[1] Focus on Strategy Not on Dollars
In golf, Tiger Woods, in tennis, Roger Federer, in investing, Warren Buffett. In medicine, in teaching, in engineering, the best practitioners focus on mastering their profession, art or sport. Money inevitably follows. With the markets so volatile, many will see a sea of red and despair. Few will ask themselves if they are adhering to their strategy. The difference between the good and the great is that the great trust in the system that works for them. Being right first time every time is not possible, but being right in the end almost every time is possible if you understand how to roll with the punches that the markets throw.
For example, if you have bull put spreads and stocks are going below the short put strike, you can choose among many contingency exits. One possibility is to do nothing. Simply wait until expiration comes around, thereby giving the stock a chance to bounce above the short put in the interim, but taking ownership of the stock at expiration if assignment is warranted. This is a nice way of taking ownership of a cheaper than would otherwise have been the case when the bull put was first entered. It’s an especially nice way of putting money to work at this time of the year, particularly if you had a heavy cash position following recent tax sales. Another possibility is to buy additional puts to protect the original bull put and convert the trade to a ratio put backspread. In the event the stock continues declining, the additional set of long puts continues making money while the bull put risk is fixed at a certain level. Yet another approach is to roll the entire trade down in strike price and out to another month. If the trader believes the stock will stop falling at some point in the future then continued rolling works because one day the stock stops and the options expire worthless.
Brett Steenberger writes that the best traders are “immersed in markets, statistics, patterns, information” whereas the hopefuls are “smitten with an image” and trade “not as an expression of who they are, but in the vain hope of remaking themselves and their lives”
[2] Learn, Study, Read
In a recent interview, Wikipedia founder Jimmy Wales stated that the mission of his company was to "provide free access to the sum of all human knowledge". The goal is ambitious and audacious. Just meander through any library and conceive of transferring all that information online and multiplying it by a google! There is so much to learn that if each of us were to dedicate 100% of our time to simply learning about one area, stock market trading, we would never complete the task. So, whatever you know, know you can learn more. At Stock and Option Trades and Phil’s Stock World, we are here to help in any way we can. Don’t try to invent the wheel for yourself if you find one that already works well. There are myriad successful trading systems. You only need master one to be successful. Commit to learning, master the subtleties and prosper.
Once you have mastered a strategic system, master its intricacies, such as timing through technical analysis. This is especially important for short-term trading. Technical analysis is not a holy-grail, but it offers trigger points that can be repeated again and again. As a result, it offers the trader a way of objectively making a decision. In a discipline which punishes emotions, this is a solution; not perfect by any means but repeatable and preferable to the alternatives such as greed and fear.
[3] Manage Risk Carefully
The simple way to comply with this directive is to Always Hedge. You can be bullish and you can be bearish, but you should always be hedged. Hedging doesn’t mean you won’t lose, hedging just means you won’t lose as much as you would otherwise have done. And, it limits the amount that can be lost. Of course, when you determine an expectation and are correct you will wish you had not hedged, and greedy thoughts appear of never hedging again. But you must control those urges, that’s what makes trading difficult, staying the course and remaining disciplined.
Above all, trust in your ability. As Howard Seidler once said "It’s important to distinguish between respect for the market and fear of the market. While it’s essential to respect the market to ensure preservation of capital, you can’t win if you’re fearful of losing. Fear will keep you from making correct decisions."
