has to do with one's personality and what they feel comfortable doing. Some people are better long gamma traders. Some people are better short gamma traders. There are very distinct psychological differences between the two. That discussion extends beyond mathematics and theoretical edge. When you learn to trade, you need to get out of these boxes we put ourselves in like being bullish or bearish or saying that you just buy options or just sell options. Hopefully you put on trades that make sense and have meaning behind them. And hopefully they have an attractive risk to reward structure or will at some point during the trade. It's not as simple as well, I'll just sell options. Or, I'll just buy them. Or, I'll do mean reversion trades. It's much harder than that. Trading options successfully really will be the hardest thing you ever attempt to do in your life. And to say all you have to do is "this" whatever that is, is really undermining how tough this business is. If you sell a 20 delta option, there is an 80% chance that the option will expire OTM and 20% chance it will expire ITM. If you sold this option 100 different times and added up all the results from doing that, including the times it went out at zero, and the times it went out DITM, and then divide by 100, you will get the current price of the option, or in other words, it's FAIR VALUE. You can go as far out as you want, hell you can sell a 5 delta option. The bottom line is, there is no edge in doing so. One in twenty times, that 5 delta option will go DITM on you. There is no way around this.

You can hedge it all you want, but then you have to factor in the all the probabilities that your hedges will be wrong. Most people who sell options either can't trade or are afraid of trading, that is why they sell OTM options. They are hoping they don't have to trade. So they don't make the best directional traders when it comes time to start hedging the position. They will always buy the highs, sell the lows, get in too late, too early, you name it. If you really want to sell premo sell the ATM. This way gamma curvature actually works in your favor. Much more controllable. When you sell OTM curvature, it's almost impossible to control and manage. Why? Because the curvature is constantly changing. A lot of retail traders get lured into the comments like, well if everyone loses money because they are buying options, then the obvious answer is just to start selling them. Well, here is where that fallacy falls apart. The reason most people lose money buying options is because THEY CAN'T TRADE! It's the same reason everyone else loses money. It's the same reason the avg guy blows out his acct in 6 months trading forex. They simply can't trade. Selling options is not going to change that. A bad trader is a bad trader. It's so easy to take numbers and arrange them in such a way that it makes something easy to sell to the public. But there is no truth behind those numbers. Selling the 20 delta options makes you feel safe because it's OTM. But if you run a simple Monte Carlo simulation on random moves thousands of times over, you will see that your results will be completely identical.

You can try this experiment yourself by flipping a coin and running the results on a spreadsheet. Whether you buy heads or sell tails, at the end, the results will be the same over an infinite time period. Now read this statement. There is no edge in BUYING options over SELLING them. Does that make it better? It's the same thing, but maybe you like it better when written that way. Take a single die and roll it. You have six numbers that can come up. Let's say you could buy a bet and sell a bet on that die. In other words if I bet $3 and the die came up 6, I would earn $3. If I sold a bet for $4 and a 2 came up, I would make $2. Well, if you calculate the fair value of this bet, you would know that the fair value, or expected return is 3.5. Now obviously you can't roll a 3.5, but that is the number you should bet to break-even over a large number of rolls. If I was to buy a bet, I would want to bet less than 3.5 and if I were to sell a bet, I would want to sell it for more than 3.5. Doing so over a large number of rolls, would guarantee me a profit. However, if I bet 3.5, no matter if I am the buyer or the seller, I can expect to only break-even over the long run minus any commissions. Actually you can make money in options consistently. Unfortunately it just requires you to be a great trader. There are no secret strategies or systems. Just good old fashioned trading. The bad news is, most of the guys just don't have the emotional or the psychological makeup to ever make this work. But for the few that do, there is a lot of money to be made.  

Lone Wolf

When something works for somebody, you should never question them, there is no need to. Regardless of how one trades, if you can make money doing it, then do it. How stupid would it be for someone who employs a certain style of trading and consistently makes profits only to stop doing it because somebody told them, that won't work, when in reality it is working. It's like a diet. You always hear people say that won't work and this won't work, but if the person is doing it and losing weight, who cares, let them do it. Everybody's body is different. Each of us react differently to diet and exercise. Well, the same goes with trading. You can take 100 people and let them trade the same strategy and because we all think differently, because we all have different experience, two of us will not trade that same strategy the same way and we will probably get 100 different results. People will say you can't make money trading NYSE, or you can't make money trading nasdaq, or you can't make money day trading forex, or you can't do this or you can't do that. Well, if you can do it, then do it. Some people like to trade covered calls, some people like to trade long gamma, some like short gamma, some like to pair trade, some like to play volty dispersion, who cares, just do it! If you can't be an independent thinker, you won't make it in this business. If you have to listen to others, this is the wrong job for you.

