REVEALED: 6 Tips to Be a Better Trader

REVEALED: 6 Tips to Be a Better Trader

Posted On September 7, 2021 3:37 pm

Stocks are still mostly meandering around as I focus today on managing the Options360 Concierge Trading Service’s open positions. Some are mechanical, i.e. with limit orders to close positions once hitting a profit target, others are defensive rolling or partial close with some simply convincing me to sit on my hands. 

This got me thinking I should go over my trading guidelines.  Note: I did not say “rules.” So as an adjunct to “6 Rookie Mistakes,” here are 6 tips for becoming a better trade manager.   

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1. Partial Buys and Partial Sells

Traders often think of trading as making a single buy and a single sale. The problem with that approach is that it puts a premium on precision. If your timing’s off just a little, a good trade opportunity turns out to be mediocre. When you build a position incrementally and sell it off in pieces, you have a much higher probability of realizing a profit and also potentially catching a more significant move. It’s impossible to predict exact lows and exact highs.  However, if you take a reasonable target price and limit losses, the likelihood’s that you’ll end up with better overall results.

Recent examples are the iron condors established in the Options360 trading portfolio.  Over the last two to three condors, I established iron condors in Home Depot (HD), Roku (ROKU), and Alibaba (BABA).  In each case, I closed half the position once 50% of the maximum profit potential was realized.  This morning, HD and ROKU were completely closed for 60% and 75% returns on risk.  BABA has increasingly become a problem child.  But, at least we had a partial close for a small profit leaving our overall risk de minimis. 

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2. Diversify by Time Frame

One of the great advantages of options is you can use time as a form of diversification. Of course, trading different names across different sectors provides a form of diversification, especially during the past year which has been defined by rotation from stay-at-home vs. reopening and growth vs. value.  However, you can also do it by trading in a variety of time frames.  

For example, even prior to the positions in HD, ROKU and BABA started rolling off, Options360 was establishing new positions in Penn Gaming (PENN) and McDonald’s (MCD) with October expirations. 

Think of options positions like your refrigerator; everything has an expiration date, the key is to milk the most out of current positions before they go stale — while also shopping for new inventory, even if it’s the same item. See this article on perpetual income. 

3.  Force Yourself to Make a Decision

The biggest losses most traders suffer are due to inertia. They buy a position that doesn’t work, and rather than dump it, they just sit on it and do nothing. This is especially true with options where losses are defined and one can adopt the attitude of “I only have ‘X’” left to lose.  To avoid turning a position from one of reasonable risk/reward into a hope-and-pray lottery ticket, force yourself to make a decision when a stock or the value of the option drops by a certain amount.

A recent example in Options360 was a bullish position established by TheTradeDesk (TTD) some three weeks ago.  At the time, TTD was trading around $80 and the Alert defined the trade’s price parameters with a target of $85, but also a tight stop-loss of $79 — which I defined as the support level.  Three days later, TTD broke below $79 and we exited the position for a $20 profit, which gets me a few days of Gatorade. And… I have no regret as TTD has slid below $76 in the past few days. 

Sometimes, I still struggle with sticking with the discipline or predefined exit targets. However, I’m slowly learning that inaction is not an option.

4. Selling Is Your Most Powerful Tool

This leads us to one of the most advantages individual traders have over institutional money managers; the ability to sell a position instantaneously.  This is your most powerful strategic tool. It’s your insurance against substantial losses. The key is that there’s nothing stopping you from establishing a new position in the same name.  Even if you took a loss on the first go.  If a stock provides a new setup, you now have a fresh look with hopefully a higher probability trade. Selling/Closing positions is how you manage risk. It’s your best friend and the key to protecting your precious capital.

5. Focus on Reaction Rather Than Prediction

The market’s full of experts making predictions about what will happen next. Once in a while, they’re actually correct, but usually, they are wildly wrong. How many “experts” predicted a pandemic and the market’s reaction over the next year? None, zero, zip. The way you make money is to react as conditions change. No one knows the future.  But, if you react quickly to changing conditions, your chances of making money increase dramatically.

6. Charts Are Your Best Management Tool

Tip five leads us right into number six: How charts or technical analysis can be your best management tool.  Charts provide a trade management framework. Most Options360 trades start with the charts to identify good risk/reward setups. But, while many people think of them as predictive devices telling you where a stock’s heading (true to a degree), the predictive ability of a chart erodes fast, and then they become a tool that’ll help guide you on when to take gains and most importantly when to bail out and limit losses.   

In summation, be sure to spread your trades across time and price, define the risk/reward parameters, don’t hesitate to pull the ripcord, and squash the notion of being the fortune teller and stick to trade management.

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.