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Rodeo Cowboys Don’t Make Good Options Traders

By Kirk Du PlessisETFsFeb 02, 2013 01:05AM ET
Rodeo Cowboys Don’t Make Good Options Traders
By Kirk Du Plessis   |  Feb 02, 2013 01:05AM ET
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Honestly, would you ever ride bull?

Not a bull market but a real raging bull? I sure as heck wouldn’t but some people would love the thrill.

Others even like running side by side with bulls (drunk albeit). Not this guy, not ever – I’m just not that fun my wife would say.

But this same concept came be directly associated to new options traders. There is a certain “thrill” that traders naturally look for when starting out, yet this mindset can be very destructive.

Have You Ever Been Disappointed With A Trade? Sure you have. I have as well. But that’s not what I’m talking about. . .

If you are getting emotionally disappointed (and/or overly happy) with the outcome of a trade you are heading in the wrong direction. This means you are taking it personally which then assumes that you are making directional “picks” and not trading individual strategies.

All too often we get into this game for the thrill of being right on a directional trade. But then we don’t pick the right direction so we continue to trade more and more, looking to feel that thrill again. Some would even relate this to a drug addict looking for the next high.

If you’ve been caught up in this trading spiral there is hope. And home comes in the form of structure!

Be Mechanical NOT Emotional
Emotional traders get crushed in markets like these that doesn’t care how you “feel.” Stop focusing on being right and start taking a more mechanical approach. Be systematic about your trading – almost like a robot.

Mechanical traders look for specific events to occur before they use their strategies. For example, if you are a seller of premium and decay (like I am) you have to wait and look for high levels of implied volatility. When the time comes you need to jump in with both feet and trade.

There is very little thinking involved! When the setup presents itself – make a trade and let the probabilities take care of themselves. Really there is not much else to this game than that.

3 Step Therapy for Rodeo Cowboys
If you already know you are guilty of being a thrill seeker I have a 3-step system that will help curb your desires for riding bulls (i.e. trading too much for the sake of trading).

First, make a short list of strategies you are comfortable trading no matter what the market gives to you. Again you don’t have to be able to trade all the strategies that are out there because I don’t either and I did just fine last year.

Second, identify that ideal market situation that you allow you to place a trade. For example, if you want to trade vertical credit spreads you need high levels of implied volatility relative to the overall market.

Third, systematically scan the market and look for indexes or ETF’s that fit your criteria. If the trade fits make the damn trade! Keep your position size small to minimize the underlying cash investment as you learn to become more mechanical.

No too bad right?
Of course this is a simplified system but you get the idea. Be mechanical about options trading. Nobody can ever pick the right direction trade after trade so don’t sweat losses or gains. Trade the probabilities and let the strategies do the work for you.

Now, it’s your turn. . .
Add your comments below and let me know how you think you can become a more mechanical trader. If you know you are a rodeo cowboy right now add a comment and let me know what you think is holding you back from trading differently.
Rodeo Cowboys Don’t Make Good Options Traders

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Rodeo Cowboys Don’t Make Good Options Traders

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