You can't just copy and paste a trading style from someone else and make millions. Trust me, it's not that easy. Trading is like anything else in life, you have to be willing to be the lone wolf. When you get to the fork in the road, you have to be willing to take the road less traveled. Only the most disciplined, the most strong, the most independent can endure such a trip. To be willing to defy the gods of trading and popular opinion and believe in yourself enough and have the conviction to do the right thing. That is a trader gentleman. And only when you reach that point, only then are you going to figure this game out. Until then, sign up for all the chat rooms, buy all the books, go to all the seminars, listen to everybody else, copy everybody else and follow the crowd. At least when you get to end of the road, the road of failure, you will have a lot of people with you and you will have plenty of drinking buddies. Haven't you ever wondered why the bars are full of 60 year old men talking about how good they could have been over a beer? Bar stool after bar stool, they all traveled together and they all ended up at the same spot. The question you have to ask yourself is this, are you willing to walk alone? I can't answer that for you, you'll answer that when you become a trader. Everyone is looking for a magic pill but no such pill exist. All someone can offer is some basic advice and experience. Everything beyond that and we are discussing semantics.

Underlying & Options

First you need to be able to trade the underlying. Then options gives you an extra edge that reduces your risk variance. With underlying there is no margin for error. You are either right or wrong. Kind of like flipping a coin. You bet heads or tails, heads you win, tails you lose. There is no in between. But with options, you can get a heads and win, you can get a tails and win and you can even have an equal number of heads and tails and win. That is the edge. It's not leverage. Hell, if you want leverage you can go to single stock futures. Options increase your risk variance and that is huge for a trader. Even a slight increase in your risk variance can make the difference between a trader that is flat for the year vs. making a million dollars. But here is the catch 22. If you can't trade the underlying and you are trading options and let’s say you have tons of edge. What does that edge really amount to? A nickel? A dime? Now if you are a bad trader, a nickel or a dime is not going to save you. In fact it could kill you. That's the difference. Most guys that have learned to trade options have learned from their own mistakes and their own efforts and not from asking others for the answers? You can talk about edge all you want, at the end of the day, the only thing that matters is the bottom line. It all comes down to being a good trader. You can give somebody all the edge in the world, a bad trader won't know what to do with it. And vice versa, there are guys with all the negative edge in the world make a lot of money. The bottom line is do whatever works for you. Options are very intuitive, much more then stocks. There are a thousand ways to skin a sheep. Pick up a book and find the answers that you are looking for. Answers have no value without the effort to attain them.   

Options As Insurance

The option gains and losses are never absolute. Most traders that trade large option positions trade the gamma in some form. And even in that case, you have to keep in mind that a trader may have on a portfolio of positions in which some positions lose money in the same group in which others make money. So while Trade A lost money, it lost money at the expense of Trade B making money. Another example is insurance companies, when you buy health insurance or car insurance, do you consider this a zero sum game? Obviously if you never have to use it, you might see it as the insurance company winning and you losing the premiums, but did you really lose? Your goal here was to lose was it not? Surely, you don't buy health insurance in the hopes of getting cancer, or buy car insurance with the hopes of driving your car into a brick wall. So in this example, you actually pay the premiums and hope to lose. Well the same can be said of options. Say a large hedge fund owns a million shares of stock XYZ at $100 a share. The stock is reporting earnings next week. The stock has had a huge run-up going into earnings and the hedge fund is scared that if the company disappoints the stock could fall maybe 10 or 20 pts. So the hedge fund buys insurance, in this case, maybe some slightly out of the money puts. Now think about this. In this case, the hedge fund actually wants to lose money on the puts. Then why would they buy them you might ask?

Because, in this case, the cost of being wrong is too great. So they buy the puts in the hopes that the company announces good results and the stock goes higher. The puts then expire worthless and the hedge fund could not be happier. They wanted to lose! This is sometimes a hard concept for people to grasp because it goes against our intuitive nature. Why would anyone want to lose? For the same reason that none of us want to get cancer or get into a car accident. Because of this paradigm, options have a special innate value that the underlying does not have. That is, no one buys or sells the underlying in the hopes of losing. If someone buys stock, they expect the stock to go higher; they are not buying it for defensive reasons. Even with arbitrage, the trader is hoping to make gains on both sides. So what the underlying trader has to live with is the fact that every time he buys a stock or future, there is another guy on the other side of that trade that thinks exactly the opposite of him. With options, this is not always the case, therein lies the edge. Anytime you can take money from someone that actually wants to lose it and give it to you, provided that you understand the risks that you are taking. For these reasons, trading options is much more profitable then trading the underlying. There are built in profits for you to take. With options buying and selling in terms of laying off risk, always look at it from the standpoint that someone wants to sleep better than you. If you are willing to accept his risk for him, you can make money at the expense of not sleeping as well. He has shifted his risk to you and you were willing to accept it. In this situation, the cost of you being wrong may not be as destructive as the cost of him being wrong. Here, both parties win.

