Most Traders Leave 73% of the Market on the Table
Trading Options at Night – T.O.N.
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I consistently remind subscribers that 75% of all stocks will follow the S&P 500. And that’s exactly why I’ve spent my entire career studying the S&P. Before the crash of ’87, I was one of the largest S&P 500 options traders. After a period of trading mostly futures, I’ve risen back to the top and once again am one of the largest SPY option trader. Now, I’ve finally developed the perfect system so you can follow right along me as we trade the most liquid market in the world.
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Encyclopedia of Trading
Trading is a very difficult venture, but we feel it is our duty to provide DTI subscribers with the best education in the business. Over his 40+ year career, Tom Busby has dedicated his trading life to determining the best way to make money in the markets. Regardless of you trading experience, these 15 lessons will provide you with the framework for success.
The 7 Biggest Mistakes Most Traders Make
Emotions; volumes of books are written about them. But they can be the biggest hurdle in trading. In fact, the fear of trading, or the fear of losing, can hinder even the most tenured of traders. Everyone hates to lose money, and everyone wants to make money. This is the fear and greed battle that we all go through. But if we let either of these emotions control us, we can’t trade, get out too soon, or stay in too long as the market goes against us. All these are indicative of not making money.
So, we not only enter the battle field of the market, but also the emotional battle within us, and we ask the profound question of “how do we overcome our emotions?” The answer is not that simple, but to put a fine point on it, the answer is discipline. You must have a plan. We are Generals entering into battle and not only plan our offense, but figure out the defense and how to counter it. In trader terms, where do we enter, where do we take profit, where is the protective stop, and what are we going to do if the market does not go in the direction that we planned? These questions must be answered before the trade is placed. We therefore have a plan to follow and now know exactly what we are going to do as the market reacts.
In making a plan, we have taken trading from an emotional game, to a business decision based on market performance. We have a defined risk, a defined reward, and safe guards in place if the market turns against us. If the market goes in the direction of our analysis, then we begin to eliminate risk (fear) and embrace the reward (greed) as the plan comes to fulfillment. However, if the market goes against us, we begin to eliminate reward, and must reduce risk as much as possible. If we accept the risk where our protective stop is placed, then it is a set risk. But if we want to reduce that risk further, we may exit sooner, or put on a hedge position to make up for the loss being incurred. The big thing is (this is the discipline) to stick to the plan and do not deviate from it.
Businesses are not run on emotions, if they were then they would fail in a short amount of time. Traders must look at trading as a business. Though trading can be frustrating at times (and so can working in a business), as long as we have a plan, and stick to the plan, then we can begin to get the emotions out of the way to give us a clear mind to think about what is going on in the market. Each day is a new day in the life of a trader, tomorrow make it a new day in your life of trading and begin with a plan.
Mistake #1. Trading without a written business plan
Trading is a business and not a hobby. Those who attempt to day trade without a good plan will likely be giving their money to those traders who do have a good plan. A written business plan is essential for success in trading just like in any small business. In fact, due to the emotional nature of trading it is probably more important for traders.
A written plan is your personal guide to help you achieve your goals, but it will include a detailed plan of how you will accomplish those goals. A good plan should include many elements of your trading including what times you will trade, what markets you will trade, how you will enter and exit, and the specific contracts you plan to trade. Without a good written plan, it is too easy to be swayed in the heat of battle and find yourself trading a position of something you do not normally trade and have no plan for how to manage.
Also, much of the battle in trading is mental and emotional. During the trading day it is easy to stray off course due to the emotional aspect of trading. This can be especially true for traders who operate alone and without contact with other traders. However, I have found that using a comprehensive written plan as a guideline to how trading will be structured helps to counter the emotional conflicts that arise. The best plans will cover all aspects of trading and how to handle different scenarios that arise. If you trade long enough, almost “everything” will arise at some point. You should make sure your plan covers how to deal with success and reaching your goals as well as with disappointment and not reaching your goals.
Mistake #2. Trading too large for account size
One of the key tenants to be a successful trader is to realize that proper position sizing is a money management tool. Too many new and novice traders think the key to success is to trade large. Some even enjoy the thrill of watching their equity swing wildly. While it can be exciting to see those large gains of perhaps $800 in a $3,000 account, that is not a proper foundation upon which to build longer lasting success.
It is much better for a new trader to develop the required skills in terms of analyzing the market, entering trades at good spots and managing both winning and losing trades. You will make your worst mistakes early in your trading career, so it is better to learn with smaller size. Ideally once you are having success trading 1-3 contracts, then you can ramp up size trading the same method and same contracts as you have been. Too many new accounts are completely blown up simply by trading too many shares or contracts before the trader is ready.
