Avoid These Mistakes
Most of us are taught from the time we are babies that it always pays to be optimistic and to spin things positive whenever we can. That same advice can kill your investment account balance! Any denial you practice can have you holding a losing hand too long, and then, if you switch to the “it can’t get any worse before it gets better mode”, you are really in trouble. That’s like double-denial.
If half of option trading is knowing your underlying, then half of your money management is recognizing the fact that you will not have 100% winners. Just as you must formulate a plan for when to take a profit, you must have a preset notion of when a trade is not working for you. Before you hit the SEND button to open a trade, ask yourself, “Do I have a best-case, worst-case, and a take-the-profits scenario for each trade? Do I have an exit plan, if things don’t go my way?” Even when you do your best, you will still wind up getting out too soon on some trades – and too late on the others. Unless you can tell the future – this is unavoidable. Don’t beat yourself up; such perfection is impossible.
A cardinal rule: Plan every trade with the primary goal of surviving to trade another day.
Surprisingly, one of the natural reluctances we have is to take profits on a good trade; this can also destroy you. New stock traders often experience this. Everyday a stock goes up, you feel smarter and smarter, and you enjoy counting your profits, UNTIL one day the trade turns on you. Then you want it to be ‘good again’ and hold it, and then lose more. Any stock trader that won’t admit to having done that – isn’t being totally honest. Losing in the best possible way does not come natural to any of us; yet if you are going to survive it’s a necessary skill to learn.
I read an article once by a proclaimed successful stock and commodity trader. His mantra was: “Cut your losses quickly and let your profit run or you will never survive!” His mantra sounded good (Everybody loves profits, right?) but was impossible to do without clairvoyance. It reminded me of the old comedian Will Rogers who said this about stock investing – except he intended it to be nothing more than tongue-in-cheek humor. He said, “Buy low, sell high. If they don’t go up, then don’t buy them.” Such arbitrary and unquantifiable rules are little more than wishes cast into the air. Another credo often sited by rookie stock investors is to ‘buy more while its going up’; this can have you averaging in for the next correction (what I call the Icarus Syndrome.) Always question these ‘parrot phrases’; if you keep an open mind, sometimes people will try to fill it with junk.
Read more in our new Online Stock Option Trading book: Options Exposed the new 2015-2016 Edition