You Cannot Buy Discipline

The idea that someone has or knows a secret way to make money is bogus. There are no secret indicators or secret strategies or any secret quantum mechanics approach. It simply does not exist. Period. Guys that are selling something are simply trying to sell a process, that’s it. A process of how to go about trading. Nothing secret about that. Making money is all about personal discipline. For even if there were a secret recipe that yielded unlimited profits to all of its followers most people would still not even have the personal discipline to execute it. You need to understand that there are a million reasons why people do the things that they do. Sure there are a lot of guys out there that can't make a dime trading so they sell some magic snake oil formula. But there are so many good quality traders that seek to get more out of their life then just buying and selling ticks all day. There are no secrets to sell, they are selling processes. If they could sell discipline, then they would, because that is the magic formula, unfortunately discipline has to come from you, not the salesman. There are no secrets to health, happiness, or wealth, just a lot of hard work and discipline. Now if only you could package those two things together and you would have yourself one hot selling product.  

Making Money Is Easier Than Keeping It

Successful people are very much the benefactors of random good luck. There is no time frame on randomness. It can exist for years, if not decades. The problem is how do you measure success. Do you measure it by money, by percentage return, by number of years trading? Good traders are people who can continue to make money year in and year out without blowing up. If you blow up, it tends to mean you took an unacceptable risk or you were ignorant of your risk, either way, not the marks of a good trader. People who win the lottery are not all that special, just very lucky. Suppose you gave 100 million dollars in real money to a bunch of people to trade with. How many guys would still have money left at the end of one year? Five years? And ten years? Maybe one or two people. It's not making the money that’s the hard part, it's keeping it. And most guys don't know how to keep it.  

Discipline

Great traders come from all sorts of backgrounds. In fact there is no "type". Which is why it is funny that people try to group quant traders into a group that is supposed to be the right "type". If you take 1,000 quant guys and put them in a room to trade you will get the same normal distribution of success and failure as if you took 1000 high school drops outs in a room and let them trade. In other words, out of 1,000, maybe 10 from each group will find a way to make money consistently. You could do the same with doctors, lawyers, teachers, garbage men. What separates the boys from the men is discipline. And the reason why 95% of the active trading population fails is because they have no discipline. In most lines of work, lack of discipline will not get you fired, in fact, in many cases it’s a plus. That is what makes trading so hard. Your income is completely derived from a trait that most people are programmed not to have. It's the same reason why 60% of the people are overweight, why people can't quit smoking, or why married men cheat on their wives. A quant trader with no discipline is as bad a trader as anybody else with no discipline. It's not the quant part that makes them successful. The overwhelming problem that quants do have however is that they tend to ignore discipline and common sense for the sake of their mathematical models. After all, if you are going to trade off a model, you have to be faithful to it or what good does it do to have a model. Ignoring discipline for the sake of a model is a very dangerous activity that will eventually lead to a blowup of some sort. However having said that, their success rate in trading will be the same as those in the field of dentistry who try to trade. A disciplined dentist will make a great trader!

Perceived Edge

The edge in a casino is defined because they actually create the edge. It's kind of like the edge a broker has for charging you commissions. Or the edge a bookie has for taking 10% of your winnings. This is not the same edge that a quant has. A quant has something called perceived edge. It's not really real. He perceives it to be real. So there is a difference. For example, it's possible that he might have a huge edge on a trade and still lose a fortune. The only true edge that exists is the edge the MM has by earning the spread on a two-sided market and then hedging his risk. Outside of that, edge get's really fuzzy. Quants on option trading desks generally create models that allow traders to hedge portfolios more effectively or create arbitrage opportunities through synthetic opportunities. But once you go further out on the timeline, the quants have no edge over you. Think about it for a second. What is the biggest equation they have to solve? Volatility right? Well what happens to volatility as you go further out. You increase your uncertainty right. This is why vega is so sensitive on back month options. Well, it is almost impossible with any degree of certainty to predict long term volatility. Hell, it’s almost impossible to predict short term volatility. So if you are trading options over a long time period you cannot be at the mercy of any so-called quant and the perceived edge he thinks he has. The only edge that you need in options trading is for the market to move and to be open. Then you’re in business.

