Aaron here, introducing guest author; Andrew Falde.
Once a commercial real estate agent, now an options trader – Andrew’s spent a good part of the last 8 years deeply involved with financial markets, and now, also an educator on the SMBu team.
Today he’s here to share with us 4 pointers to help you avoid failure as an options trader (but really, these tips hold weight for all trader types).
Enjoy guys, I’m going to pass you over to Andrew…
If you can avoid absolute failure long enough, your success is almost inevitable. To completely fail means you have quit. Failure is not a period of poor results or missed goals. Poor results and not achieving goals is to be an expected part of any worthwhile endeavor.
The following four items come from my past trading experiences which at times felt like failure. But I did not fail because I did not quit. I got connected with people who were experiencing success… And gave up my own preconceived ideas of how to make things work.
It became very clear, I had overcomplicated everything. I followed the gurus with the big marketing budget rather than the ones that would actually show their P&L.
My hope is that my multiyear learning curve will not be your experience. The learning curve for options should not be painful. It should be confusing – even a little stressful at times. But it does not need to be painful.
So let’s hop right in to these four ideas that I believe can help you avoid failure and get onto the path of a growing account sooner.
1. First know what in the world you are dealing with and how much leverage is involved.
Options trading allows you to take a tremendous amount of leverage. In some ways that becomes a way to have less risk. But usually it’s a way for traders to accidentally take on way more risk than they should.
One common delusion that newer traders have is that a “defined risk” trade helps them control the amount of risk and leverage they are using.
The reality is that you can define $1,000 worth of risk but actually be controlling $100,000 worth of the underlying. The movement from day to day inside of that spread involves the effect of the underlying size. Whereas a trader who was using no leverage could see a 1% move in the underlying affect them by $1,000; the leveraged trader can lose $1,000 if the underlying simply does not move as expected.
If $1,000 represents 10% of your trading account, then the underlying simply not moving can draw you down 10%.
It is a good idea to focus on what each and every contract represents. Know and respect the size of the underlying market that you are controlling with each and every contract.
2. Do not underestimate how long it will take you to become proficient.
Online marketers, booksellers, gurus are in the business of convincing you that you will be successful if you take their training. Please understand that I am not downplaying the importance of using mentorship and coaching. You should read books. You should hire somebody that can teach you how to trade. You should take multiple courses on trading.
But do not fall into the trap of believing that the course, mentor, book is going to translate and transfer the skill, patience, and experience needed to create a growing account equity curve.
There are shortcuts to creating a growing account without years of experience.
Within 3 to 6 months you could understand enough about the options market to implement a strategy that can begin to produce income.
But to master the more complex strategies and begin to have a deep enough understanding of how to modify them to fit your objectives takes much longer. In my estimation, it takes 18 months to become proficient enough to develop and trade complex options profiles. And this is assuming that you are giving it your full effort and have some level of cognitive ability to understand the math and language that is unique to options trading.
3. Use coaches and mentors – have the mentality of a world-class athlete.
By definition, a coach and a mentor should be accessible. In the realm of athletics it is not necessarily true that the coach will be playing the game. However, in the trading world, you want a coach that is playing the game. But to continue our analogy of professional athletics…
“The most talented athletes in the world somehow never become good enough to no longer need a coach. This is true in the trading world as well.”
Here are a few things you want to see in your coach and mentor. You need to see examples of actual trades taken. By no means am I recommending that you ask for account statements. But over the course of a couple months you should see enough examples of decisions, trades, and evidence that demonstrates the competence of their trading.
For example, at SMB you can see the actual positions of our top options trader every Monday. I share my trades and P&L on a regular basis in our chat room.
If you wanted private coaching from me or if you wanted me to trade your account for you. I would get into a web meeting with you, and show you my actual platform with current trades and year-to-date P&L.
At SMB, we are very cautious and careful to not talk about P&L on a regular basis. That is because it can actually have a negative effect on traders that think they can do the same thing without proper training. There are regulations about this and we abide very closely by them. That said, we provide every bit of information that we possibly can to demonstrate that we are real traders that generate real P&L.
4. Understand the inverted effort scale of options trading
Options trading is unique from many other types of trading. The less active the market — the more your profit potential goes up. Market neutral spread trading provides the best returns with the least drawdowns when the market sits in a small range. If the market trends aggressively, then the spreads need to be adjusted and/or moved. Some strategies that are “high probability” may just involve a stop loss because there is not enough premium in the trade to allow for frequent management.
Many newer and developing options traders tend to over trade and over adjust when the market is in a range. And they tend to freeze when the market becomes “overbought” or “oversold”. There is a psychological barrier for many that the biggest profits occur with the least effort. And that there must be great effort applied to trades that may ultimately lose. The challenge with having to give effort and lose seems counter intuitive. And the idea that easy money is not reliable makes them second-guess their winners.
If you would like to proceed down the path of learning the options market, I would be happy to help you do that. And hopefully my experience and extended learning curve can help you generate a shorter learning curve with less pain and quicker success.
Let’s connect so I can learn more about you and answer your specific questions. Here are a couple ways to do that:
- Leave a question in the comments of this blog post.
- Send me an email, [email protected].
- Join OptionsTribe.com with a premium membership and chat with me in our private chat room.