Studies show that barely more than 10 percent of all options traders display the type of mindset that will help them be successful in the long term. If you ever hope to be one of them, the first thing you need to do is to separate your emotions from your actions. Instead of letting your emotions factor into your trading strategy you need to remove them from the equation entirely by striving for the purely logical mindset that the best options traders cultivate. Following the suggestions outlined below will allow you to focus on long-term success regardless of what distractions are currently taking place around you, naturally improve your successful trade ratio in the process.
Have the right expectations: When it comes to honing your trader’s mindset, perhaps the most important thing you can do is understand the results you are likely to experience. Having realistic expectations will allow you to respond appropriately both in times of failure as well as success. Specifically, this means you are going to want to banish thoughts of major success in a short period of time. This, in turn, will make it easier for you to prevent negative thoughts from creeping in throughout the day and causing you to take risks you otherwise would not take.
Additionally, it is important to be aware of what your emotional triggers are while trading. As everyone’s triggers are different, the best way to understand your own is to keep a trading journal. In this journal, you are going to want to keep track of all of your trades, both successful and unsuccessful. You are going to want to note the date of each trade, the specifics surrounding it, the emotions you felt at the time, whether or not it was successful and why.
This exercise will not only help you to be aware of the emotions you are likely to experience in the future; it will help you understand why they appear in the first place. Emotions are the enemy of good trades and the best way to outpace your enemy is to know them inside and out.
For many traders, the strongest emotional triggers occur because they believe that correctly executing on a plan should lead to success 100 percent of the time. This stems from a misunderstanding of what considering a plan successful actually means. When it comes to options trading, a successful plan is one that hovers around a 60 percent success rate. This means that the scheme is extremely likely to turn a profit in the long run but a full 40 percent of the time it is used it will end in failure.
Losses are an unavoidable part of the investment process as risk is what ultimately leads to profit. If every investment were a guaranteed success, no one would bet against it, and there would be no chance for a profit. To mitigate these feelings, it is important to understand that a good trade is not one that made money but rather one that followed your system to the letter. In order to do so properly, you need to focus exclusively on your long-term results and treat everything else as meaningless noise.
This means you will want to wait at least a month between periods where you update your plan as anything less isn’t going to provide you with enough details to make changes effectively. A significant moment in your evolution as an options trader will be the moment you can see why the trader who struck it rich after a few random trades is less successful than a trader with a few different plans that are always executed on properly no matter what. Remember, an effective trader is a selective trader.
Additionally, it is important to view options trading as a marathon rather than a sprint. With this fact in mind, it will be much easier for you to consider unsuccessful trades as a learning experience rather than an abject failure. This will then make it easier to keep emotions out of the equation, a feat that will become even easier with practice.
Understand that sometimes it is okay to do nothing: Another negative mindset that many traders foster hinges on the idea that they always need to be trading. The reality is that inaction can be just as profitable as an extended trading day if the conditions are right. As long as you are not the writer of an option then creating a pull or call doesn’t force you to take any specific action if things don’t work out in your favor. This fact may seem obvious, but when thought about logically, it becomes difficult to put theory into practice when there is money on the line.
This is why it is important to include situations where not going through with a trade is the right choice in the system that you decide to use. Once again, as long as you listen to the system that you created when your mindset was at its best you have the potential to become an expert options trader.
One of the most important things you need to wean out of your trading habits is jumping into trades without thinking them through entirely. Getting into the habit of picking and choosing the best trades for your system will help you become a professional when it comes to separating the wheat from the chaff. Knowing how to do this will contribute to ensuring that you are not just getting lucky now and then when it comes to making trades.
The same goes for getting out of a trade that turned sour as sticking with it and hoping things turn around is on of the easiest ways to lose your shirt. The best choice is always going to be letting the trade in question speak for itself and, if the trade doesn’t go the way you expect, use that as an opportunity to learn for next time.
