Don't Trade Options

If you don’t have a written plan. The goal of this post is to share personal mistakes in my early trading to hopefully encourage others down a different path. People tend to hate those kinds of statements because it makes us feel inadequate and that we’re doing something wrong. However, I can unequivocally say, transitioning from trading off the top of my head to writing a thorough plan is massive and probably one of the largest changes to my trading success.

I started trading in high school, so I scoffed at the idea of having to write things out. I figured I could just look at my brokerage statements, adjust based on what I saw, and do just fine. Looking back 16 years, I want to slap my cocky naive self. Trading is difficult and options are incredibly complex products where millions of people try their hand at it and we know the majority fail. The arrogance I had, thinking that as a late teen, I would just be able to successfully deploy without a written plan or log is literally wild.

If the idea sounds like work and annoying to do - you’re spot on. AS IT SHOULD BE. Just because the barrier to enter into trading is SO LOW, don’t allow that to lull you into a false sense of security. This is probably one of the primary reasons traders struggle - failing to understand the challenge ahead of them, misled by the ease of entry. To put things into context, 1-4% of high school ball players become D1 athletes and less than 1% go on to play in the NBA. What would you wager your chance of success is as a day trader? You guessed it, less than 1%. You can check out an awesome study by Barber, Lee, Liu, and Odean: The Cross-Section of Speculator Skill: Evidence From Day Trading 2014.

How many of those professional basketball players stepped onto the NBA court and were successful? I imagine it's infinitesimally small. Yet, traders attempt that same feat every, single, day. More likely (in the unlikely world of professional players), most of them spend thousands of hours honing their skills. To create success in trading, I believe the exact same rigor must be applied, this begins with the basics - a trading plan.

The real benefit of a trading plan isn’t using the finished plan as a reference, although it is a good one. The benefit comes from the rigor put into creating one and the exercise itself. Similar to when I was giving a 5 paragraph order as a Marine Officer - I very rarely would crack open my plan to remind myself what to do in a scenario. I didn’t need to because I knew it cold from building and delivering the plan. Same exact thing goes for trading. If you don’t have one, below is a simple outline to get you started.

• Orientation. What is the goal of your trading? This should be quantified. We should also force yourself to answer: Is my goal realistic? WHY do I think it is? How can I track whether it is or not
• Portfolio deployment. How do you intend to use your portfolio, manage risk, assess markets, etc.
• Tools. This can be everything from notes, TA/FA tools, chart setups, market functions, etc.
• Strategy Outlines. This breaks the strategy down into a full lifecycle, in depth. What’s the idea of the strat? How does it make money? How does it lose? How do you manage PnL? How does that affect expectancy? What deltas do you use? Why? How do you scale?
• Tracking. This is where we track and quantify our ideas, questions, and assumptions. This enables unbiased analysis and optimization.
• Audits. I’m a firm believer in having people I respect look over my work to poke holes, identify gaps, confirm rigor.

Whatever you do, do NOT wait to start. I didn't start one for a long time because I was overwhelmed by the prospect and didn't know where to start. Do not worry about nailing perfection out of the gate - start and build over time. 

Yes, it's work. Yes it’s worth it. 

Be an Outlier! -Erik

Erik is a Marine veteran, stock market trader, real estate and angel investor. He became a first generation millionaire before 30 through saving, investing, and creating more income streams. He began trading in 2007 and has spent over 30,000 hours honing his craft. He primarily trades derivatives and has consistently outperformed the market. You can learn more about him at his webpage: www.esinvests.com or check out his YouTube channel: www.youtube.com/esinvests.

DISCLAIMER: The content presented is for informational purposes only and should not be considered as financial advice. esInvests, its affiliates, and employees are not responsible for any investment decisions made based on the information presented. Any opinions, news, research, analyses, or other information contained in this content provided as market commentary and do not constitute investment advice. esInvests does not guarantee the accuracy, completeness, or reliability of any information presented in these videos and is not liable for any losses or damages arising from the use of or reliance on this information.