It's time to start thinking about trading goals for next year. You may be groaning, thinking this is an exercise akin to going around the Thanksgiving table and saying--out loud--what makes us feel grateful. Groan away. It's still important to set concrete goals so that we can make the efforts necessary to meet those goals.
I've just had the opportunity to view the trading plans of many traders over a several week period. Trading plans and goals can be as simple as a single page of goals along the lines of "Enter four trades each month in W, X, Y, and Z," which is my tendency, or as complex as a multi-sheet Excel workbook with backtesting rules, imported quotes and multiple embedded formulas. However simple or complex a trader's plan might be, setting goals was important to all those traders, as it has been for me for several years.
Market action has prevented me from meeting all my goals these last two years. The market craziness hit at just the time that I was working toward my primary goal: varying strategies so that I have a more balanced mix of portfolio delta, vega and other risks. When it's all you can do to manage the more familiar trades, diversifying into less familiar strategies proves a more treacherous process, one that requires more time than anticipated.
At least I've benefitted in one way. It's been my contention for years that a trader should not increase the size of a trade in a less familiar strategy until the trader has gone through a bad month with that strategy and managed it well. Managing it well doesn't require making a profit. Meeting that goal does require following one's trading plan and minimizing losses effectively. This market action has afforded plenty of opportunities to experience a bad month. Those of us in premium-selling trades can point to several months this year when such opportunities presented themselves, as these trades are more difficult to manage in strongly trending markets. The first month when I moved from paper trading to live trading double diagonals on the MNX was a month that required multiple adjustments, for example.
Even if I haven't yet met all my goals, the act of setting those goals helps me to take the steps toward eventually meeting them. When they reappear on a new list of trading goals, I know that I'm perhaps not moving fast enough toward meeting those goals, and I take steps to speed up the process, if possible. I did that this year and am now further along than I was last year.
In the process of meeting that goal, another has popped up. I was so focused on varying risks that I hadn't thought about the other benefit of rebalancing the strategies I used in my trading portfolio: increasing my yield. Butterflies and calendars both can produce a greater return on the buying-power withheld than the types of high-probability iron condors that are the major part of my portfolio. Double diagonals can, too, but their yields are not often as great as those of butterflies and calendars, at least in my experience.
In the process of reassessing, I added more than one additional goal. I discovered that I'm still cutting my winning trades short too often, like a newbie trader. I usually have a valid reason for doing so. For example, in December's option expiration cycle, my OEX iron butterfly reached a 10.2 percent yield on the buying-power effect or margin withheld on a Friday, a mere two days after I'd placed the trade. Such a quick return on the money would allow me to collect that return and put the money to another use. I'd put my MNX double diagonal on a little later than was optimal, and it was time to put on the next month's trade before the current one had reached its full potential. I've set parameters for how much I'll invest in each trade in each vehicle over the next few months and that didn't include two sets of MNX double diagonals. In addition, the markets had been coiling ahead of the jobs number, a number that sometimes roils markets. I closed the trade and locked in a 7.4 percent yield, intending to open a new DD as soon as I saw which way the market winds were blowing. My RUT calendar required two adjustments, each one forcing me to lower my expectations for the gains for that trade, and I ended up closing it for a mere 3.5 percent yield the Friday before opex week, my cutoff date for staying in a calendar.
I had good reasons for my actions, but by then a pattern had begun to assert itself. I always had a good reason for closing profitable trades just a bit too early. A reason can always be found. Now that I was broadening the types of trades, an old pattern of mine was apparent again. I trade iron condors the same way all the time, closing them when the spreads on either side narrow to $0.15-0.20 or managing them a certain way if one side goes wrong. That old pattern hadn't had an opportunity to get in my way so much, proving to be an antidote for my old tendency to lock in profits too soon. Once I began varying my strategies a bit more, that old pattern reasserted itself.
So, I'll be adding two new and linked goals this year to my trading plan. I want to increase my yields and manage my tendency to take profits too soon.
What about your goals, new or renewed? Some possible goals include the following ones:
Learn a new strategy
Average a set amount of profits per month or a set yield on the margin
Practice setting alerts of various types to aid trade management or allow a life away from the trading screen
Investigate a new technology that enhances that ability to get away from the trading screen
Form a trading group with traders who have similar goals and trading styles
Take a class through the CBOE or OIC
Back test several new strategies (LEAPS, covered writes, CPT or others) from the Option Investor pages, then settle on two or three to paper trade on your brokerage's simulator or paper trader
Compare online brokerages to determine if yours still meets your goals
Learn to calculate standard deviations and do so for your favorite vehicles every day for a month, getting a feel for how much a standard deviation would be for a day, week or month
Talk to your broker about minimizing risks
These are just a few possible goals. You'll find your own. Write them down. Take the first step toward meeting each goal. Study those goals from time to time to determine how close you are to meeting them and what further steps you need to take if you're not making progress.
I'll be writing my list, too.