Smart Advice Works for All Traders

One theme that appears repeatedly in InvestorPlace and in trader blogs is a list of best practices. These lists include trading rules, trader advice, and necessary habits for becoming a successful trader, and so on. Some are directed to specific products, such as options trading, or using ETFs. Some are for specific situations, such as an options expiration. Others are more general, offering guidance suitable for any trader. Some lists are intended for beginners. That’s an ideal target.

It’s important to understand as many aspects of trading as possible — if only to prevent the formation of bad or careless habits.  Other lists are targeted to experienced traders and may contain useful ideas for tweaking the way they trade or handle specific situations. These lists are generally helpful in that they provide good suggestions and much food for thought. One recent example is the “Top 10 Ways New Traders Lose Money” by John Forman. As is the usual situation, each item on the list does not apply to each trader. However, this is an excellent list because it contains some advice that applies to YOU.

The Problem

I believe these lists serve a useful purpose. There’s nothing wrong with reading the suggestions of different traders, each of whom may have some idea that truly applies to the reader. That’s the idea behind writing such lists. However, the bad news for people who take the time to read such tips, hints, or trader mistakes to avoid is that the reader seldom believes that the list is appropriate for his/her circumstances.  Common thought may be:

  • I know that
  • Of course; that’s obvious
  • Who would make that mistake?

The truth is that too many current traders and trader wannabes discard valuable advice. Why does that happen? My belief is that the new trader doesn’t believe the ideas are relevant. The advice comes from too many places and the ideas may be in conflict. Fact is, different traders found different paths to winning the game, and have different advice to offer. But that’s no reason to discard these ideas. Consider each and carefully decide its relevance for yourself.

The second item on the list is: “Unreasonable expectations.”  That’s an important item, not to be discarded as “obvious.” The truth is that it is not obvious. New traders are far more confident of success than more experienced traders because they have not yet moved past the hype that made them interested in learning to trade in the first place.

Let’s face it: Brokers want you to believe it’s easy. Come to them for great investment research, and that’s all it takes to win. Some of the hype-artists are educators who claim that their courses are designed to allow you to double your money every year, and if by some unfortunate circumstance you fail to do that, they offer an invitation to take their course again — at no cost. Some advisors want to trade your money and for only half the profits (and none of the risk) they will turn your investment into a pile of cash.

They all make it sound so easy. No wonder that new traders have high expectations. That leads to trading more size than is prudent, taking more risks than common sense dictates, and holding onto losing trades because they “just know” that the market will perform in a manner that gives the new trader his/her well-deserved profits.

This is the path to ruin, and if those high expectations are not lowered immediately, the chance of losing all your money is very high. Experienced traders too fail to heed the messages. It’s far easier for them to believe they already know all they have to know to make money. While it may be true that they are earning profits every year, it’s also true that there are ways to improve their results — if they would just take the time to learn what things can be done — and then make the effort do learn how to accomplish them.

The point of this post is to alert you to a simple fact: When you read a list of suggestions, don’t dismiss them as useless. There is something on that list that you can do to improve your performance as a trader. Of course, if you don’t want to do the work and don’t want to make the effort, that’s a personal decision.

Follow Mark Wolfinger on Twitter @MarkWolfinger.


Article printed from InvestorPlace Media, https://investorplace.com/2011/01/advice-option-trading/.

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