Several months ago, I wrote about an experience that most options traders will unfortunately experience: a loss that damaged my confidence. The most important tenet to becoming a successful options trader lies in controlling losses, I have long felt, and I had let a loss get ahead of me. I thought I was an experienced-enough trader to be long past that possibility. Shame and fear battled for control of my emotions.
Neither emotion benefits options traders. They engender fears about getting back in the market, fear-based decisions once in a trade, overtrading, and a determination to make up the loss, none of which benefits trading.
I set about devising a plan for repairing my confidence. I felt that doing so was more important than focusing on big profits. This plan was intended for the short term only, for reasons that I'll discuss later.
I set about better balancing my work life with other aspects of my life. You might be surprised to see a touchy-feely goal placed first, but Denise Shull, a researcher into the neurobiology of emotion, wouldn't be surprised. Shull has been conducting a series of seminars on trading psychology for think-or-swim. According to her seminar on Monday, September 13, her first consultations with traders often uncover people who are not getting enough sleep, nutrition or exercise, all of which impact their trading decisions. Shull often advises that traders cut down the number of inputs on their trading screens and tells traders to get up and walk away from their computers when too stressed, too. She backs up her beliefs with information about functional MRIs and other studies that prove the deleterious effects of too little exercise and too many inputs on decision making.
How did I specifically accomplish this goal? Concrete steps I took included utilizing fewer indicators and oscillators on my graphs, turning off CNBC and taking Marketwatch or other such news programs off my computer screen. I'm getting news via Option Investor and can further investigate any issues that interest me after reading them on our pages. I set alerts to let me know when I need to be at the computer and otherwise avoid sitting at the computer all day. A moment-by-moment focus on the markets amounts to obsession and leads to overtrading. I leave my office.
Furthermore, I leave the building, something I never did previously during the trading day. I spent a couple of months practicing managing paper trades via contingent orders, and now contingent orders are set on live trades. A netbook and air card go along with me when I'm away from the office during the trading day. Very few programs are loaded on the netbook so that it boots up quickly. The netbook's sole purpose is to allow me to follow and execute trades while away from my office. Alerts are set ahead of those contingent orders to give me time to get my netbook up and running. If I can't do so, such as when in a hospital setting or other setting that doesn't allow such connections or when traveling in a rural area where my air card doesn't work, the contingent orders are there. In addition to providing balance, this has relieved the fear of what would happen if I were suddenly called away with a live $75,000 trade working. Perhaps others will find a smart phone a better solution, but I wanted pages with full analytics rather than the mobile platforms that most brokerages provide for smart phones. Other possibilities are a regular laptop computer with access to coffee shops, libraries or other places in your community with Wi-Fi available to patrons. Investigate what works best for you.
Next, I made myself accountable. I was always accountable to my husband, and to a few trusted friends, too, but I needed something more stringent. The proprietary profit-loss graphing program I use places my maximum preset acceptable loss right on the graph in the form of a deep red line. Because I felt that illness and stress had played a part in letting those losses get away from me, I alerted co-worker and trusted friend Jane Fox, who writes for the live portion of our site, that I would appreciate her reminding me that times when I was sick or stressed might not be the best time to make big trades. I sought out a small trading group that requires participants to go over their trades once a week, showing all adjustments made during the previous week and going over the planned adjustments, if needed. I told the group right away that my primary difficulty was avoiding fear-based decision making. I wanted them to call me out if they noticed that I succumbing to that kind of fear.
If youâ€™ve never belonged to a trading group, you might not know how much that accountability can mean. If you're tempted to let a trade go just a wee bit or a lot past your planned adjustment level, the knowledge that you're going to have to explain yourself in a few days can push you to follow your plan. When you're tempted not to trade at all because you're just too scared, knowing that you'll have to explain yourself at the next trading group may push you into being a little braver. While I can't invite you to join my group since it's associated with a private group, I can suggest that you seek out one of your own. Sometimes your brokerage's chat might allow you to find traders who also want to form a group, and Google's trading groups might have a group that's a good fit. Just be careful about taking advice from others if they haven't proven themselves. Remember that your primary goal is to be accountable to someone else for your decisions. Don't give out private information. Hide your account information before showing your trades to anyone. I prefer to enter my trades into a third-party charting program that provides no account information, for example, and show that instead of my account. Be wise. Don't ask another group member to trade your account, as it's easy to misrepresent your results. Don't jump into the trade du jour the group has decided to test. Again, your goal is accountability, not to uncover the newest holy grail trade sweeping through the options-trading community.
The next component was to get back on the proverbial horse by trading again, but not necessarily to climb onto the same bucking bronco. I knew that to regain confidence, I needed successful trades more than I needed big profits. I knew I would be vulnerable to overtrading and I was. Therefore, it was lucky that my plan included trading smaller, trading fewer live separate trades employing fewer strategies and choosing lower beta underlyings. I talked about this recently, so I won't go into great detail, but I wanted to avoid too many of those inputs Denise Shull talks about and lessen any fear if a trade started going wrong. Because at times in my trading life, I have routinely traded 100-120 contracts of iron condors in a month, trading 25 for this short time period seemed much less fear inducing. Because I had become accustomed to trading OEX butterflies, trading the lower-beta IBM versions seemed much less fear inducing. I took profits earlier and, therefore, stayed in trades for fewer days, and had more days off when no live trades were open.
One consistent theme in my writing about trading has been there is no one right way of managing options trades. I needed these smaller trades and quicker profits because of my own personality and the strength of the blow my confidence had taken. However, trading smaller right after a big loss can hamper traders' ultimate profit and loss figures for the year. As often happens after times when options trading was particularly difficult, the last couple of months for my trades have been relatively easy ones. I could have taken full profits on bigger size trades, and already have made a significant dent in offsetting the loss I took. Instead, my plan meant I haven't made much of a dent at all. This is a problem, but I know myself, and I know how hard that loss had hit. I needed time to recover. I made sure that this first part of my recovery plan occupied only a short period of time.
So, what's the last strategy I employed in recovering my confidence? I paid attention to what works best for me according to my personality, the way my focus works best, and my lifestyle needs. In an effort to learn as many adjustments as possible, I had been pushing the number of trades and strategies I employed. I had sized down the trades, thinking that would compensate for the greater mix of strategies, but it didn't. My personality means that I can better focus on bigger trades in fewer strategies than smaller traders in more strategies.
My plan worked for me. It might not be the right one for you, but I write this in hopes that some of the tactics I employed may encourage you to seek tactics that will help you avoid altogether taking such a hit to your confidence.