Liquidity Is Not A Right. Its A Privilege

If a market maker or specialist or a local is making a market for you he is required to honor his markets. By being required to honor his markets he is taking much more risk then someone who can post a bid and pull it or post an offer and pull it. If he is taking this extra added risk he will be compensated for it or.....he will not participate in the process because there is no advantage for him to do so. Why would anyone want to take any risk if he had no upside? Just doesn't work that way. I can't buy a car at cost, I can't buy a beer at cost, I can't buy a house at cost, and whoever took the risk to make the product is going to want some margin of profit. Yes, that includes the guys on the screens. There is no good guy or bad guy; there is a guy that is on the other side of your order. I can assure you that if his markup was too high, no one would buy his cars, his beers, his house or his futures contract, they would take their business elsewhere and his job would cease to exist hence the world of capitalism and survival of the fittest. These guys stand on the floor and they take the other side of your order. They assume all the risk. So when someone comes in to buy 1000 straddles on XYZ a day before a bankruptcy announcement these guys in the XYZ pit take the other side of that trade being clueless about the news. So they wake up the next morning and see the news and now some of those guys careers are over. What do you want them to do? Sell options at fair value; sell futures at parity with the electronic market? You tell me? Should these people be compensated at all for taking the risk that you lay on them? They keep the system running. These guys are willing to absorb your risk and all they want in return is a spread. Remember what happened in 1998 when Russia defaulted on their debts and there was no liquidity to speak of in the fixed income markets. In fact LTCM was trying desperately to get out of some on their bonds and these guys on the screen refused to make markets, they refused to give quotes. The end result. A 10 billion dollar hedge fund went up in smoke and the entire economy almost collapsed. Oh and they called it a liquidity crisis. I think too many people take for granted the liquidity they get every day like it’s their right. It's not a right, it's a privilege, and don't forget for a sec who gives you that privilege every day.

Think Outside The Box

What is the reason for not wanting to short the stock versus buying puts. Is it the margin that needs to be put up? It's a very important question regarding what you want out of your position and what you don't want. What you want is to be able to profit on the short side of the stock. At the same time you don't want to deal with wide option spreads and time decay right. Do you know you can create a virtual option with just using stock? Think about what an option is and what it does and what the profit profile looks like and then ask yourself how can I duplicate this profile using just stock. Remember its the curvature in options that create your profit profile. You can create that same curvature by buying and selling the stock with the same slope of the option. Example. If you want to buy a put on xyz you could short 50 shares of stock and then continue to sell 10 shares every .50 down for let’s say 2 1/2 pts, at that point you will be short 100 shares of stock. As the stock comes back up you could buy back those shares in the same increments. If you bought the front month ATM put you would be doing the same thing. The put would be the same as being short 50 shares of stock and as the stock dropped you would be getting shorter by the same amount up to parity. Why should you do this? For one, you don't have to pay the enormous spreads in some cases that options have and two, no time decay. Think about it. You could buy a virtual put with no time decay and no spread. Just something to think about. What you will learn about options and even trading in general is that it does pay to be creative. Think outside the box.

Even A Broken Clock Is Right Twice A Day

Lot of the trades LTCM put on were total crap shoots. They did a lot of short equity volatility. Over a billion dollars worth. That is insane. They had no hedge on that so pure naked exposure there. They also began speculating on stocks and junk debt. They lost billions on this stuff. Let’s ignore all this for a moment and stick to the mathematical arbitrage trades. The fact of the matter is their bet was wrong. Anyone can make the claim that they had to get out of their trades early and if they just had enough capital they could have weathered it out. Ever heard of the saying the markets can remain irrational longer then you can remain solvent? If we use your rationality, that given enough time they would have come out ahead then why can't everyone use that excuse. Hell given enough time most good companies bounce back right, most sports teams, most businesses, most marriages, the weather, traffic, you name it, any pattern in nature, even evolution. As mark twain once said, in the long run we are all dead. Well in the long run we are all right. A 6 year old child can make predictions and be even right in the long run. A broken clock is right twice a day right? So if I am out on the street screaming the wrong time. Eventually, given enough time, I will be right at least twice. The problem is I don't see the skill in that. I don't see any edge. Now as far as credit spreads go in the fixed income market, everyone knows that they always come back to some normal level. The trick is being able to time it, not in the prediction that it will eventually happen. But here is the kicker. Society is full of people who make money every day on flawed theories due to random luck yet call it skill. But given enough time, every man that has made his living on luck and false theories eventually gets to meet his black swan. And you know what he says when he comes face to face with that black swan. He tells everyone that what happened to him was a once in a thousand year event. Something that could have not been predicted. But then he will go on to say that if he had been able to wait it out or if he had more capital, given enough time, he would have been right.

Long The Bull. Short The Bear

1. The first and most important rule is - in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. Thus, we've not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
2. Buy that which is showing strength - sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to "buy low, sell high", but to "buy higher and sell higher". Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don't enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
4. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
7. Be patient. The old adage that "you never go broke taking a profit" is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
9. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
10. Never, ever under any condition, add to a losing trade, or "average" into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
11. Do more of what is working for you, and less of what's not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, "let your profits run."
12. Don't trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don't care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge "to get the money back" is extreme, and should not be given in to.
14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial "hay" when the sun does shine.
15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
16. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don't need to fight at all.
17. Markets form their tops in violence; markets form their lows in quiet conditions.
18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.