Put more value on patience: Patience is one of the most important, and most difficult, thing for many traders to learn. This is because sitting idly by with money on the table is such a difficult skill to master. Luckily, like all skills, it can be improved with practice. In order to perfect this skill, it is important to internalize the fact that the market isn’t always making big moves, even at times of peak volatility. A useful way of helping yourself learn patience is by never focusing on just one trade at a time. Keeping your options open makes it easier to put each trade in perspective and prevent any one trade from artificially inflating its importance in your mind.
This is not to say that individual trades should be treated flippantly. Rather, you need to consider each trade in a perspective that takes the entirety of your goal into account. Additionally, this means that you are going to want to come to terms with the fact that there will be some days where there just isn’t much going on. Overtrading can be just as damaging to your bottom line as not trading enough or making bad trades, especially if your transaction fees are higher than you might prefer.
To help cultivate the right mindset you are going to want to set either monthly or weekly profit goals as opposed to daily trading goals. Setting daily goals will likely cause you to make erratic trades at the end of the day as you strive to meet your goal. Even if you do end up making the target amount each day to hit your goal, it is likely that at least some of these trades will not have stood up to the strict level of scrutiny that a good plan requires. What’s worse, if you end up seeing results based on the poorly thought out trades then it can promote the formation of destructive habits moving forward.
It is important to focus on building the type of discipline that will serve you well in the long term as early in your trading career as possible as you will less be less likely to have major trades on the line. The longer you go without giving into your impulses, the easier it will be to ignore them completely.
Learn to adapt: While it is important to stick to your system when your emotions are telling you otherwise, it is equally important to understand that sometimes market situations will change on the fly. When this occurs, you are going to need to go off the book if you hope to see your current trade end in profit. At first, it is going to be difficult to determine when it is the right time to toe the line and when it is the right time to experiment as the only clear indicator is practice.
In order to ensure that you have to fly blind as infrequently as possible, you are going to want to have several different trading plans on hand that is ideal for different market states. Learning which plan is right for which situation and when it is time for a change, in real time, will help you see much greater overall returns a much greater portion of the time.
Regardless of your planning, sometimes the unexpected will occur which means that you will need to make a leap of faith in order to be successful. A competent trader will be aware of market signs that change is on the horizon and will be able to act accordingly. This is another skill that cannot be taught; it can only be gained by experience.
As long as you keep the appropriate mindset regarding individual trades, any new strategy that is attempted will result in valuable data, if nothing else. It is important to understand that learning not to use a specific course of action a second time is always valuable, no matter the costs. Working to build this into your core trading mindset will lead you to greater success in a wider variety of situations in the long term.
Put consistency above all else: When it comes to developing a professional trading mindset, you are going to need to learn to prioritize consistency in all things. This can be another fact that is easy to understand in theory but much more difficult to put into practice. In order to get to this point, you will need to deal with financial setbacks and profits that were less than they first appeared. Ensuring these types of situations don’t happen in the future requires a level of inquisitiveness that isn’t innate for many traders. Making a habit of digging deeper into the reasons behind your successes as well as your failures is sure to lead to a greater level of success overall.
While certain types of investment market trading lend themselves to high risk/high reward strategies, trading options is not one of them. The best options traders tend to prioritize reliable gains of middling size and leave the riskier trades to the novices. While a larger than average return is nothing to sneeze at, a reliable trading record is going to generate a greater level of gain in the long term.
Understand your strengths and weaknesses: In order to find success in the long term, it is important that you understand where your trading strengths and weaknesses lie. Only by reaching this level of personal understanding will you ever be able to create a trading plan that builds on the one while minimizing the other. This is another reason it is so important to keep a trading journal as it will help to reveal tendencies that you tend to repeat that you might not otherwise be aware of.
Doing so will help you to become more aware of when you are letting emotions cloud your judgment as it will be clear when you made trades that you would not have made at the beginning of the day when your head was clear. With enough practice, you will then be able to head these emotions off at the pass and take a break instead of letting your successful trade percentage suffer.
Focus on keeping a clear mind, and you will find that not only is it easier to stick to your system but that you are able to determine the specific causes for success or failure found in each trade as well. Practice keeping this mindset during every trade, and you will see a greater percentage of successful trades sooner than you may expect.