Mistake #3. Unrealistic Expectations
Too many traders get into trading for the wrong reasons. They think this will be a lottery ticket where they can trade for an hour per day and make millions of dollars. Nothing could be further from the truth. Trading is an incredibly difficult endeavor. Many new traders go through a process of searching for the Holy Grail of trading…a system or secret indicator that will make trading easy and they will simply print and collect money. The trading educational industry tends to flame the fire of these unrealistic expectations with unrealistic and untruthful claims about the performance of any system or method.
The only thing that will lead to lasting success in the trading industry is to be properly prepared and work hard. Of course, the process of both of these areas is much more detailed and requires much time and commitment. It is important to invest the time and study that is required to be a good trader. System jumping will never lead to success. It will be important that you also find a method and a time frame that suits your individual personality. A favorite saying of mine that is good to keep in mind when it comes to evaluating different trading methods or systems is “The grass IS always greener on the other side, but it still has to be mowed.”
Mistake #4. Lack of Discipline
Successful trading or successful investing is nothing more than good damage control. It really is true because the opportunities will always be there, but if you do not have the discipline to use proper stop loss orders (damage control) then you will probably not last long in the trading business. In poker, going all in always works until it doesn’t. This is like trading without stops. The market may continue to bail you out of bad trades that refuse to stop out of, but eventually the one big one will come and wipe out your account equity.
Some individuals are naturally more disciplined than others. Understanding your own personality could be the difference in failure or success in trading. If you are not naturally disciplined, then you must structure your trading to make sure you have a plan to control risk. Many traders spend tons of time trying to determine the best place to put a stop loss, but fewer seem to understand the importance of always honoring their stop loss. As long as you have discipline to stop out of bad trades or manage a trade in the proper form then you have a chance to survive long term. If you are not disciplined, then trading will not serve you well.
Mistake #5. Lack of Focus
A mistake we often see with newer traders is lack of focus. This usually pertains to trying to monitor and trade too many different instruments. They are trying to trade stocks, options, futures and are always moving from one trade to the next. We have found what works best is to focus on only a few stocks and be focused on fewer futures markets. Exactly how many will depend on your trading program and the time frames and style you wish to use. If you are trading off a 5-minute chart, then you will have to be incredibly focused on managing each position. If you are a swing trader or trading off 60-minute charts, then by nature they will not swing as fast and it may be possible to monitor more positions. The key is to be consistent with both what you trade and how you trade. Also, your business plan should include a section on how you grade your performance with each instrument. You may decide during one of these evaluations that you simply cannot make money consistently trading bonds. There is nothing wrong with this, but you should stop trading bonds, and this will free up time and energy to focus somewhere else.
Mistake #6. Lack of Education
Being a professional trader requires proper education combined with trading experience to be successful. I am fond of saying nothing can teach you better than screen time. Screen time means when you are in front of your computer trading or analyzing real time markets. Over the course of many years and many market cycles, a trader will naturally develop instincts that a newer trader simply cannot duplicate. Therefore, it is wise to invest time and capital to learn the right way to trade. The best way to do this is to study with and be mentored by a professional trader in front of live markets observing and trading. Again, nothing is better than time and repetition.
We too often observe traders trying to learn on their own how to trade. While this may seem like a thrifty idea it most likely will be very costly. It is penny wise and pound foolish, to borrow an old expression. Of course, it is also difficult in the internet age to know which educators can teach you how to trade. There are also many different styles and there are many ways to be successful. There is not one magical approach that is better than all others. The key is to find a solid method that works over time and can be understood, learned and duplicated.
Mistake #7. Over-trading
One of the most common mistakes that prevents day traders from reaching their goals is over-trading. People often seem amazed when they see me trade and realize that I only did one or two trades and may have a stop at break even within 45 minutes of the session open. This is typical for me and most days I do not trade again. There is a perception that to really make big money in the markets that you must trade numerous round trips over and over. While some days certainly offer multiple good setups, most days do not. As a day trader you want to be selective and only target the high probability setups. There are not 24 high probability set ups each day. This is where trading according to your plan is useful. We often see traders that are beginning to achieve a certain level of success start to try to make more money by trading more frequently. This is the absolute wrong thing to do. The best way to increase productivity is to continue to do what is working on smaller lot sizes but start doing it with more size.
For example, if a trader is trading well using 300 shares of stock per trade then decides to move to another level they should not try to trade 300 shares more times per day. Instead they should start by trading 400 shares for a predetermined period of time. After that move to 500 then 600 etc. until they are doing the same types of trades and managing them the same as before only they are doing it with more size.
Patience in trading is a very good thing.
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