Ninety Percent

There was an interesting article some time ago that was talking about the number of people who over time have been successful at speculating going all the way back to like the 1600's. They said even 400 years ago about 90% of the people who made a try at it failed. Same numbers from 300 and 200 and 100 years ago. Same percentage failed in the 1920's, the 1950's and 1980's. All the way up to today. That 90% number is still alive and well. The interesting thing about this article was and that it pointed out that despite all the information we have today, the lower cost of trading, electronic lightening fast executions, all these fancy charts and instant news, despite all of that, technology has in no way shape or form allowed more people to make money at speculating. Bottom line, trade where you want to trade, whatever product, whatever exchange, whatever timeframe, just don't blame others for your failures. People don't fail at trading because of bad fills and high commissions and greedy specialists and evil locals, they fail because they can't trade. When people can't make money trading they will blame everyone but themselves. The exchange fees, their trading software, their prop firm, they only have 3 flat screens instead of 6, whatever. They are just excuses. The day they can look in the mirror and blame themselves for their losses will be the day they start cleaning up in the market and stop worrying about the miniscule amount that exchanges charge to clear your trades. You know what's funny, 10 years ago, guys use to pay 10 times the commissions and exchange fees they pay today and use to trade over the phone instead of computer and they still made ungodly amounts of money.

Its Going Well

There is nothing new about options. They haven't changed in the last 29 years. They are the same as when calls first started trading on the CBOE in 1973. There have been no new developments. I would run fast away from anyone that says they have something new to tell you about options that hasn't been written about the last 30 years. Next thing, options cannot be learned at a seminar or in a classroom. You may learn how they can be put together but until you've made 5,000 to 10,000 trades you will not have even the foggiest clue as to why they respond and change value the way they do. OK, last thing. I can assure you this that the few people in this world that know how to take money out of options, do not talk. They do not talk. They do not sell their ideas on TV, they do not sell their ideas at seminars and they don't even tell their buddies at the bar. They keep their mouth shut and when people ask them how their options trading is coming along they answer with a simple, "It's going well."

Hedging A Naked Portfolio

You can't manage risk with negative gamma. You can hedge it at any point in time but when the market gaps up or gaps down, the negative gamma will eat you alive. You can't hedge that because you won't be given the opportunity to. If you tell me you have a portfolio of naked options that is bullet proof and then to take it even a step further and say rare events don't hurt you and then on top of that say you can manage the risk with a naked portfolio is a joke. It doesn't matter what your returns a year are doing this strategy. It could be 1000% a year. One event, one singular event will wipe out every profit you ever made the last 10 years, and then it will take whatever is left. I assure you, you will be bankrupt soon. In the world of dynamic hedging, you cannot hedge a naked portfolio. It's not possible. And in times of crisis everything is 100% correlated to everything else. No such thing as diversifying naked premium. The black swan always gets it man.  

Options Secrets

There are no such things as secrets in options. And yes there have been hundreds of books written about selling options. Options haven't changed in 30 years. You want to know what guys do on the floor. Go ask them, they will tell you. Why? Because it's no secret what they do, they just have the advantage of earning the spread, seeing the order flow, fading the order flow they don't like, and no capital limitations. Oh, also dirt cheap transaction costs. But they aren't doing anything secretive. I don't know why there is this myth that there are these magical secrets out there and once you discover them you will be wealthy beyond your wildest dreams. Look 99% of the money made in the market, in any market is made in one of two ways. One through order flow information and two execution and cost of execution. The other 1% or so comes from pure speculation. Everyone and their brother knew what LTCM was doing, it wasn't a secret. They could just put on their trades much cheaper than anyone else and got financed better than anyone else. When you study options you learn there are only so many things you can do and none of them are a secret. In fact, somebody correct me if I'm wrong but has there been any new strategies in options since the call options started trading in 1973 on the CBOE? I don't think so.

Naked Options

For those who want to sell premium, don't use naked options. Do what the guys on the floor do. Put on back spreads. You can put them on for a credit initially have a position with positive theta and negative vega and collect the premium. If the stock takes off you will then have a position with unlimited upside as you will now have a long gamma and long vega position. This strategy is 10 times better then the dream your way to millions by selling options by the dream man. Why? Because you give yourself so many options. Your position can profit in many ways. Either by lack of movement or sharp movement. Depending on where you sell the strike and how you pivot the slope on the back spread will determine if you want the position to provide a better return by earning the time decay or on the possibility of a big move. Either way, back spreads are unlimited reward and limited risk. Naked options are limited reward and unlimited risk. This spread will also allow you to sleep at night. And when that ten sigma event comes, instead of filing for bankruptcy, you'll be buying your neighbor's house who sold the naked options.

Short Gamma

Let’s say you go ahead and short a boatload of premium on the OEX because it is way up there now. And everything is going along just fine. Then out of the blue the United States launches an attack on Iraq. And Iraq in turn launches an attack on Israel. First news headline in the morning, 10 American fighter jets shot down. Guess what buddy. Game over. That could wipe out your account the first hour of trading. That's the point about selling premium. You never know when that will happen. And when it does, you have no way to hedge that short gamma. Because the vol is going to jump. Most traders that work on the floor who have any kind of lengthy career have done so by staying long as much gamma as they can afford. Every trader that has gotten escorted off the floor because he blew out his account was short gamma not long gamma. There is not a single guy on the floor that blew out of his account because he was long gamma.  

