The Psychology Of A Professional Trader

Our Members have heard me say that Fear is probably the greatest impediment to succeeding as a trader. Fear comes in two forms: loss of capital or loss of a future potential gain. Since absence of fear is the key to succeeding then how do we conquer that one stumbling block?

I like to approach the market with what I consider to be a deep understanding, level of trust and confidence in both my trading strategy and my ability to succeed as a trader.

What can keep me from gaining that deep sense of trust and confidence?

I must say that what kept me from getting to the next trading level was my inability to approach the market without a bias. You probably knew that was coming – not reading anything stock market related either prior to taking a trade or after you are already in one.

If information offers you a choice that would reinforce your trade or information that does not reinforce your trade – which would you follow?

You would naturally gravitate to the information that supports your trading decision not realizing that price – the true indicator of what is happening in the market – may be telling you otherwise.

Other tools for building confidence and trust are:

  • Prior to taking a trade decide whether you want to be right or want to make money (they are not the same)
  • The market can’t take away from you what you don’t allow (always trade with protection and never trade with capital that you cannot afford to lose)
  • Use the trading strategy that is suitable to your lifestyle and your trading style
  • Know that the market has a rhythm (known as its volatility) and you need to consider the market’s volatility prior to approaching any trading style

What to Trade When and When Not to Trade What

It all starts with knowing what the current market environment is. How do we measure the market environment?

By knowing what the current volatility levels are. Volatility is a measure of movement. When we understand the market’s movement (rhythm) we can tailor our trading accordingly.

The lower the Implied Volatility (IV) on a stock, the smaller the movement, the smaller the movement and vice versa.

Trading Methods for When VXO is in the Teens – Low IV

I have written an earlier post about VXO so you might want to check it out.

Here are some of my favourite trading methods under different trading environments.

Investing – We are looking to be in the trade for a 3-week window of time targeting a 10% move. This method is ideal for low VXO market environment because with the IV’s low the only place they have within a 3-week window of time to go is up whereas when the IV’s are higher they can really fluctuate for the time frame that we will be in the trade.

Investing After Earnings – This method involves purchasing a Call and Put option with no bias in direction. It is not suitable for higher IV’s since we have time decay not one but two positions and this method requires that we be in the trade for 2-3 months.

SPY Cash Generator – We make money when SPY goes towards our direction or sideways… how cool is that!

Trend Method – Designed to capture the maximum move the stock will give us, without any particular time frame of exit.

Trading Methods for When VXO is in the 20’s – High IV

Short term methods – I’ve got about 5 different short term trading styles. These methods capitalize on a 5% movement with a time frame of 3-4 trading days.

Trend Method – As above

SPY Cash Generator – As above

Trading Methods for When VXO is in the 30’s+ – Extreme Volatility

SPY Cash Generator – As above

Fading – This method is designed to be an intra-day trade. The concept is that stocks will become too separated from their moving average and the trend is back down to that moving average.

Other Considerations

Always trade with a carefree state of mind which means that we will virtually trade first to ensure we understand: the concept of the strategy, the appropriate option, the proper money management technique and the mechanics of placing trades online. That is why it is a very good idea to keep good records.

Practice minimal monitoring of the position. If you need to check your SPY Cash Generator every single day you are monitoring it too much.

Instead practice monitoring yourself. How do you feel about your trade? Are you confident in your trading decision?

Remember that feeling positively about yourself attracts abundance that will naturally flow in your direction. So don’t forget to practice your Universal Laws of Prosperity!

May everyone have a safe, pleasant, blessed and prosperous trading week!