I was analyzing and calculating results this morning and chatted with a few people about the journey and the results to date and really just about trading and emotion. I found that through my introduction to option trading till where I was now, the biggest battle I had was with myself. I bet people here that a lot in this world but to it’s important to really break down what that means.
Caveat: The below is more in the context of managing a month long trade and not anything to do with technical trading or the like. It’s about deviating from a plan and using discretion and “outside the plan” decision making.
Trading does really attract some smart people. Smart people like to gather and collate as much information as possible in the activity they’re engaged in. Trading and investing is quite unique in that obtaining as much data or more than the next guy won’t necessarily generate a winning trade. It may give you slightly better odds, but the market moves in such a way as to not be highly predictable. Of course, you might have slightly higher odds but we all tend to over estimate the value of our information sources and end up surprised when things turn against us. In almost anything else you put your mind to, having as much information and being able to process and collate it will usually result in getting better and better at the activity. Usually more information significantly increases your success rate, but in trading it really doesn’t (in this context). There is so much information sources/types out there that people will usually have a tendency to over-educate themselves and to gather and review a lot of complicated information be it macro economical or technical or what have you and they try to collate the data into some useable decision. A lot of times, these decisions end up being wrong and there-in comes emotion. Nobody wants to make a discretionary decision outside of their system and have it be wrong. The normal tendency is to try and win it back or to make it right or it might just generate a lot of stress and burn-out. I can say that I’ve never tried to make it right or win it back but I have generated a shit-ton of stress. Stress that wouldn’t exist if I followed a pre-determined plan. You end up looking and “hoping” that the market moves in the way of your discretionary decision. MOST importantly, people will look for information solely to justify the behaviour or action. Let me tell you, in trading, you’ll easily find suitable information to justify ANY action you want to take. That is a dangerous thing.
Discretionary adjustments bring about stress and emotion and those two things can lead to significant mistakes and over emphasis and over valuing information to justify further mistakes. That’s what it boils down to.
You avoid this by creating a plan, following it religiously and by having proper alerts setup to avoid looking at the market on a continuous basis.
My results for the MIC since May are:
Apr (still in): 4%
Average without Nov: 2.99%
In the November trade I had made some discretionary but probably significantly POSEV adjustments that cost me a large month and several lost nights of sleep and un-needed stress. Had I managed the trade according to plan, I’d actually have gotten out with a profit. Why was I trying to beat the trade? Well, I thought I had collated enough information to justify deviating from the plan. I mean, seriously, I still believe it was hugely POSEV but, hey, both times I thought that and went against proper risk management, I’ve gotten burned bad! It doesn’t matter if it was POSEV it was just too large a risk to take! What did I do? Well, instead of removing call spreads as my delta increased, I rolled them forward and increased the units. Why? Well, I had calculated the odds of the market going from 1820 to 2080 (as actually happened!) as quite negligible, especially in the small time frame of the trade usually after a fast down like that there is another down leg (opposite of a bounce). Every indicator was flashing insane over-bought. The position I took gave me a huge up range (apparently not enough). I found probably 30 sources of information that would have attested to 2080 being <1% chance. It was unheard of, I think the market moved like 200 points in a matter of 7-9 trading days. Suffice to say, the market kept going and went hard up. I had rolled/added around 130 points in at a point where it should have taken a breather. That brought my largest loss and an un-needed one and it was because I deviated from a plan and tried to act on information as if it was a sure thing. Information will give you some odds but it won’t be enough to justify going outside of your risk plan. What was the other one? Well, that was when I first started trading and is too embarrassing to even mention (had to do with AAPL credit spreads and the infamous Andy Zaky)
You notice how after Dec I took two months off? Why? That was stress about the way November went.