Options Are Very Very Complicated

First of all, a good trader doesn't listen to other traders to find out what works, he finds out what works himself. Second, I could tell you that delta neutral trading is the most profitable trading style ever and you could proceed to lose your house using it. Options are very very complicated. You need to understand volatility forward and backward, not just how its calculated mathematically, but how it moves and changes with the market. You need to understand the vol skew and why that happens. You need to know why market makers juice the premium. You need to know the relationship between statistical volatility and implied volatility and why those two trade at different levels. As far as deltas go, you need to know what delta bleeding is. You need to know the relationship that delta has to time, to volatility and to price. You need to know the difference between standard delta and true delta. You need to know what CEV (constant elasticity of volatility) is. Then if you’re going to trade delta neutral you need to know what gamma is. You also need to understand the gamma of the gamma which is the second derivative of gamma. Also volatility has a second derivative, the volatility of the volatility. You also need to know what the alpha is which is gamma's relationship to theta. You also have to understand what stochastic volatility is and how it is different than regular volatility. There are 100 things you need to know about options before you can make it work. Its not as easy as just saying buy straddles. There is a very good reason why 95% of the people who trade options lose money. It's because they are asking if such and such a strategy works and they use it like a one size fits all strategy. Options is a zero sum game unlike stocks. That means for every winner there is a loser. It's the top 5% that take the other 95% money.

Knowledge & Trading

It is not about earning a good living. It is about the positive correlation to results and education. If you go to a great school and prostitute yourself to the corporate world you will make a good upper middle class living. For those people who don't like to think on their own and need to be told what to do and how to do it then the corporate world is for you. You can earn a very nice safe salary with benefits. But you will be a slave to your master. Nothing wrong with that. However some people decide to grab their nut sack and put their money where their mouth is. They may not know much about trading. They may not be managing a 100 million dollar portfolio but that does not make them a worse trader. Every magazine article, every newspaper article, every tidbit, and all the evidence points to no correlation between your ability to trade and education. The fact of the matter is that around 90% of the traders trading on their own will not be able to live off their trading. But guess what, the numbers are the same for institutional traders. Most of them don't make money either. Good traders are successful because of personal qualities or characteristics they have, not knowledge. There is no special indicator, no quantitative science, no magic formula, and no secret method. It's the same qualities that allow one quarterback to be able to hit a guy in the end zone with .03 left on the clock with three guys in his face while the other guy takes a sack or throws an interception. It's one ability to step up under pressure and make the big plays. Do you think NFL coaches care what college a quarterback went to or his ability to make plays under pressure? Think about it. It's exactly the same with trading.

Market First

Always remember, the basic rule of technical analysis - market first; and then only stocks. The market has the major influence on the performance of an individual stock. It means one should never get bearish on an individual stock if overall market is bullish. Similarly, one should never get bullish on an individual stock if market setup is bearish, irrespective of individual stock chart.

Writing Options

If you want to make supplement income from it, writing options is good and easy money when you watch them expire worthless most of the time. Even if the market crashes, by just holding a small position, you would not be completely wiped out anyway. The essence of option writing lies in making many small but probable gains. However, if you go big time, it takes only one big move to kill you out. To play professional, take covered position like doing a spread. Although this severely reduces your profits, as least you sleep better. Beware more of naked puts then calls. A sudden market collapse will leave you little time for actions. Even volatility will turn against you.  

Reversals

Complex strategies like butterflies, condors and such are just for pros who have a smaller spread then retail traders. Spread will cost you about 15-20% of your projected profit if you are a retail trader. No matter how much one knows about expectancy, greeks and hedging, if you do not know how to spot reversals you will never make money in options markets. If you know how to spot or forecast reversals, all you need to know is how to buy a call or put or how to write credit spread. All the theory goes out of windows if you cannot spot reversals.

Inefficiency

If a system is shown to be a winner in the past and is implemented going forward, even if it continues to be a winner short term, it will eventually cancel itself out as a winning system because the market will adjust prices to eliminate what it recognizes as an inefficiency. From a practical standpoint a retail trader finding such inefficiency is about as likely as a high school biology student finding a cure for cancer. It’s a waste of time trying to devise a strategy to beat the markets. And it's even more non-sensical following someone else's system. Winning traders have no system. They are rigorous risk managers of course. But they trade not on any predetermined set of rules. They improvise and adapt to circumstances in an effort to make money.

