Trading From the Inside, Out… By Option Prophet

Ok, here’s the deal…

The last thing you want to see at a prominent social gathering as you glance across the room is your very own financial portfolio hobbling in on a cane, wearing a neck brace with its power arm in a sling and ordering up a double of “whatever he’s having”. 

Your trading account is slowly recovering from a fat lip, a black eye and more than a few after hours pot shots to the won tons. Your account has seen better days and you absolutely refuse to (feed the machine) continue wiring capital to re-fund your account every other week. You’re on a nickname basis with the accounting department at your favorite brokerage although you have never met in person and you’re beginning to dread the next time you come face to face with… (Cue the Tuba’s – enter ominous foreground music) “The Market”

Smell familiar? – Yep – it stinks! 

You’re on the fence about throwing in the towel or taking that “one last shot of miracle cure, hold the ice” Better known as a snifter of Hope with a Prayer chaser. It’s a mild demotion from a Lick and a Promise. 

Like a windup toy destined to walk the straight and narrow from here on out in a world of twists and turns, you elect to join the ranks of Team Insanity and take the plunge. Eyes wide shut, arms at half mast resembling that of a forklift and zombie stomp in full stride… destination… the same old thing! 

Sound like someone you may know? – Perhaps… 

The sad fact is that, that somebody also knows someone that rides that wheel. 

I realize that there are many traders that are in this position and that there are just as many traders with their boarding pass in hand, ready to climb aboard the “Flying Dutchman” and set sail into the great unknown just one more time in hopes to wander upon that Mystical Island of Wealth – Fantasy Island.

Overcoming traumatic trading losses is devastating to your financial situation as it is to your overall state of mind and state of being. 

When you sit too close to the core, the essentials the ride about the rim become hazy and out of focus. 

This article is not intended to be a sermon nor is this article intended to be a term paper on the subject. I merely feel that some light on the subject should help bring some awareness to unconscious decisions and actions made by many traders… at least the many traders I continue to meet and help.

The Scenario:

You’ve calculated your Trading Plan based on mathematical information with chart patterns, indicators, fundamentals and such. You say to yourself, “ok this looks good – this should work” after you have paper tested your ideas a few times. The possibilities look promising and the results you’re achieving meet your required expectations along with your risk profile. So you get the green light and prepare to put your live capital down on now what you believe to be a “probability” not a “possibility”. 

Now, you have reached the point of Testing with Live Capital. Paper trading is a great resource for learning mechanics and is even an asset for developing alternative trading skills, depending on the types of trading you engage in. But paper trading really is in no way comparable to trading a live account with real capital. Understanding the divergences of live trading versus paper trading is essential. Every serious trader should have stock in this understanding. (Pun intended!) 

Some things to consider while foregoing your next round of testing: 

*Remain objective throughout your modes of testing. If you are unable to establish an unbiased perspective of your theories while in test mode, probabilities are you sure as hell won’t acquire one during other aspects of your trading venture. 

*Avoid skewing your criteria to fit the result you desire. In testing theories you should be continuing to disprove any notion that the “Holy Grail” you just developed works as calculated. Nothing is perfect and you should be insistent in proving the same is true for your methods. 

*Question your motives for taking a trade prior to the trade, after the trade, but not during the trade. If the trade goes wild while in the position, your Trading Plan for that specific strategy should already have the guidelines on how to handle the situation. 

*Keep a record of your trading activities. If you have no record of events you have no measuring guide as to where improvement is needed or where enhancements can be made. Most traders look at stock charts to gage a stock’s performance, why not look at references to gage your own performance? (Rhetorical) 

*Don’t bring your prior trades to the table for prospective trades whether you’re dragging yourself up from a bad trade, a good trade that went south, or simply coming off a nice win. Every trade is unique. Every trade is new and unlike the last one, as it will not be the same for the next one.

The only thing that repeats is an echo.

*Don’t trade scared. There’s a big difference between pulling the trigger too early on an emotional surge and pulling the trigger early because your trading plan calls for it. Whether you’re entering, exiting or scaling, if you need to be a bit more dynamic or adaptive in your trades, write it into your plan. Driving the stake down on paper before hand is merely a guideline to give you reference…it’s not the “end all, cure all”. Everyday life is a dynamic process, so why would trading be any different? (Rhetorical) 

*While trading, be aware of, but don’t isolate the focus to your current P&L. Emotions have sharp teeth and aren’t afraid to use them. Numbers and calculations should have all been figured into your trading plan ahead of time.

In other words, by focusing solely on the potential result of your methods you tend to dampen the process that should be taking you there. 

*Stop loss management. This is in regards to trading an underlying (Stock, ETF, Future and is not intended for the experienced Option Trader. The experienced Option Trader understands that as a buyer of Options you acquire a dynamic soft stop within the Option or the Option Strategy itself.)

Don’t choke your position with a stop loss. There’s a time within the trade to tighten the stop on your position, but initially you need to let the position breathe. If you’re feeling as though your stop is too tight initially then perhaps you need to re-evaluate the type of market you are trading, (ie: highly volatile chop), the entry on the position, your risk profile, the size of your position or your profit objectives on the position. Don’t just put a stop loss on for the sake of security by telling yourself that your position is protected. There are times during the life of your trade that a stop has no immediate effect on your position when tagged or touched. In live trading, stops are sometimes blown through and triggered with a lot more slippage than anticipated. Stops need to be calculated and managed as part of the initial position. This is another nuance that should be written into your plan. A stop can be your trade’s saving grace, but it can also be your position’s extinguisher. 

*Trade from abundance mindset. Your mindset should be free from all anchors when you’re actively trading. Don’t risk more than you can afford to lose, don’t trade the mortgage payment, and trade clear in mind. When trading from scarcity, you tend to do things you wouldn’t normally do. 

All in all it is imperative that the active trader or investor have the proper education and hands on experience to manage one’s capital.

I wish you all good fortune

Peace-

Option Prophet