Job Description Of A Trader

I am a trader....so I should trade. Well, this is the biggest mistake a trader can make. The trader's job is not to trade....but trade well. There is a big difference between the two. Trading is a business. A business of making few good trades in a month. In order to achieve this - trader needs to do his job well. To do the job well, he/she should be aware of his/her job description.
Job Description # 1: Be an Opportunity Watcher. Opportunity does not travel on any schedule; you have to watch for it Trader's job is to wait for an opportunity that can deliver explosive profits. Hence, this is a business of patience (waiting for a good opportunity). Few good trades in a month are all that one needs to make big bucks. Trying to trade every small move (read overtrading) only leads to underperformance, frustration and stress. The goal is not to trade often but trade well. Trader needs a different mindset for this - Patience, and Boredom

Job Description # 2: Look for Disbelief. I love when somebody says - This cannot happen. Remember, market has a habit of moving in a direction that causes pain to maximum people. When markets move up, it causes pain because it creates a feeling of left out and hence buying frenzy. Similarly, when market goes down, it creates panic of holding up losing position. The explosive profit comes when there is strong disbelief; and that disbelief results in large moves. The trader's job is to wait for a disbelief opportunity. A good trade should fulfill following conditions - 1. Technical Trigger; 2. Element of disbelief and 3. Trigger response - swift and sudden - there should be some shock element.

Job Description # 3: Do not apply your brains. Remember, Trader is like a watchman. He is paid to watch and not think. So, don't apply your brains when you are not supposed to. Trade what you see and not what you think. Always approach market with open and opportunistic mindset. Remember, the disbelief comes from thinking. Please try to see the market as it is and not as you desire. Have a healthy respect for the market and give preference to eyes and discipline than brain. As a trader, keep your focus on what market is doing and not on what market should be doing. Lots of times, we miss a great opportunity because we are so caged in our thinking that we dismiss real moves.

Job Description # 4: Your job is to preserve capital. Trading is one business that can give you highs and lows pretty quickly. It is in these highs and lows, traders make stupid mistakes like getting overcautious in lows and throwing all caution to winds in highs. A trader should never get carried away or bogged down by success and failure. Remember, trading is a journey and one bad mistake can wipe you out of business. Hence, as a rule, one should never get carried away; and focus should be on trading capital all the time. Sometimes, it is better to miss an opportunity than lose capital. The focus is to make money while preserving capital.

Job Description # 5: Be a good employee and be disciplined. Market (Read boss) is always right, no matter how illogical he/she may sound. Never fight with the market. The price on the screen should be the guide, and not the price in your mind. Always have healthy respect for the market and never keep your focus away from the goal - TRADE WELL. Markets can do crazy things at times and the only self defense a trader can employ - Discipline. Remember, it is the discipline and passion for markets that keeps trader in the market for long run. The moment you lose discipline or passion for markets - you are done.

Everyone Rich = Oxymoron

The fact that the game gives you a zero expectancy is good news. No one should get depressed because of this. Not having a negative expectancy is a huge benevolent thing. Take a look out of the window; there are more ordinary women than beautiful ones, more ordinary cars than Ferraris, more ordinary people than rich people. Not to mention that probably every gambling game in the book gives a negative expectancy to the player. In a world where the odds are against you, enjoying a zero expectancy may be an edge. As the old saying goes... "In the Blind Men Land, if you have one eye you become the King". There isn't a formula to get rich - and if that thing existed, everyone agrees it wouldn't last much. If such thing as an option strategy that gives a positive expectancy no matter what existed, a basic computer program would get anyone rich. And everyone rich = oxymoron. Wealth needs the pyramid concept to survive. Bottom line is: Thank God math is not against you. Learn how to work on the grey area. Keep your eyes opened always. Be dynamic. Be ready. Be smart. No one in this world has the ability to predict the future, but this same world has a lot of rich people on it. And never forget that while the market follows mathematics principles, it doesn't end there. Albert Einstein believed, according to his own words, that "God doesn’t play dices". He meant that there is no contingency in the world. No randomness. Everything follows a rule.

Market Is Always Right

Even after trading market for good period of time - the market is still a mystery to me. Why me? It is a mystery to nearly everyone — professionals and so called experts on TV. What is market? The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it. [All those - human beings...and not machines.] The wisdom of ALL THOSE is driven by emotions of fear and greed; and not rational/logical thinking. That's why market is all about understanding people's behavior and how might people think/behave in different circumstances. Also, the psychology of greed and fear has a tendency to destroy rational thinking when emotions overpower thinking process. That's why when market is in good mood - stock prices start moving to moon and when mood is bad - it can be hammered out of business. I can calculate the motion of heavenly bodies but not the madness of people...Issac Newton. Market has a mind of its own There is a saying that market is moody and you don't know when it's going to do what. Market has a habit of doing the most obvious thing in the least obvious way. That's why trading becomes a difficult job. Sometimes, market does what you expect but not when you expect. Market also does not care what you/experts think. Mr. XYZ thinks market will go up. He gave a very logical explanation. Yet market was down.....Please...market does not read blogs....or listen to experts on TV. It does what it has to do. That's the nature of the market. Remember, market has nothing personal against anyone. Market does not discriminate. It has no personal favorites. Market has a mind of its own, which can be very different from so called expert/logical line of thinking. Understanding Market wisdom/mind = Constructing different scenarios. Since, market is moody, driven by emotions of fear and greed - it always throw up surprises and different scenarios. Hence, it is important for trader not to have any trading bias. Trading is not about predicting what will happen next but developing a game plan for different scenarios. The best way to trade is construct different scenarios and position accordingly when those scenarios play out. It is important to understand that you have no control on what market will do. What is in your control - what you can do when market behaves in a certain way?

The financial markets generally are unpredictable. So that one has to have different scenarios... The idea that you can actually predict what's going to happen contradicts my way of looking at the market....George Soros. Market rewards flexibility. Market rewards contrarians and traders with flexible attitude - one who is willing to accept mistakes on the go and change opinion if market changes its nature. As a trader one should regularly ask - What's the one thing that nobody expects to happen? The best trading move happens in the direction of the surprise. There is a saying that market has a habit of moving in a direction that causes pain to maximum people. The pain is inflicted upon traders who have inflexible attitude. Lots of amateur traders refuse to acknowledge whenever market changes its behavior and rubbish the move as illogical. It only leads to their downfall. Market should never be looked with firm view. Remember, trader has a tendency to trade his belief but market rewards traders who accept mistakes and trade in the direction of disbelief, if market asks them to do so. The lesson - See the market as it is and not as you want it to be. Market is your Boss; and Boss is always right For a trader, there is only one boss and i.e. market. So, one should never try to impose one's views on one's boss i.e. market. The trader's job is to follow the market irrespective of one's beliefs. At times, traders do get carried away and indulge in what is called as revenge trade. Remember, it is easy to get angry at the markets but the consequence of that can be very painful. Market is a ruthless boss and it does not scold you...it just takes money from your pocket. Few losses and all thinking gets blurred...confidence goes for a toss. Despite being ruthless, market does not hate anyone. Market is very fair and does not discriminate one on past behavior. There is only one way you can win the heart of market - Accept - Market is always right....There is no harm in being skeptical about the market, but don’t dare to go against the market.

You Are Your Enemy

According as circumstances are favorable, one should modify one's plans. We should only add to winning positions and never average down on a loser. Profits are carried by momentum, and if you are on the right side of momentum, you can make a lot of money. When losing, stick to the plan and exercise stop losses. When winning, increase position size as new entry signals are confirmed. When you engage in actual fighting, if victory is long in coming, then men's weapons will grow dull and their ardor will be damped. If you lay siege to a town, you will exhaust your strength. If the expectation of your trade is not working out in a timely fashion, then you have read the market wrong and it is best to exit the position. It is only one who is thoroughly acquainted with the evils of war that can thoroughly understand the profitable way of carrying it on. If you think the stock market is fair, quit trading immediately. Hence the saying: If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb to every battle. If you know the market and know yourself, you will consistently profit. If you know the market but not yourself, your success will be random. If you do not know the market or yourself, you will consistently lose money. Success in the stock market is not just about the market, it is also about knowing how you react to fear and greed. The onset of troops is like the rush of a torrent which will even roll stones along in its course. The trend is your friend. The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy. Good traders know that they can consistently make money, and that confidence fuels them to consistently make good decisions. To lift an autumn hair is no sign of great strength; to see the sun and moon is no sign of sharp sight; to hear the noise of thunder is no sign of a quick ear. Great traders see more than the obvious. There are not more than five primary colors (blue, yellow, red, white, and black), yet in combination they produce more hues than can ever been seen. Keep stock trading simple. You need only understand support, resistance, optimism, pessimism, price volatility and abnormal behavior.

Time & Money

Do not squander time for that is the stuff life is made of - Benjamin Franklin
We have heard this before - Time is money. Your most precious resource is your time. But lot of us struggle - what to do with our time? We always think our Net worth in terms of money rather than time. There are millions of articles on - "How to save money?" but is that the case when it comes to time - "How to save time?” No I am not talking of time management. I am talking of investment. We always focus on - Where should we invest our money? Do we really think the same when it comes to time? One of the smartest things you can do is so start investing time in places which matters most to you. This also helps us getting ready for the opportunity when it knocks our door. The grass is always greener on the other side When we are young, and we have lot of time on our side to become what we want to - we tend to ignore that and start chasing money. Our success criterion is how much money we can have as soon as possible. We are impatient as we don't value time. The whole philosophy is - "If we can’t get what we want and we can’t get it right now, then that’s just not good enough." We love momentum. That is why - you will see very few 30 years old value investors. Please note - I am not suggesting momentum is bad, and Value investing is nirvana. When we become old, we suddenly start valuing time. This is the period when time becomes the most important aspect. Patience becomes the key. Value investing becomes the key. We will always seek what we need while the debate may continue on time over money. I am also confused on the subject that what should be the priority - time or money. But it's an important subject to think over. Anyways - Time is precious and we should always try to make best use of it by spending it in places which we can cherish later. Good memories can be great source of energy. So, one should not get too much obsessed with saving money. It's alright to spend occasionally on stuff that can buy you great time. "It's better to waste money, than it is to waste time. You can always get more money." - Hal Sparks.