Trader Mindset

The hardest part of investing (and trading) is knowing when to take profits. In my trading, I'm using systematic exits.

Harder, is when I have a long-term buy and hold in my investment portfolio and I have to let go of a name that I've had for ages.

See the corresponding video on Disney.

You can create some interesting spreads between weekly and monthly option expirations.

Some traders buy the longer dated options and sell nearer expirations to pay for them.

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There are traders whose sole responsibility is to create alpha in only one sector or in one commodity group. Sometimes, it might be in just one contract such as natural gas, for example.

Since most markets are not trending, focusing on one sector can be a challenge if there is no direction or trend. Unless you've been trained...

These particular traders have learned to make money in natural gas regardless of the market environment. That ability did not show up overnight and it took a great deal of trial and error in order to understand the shifts between market environments.

You can get there also, but you have to be willing to run more than one system.

The key to understanding the context of "diversify" here, is that the trader deploys several systems depending on the market environment.

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When markets are trending, they're long or short. When volatile and choppy, they have vol crush trades on. When consolidating, they have credit vertical spreads. And when seasonal, they can create calendar spreads in futures. These aren't day traders either.

You can study the relationships between an underlying security and all the related instruments to find your trading edge.

Admittedly, some of them have access to the cash commodity markets too, so that gives them many more combinations of relationships to study.

I don't believe there is anything that can be called "advanced trading." Most of the time that I see that expression, it's in marketing literature.

The best trading rules that make your money are easy to understand and simple to execute. Words like "advanced" are there to feed your ego.

My take is that if a trader has a strong sense of self, then finding the right trading methodology is easy (or easier). Trading is largely psychological and emotional and the best traders acknowledge who they are and what they can handle, and act accordingly.

I've said before "if you don't know who you are, then what you know doesn't matter" when it comes to trading.

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There were times when I invited huge vol to my portfolio. It would run up 20% and then dive-bomb to -20%...that's intraweek!

The portfolio comprised of outright directional trades including long/short futures, debit option trades, and long stocks.

What I found over time though, was that all this ebb and flow created an equity curve that looked like a heart monitor.

I had to find a way to create positive slope to the curve. That's how we keep score.

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Moreover, it wasn't about the instruments that I was trading nor the combination of them, but HOW I was trading them.

Once I determined that my up days and weeks were from a small semblance of skill and not luck, I had to learn to keep the profits that the market was "giving" me.

Backtesting, I found the optimal points where I had to cut my losses and, more difficult than that, where to take profits without unwinding profitable trades too soon - to me, the hardest trade there is to make.

In this episode, I remember how I had to make tough decisions around blue-chip names when you're taught that selling them is a sacrilege. (Watch the attached video to see what I mean.)

Our first order of business once we add risk, is to keep losses small. Once I did that in concert with learning tactical ways to take profits, my equity curve took off.

And that's not having to change my orientation to trading, the instruments I traded, nor the timeframes within which I traded.

Those two seemingly small adjustments led to huge gains and I didn't have to do that much to turn this situation around.

Frustrated about your trading? Maybe you're fine right where you are and you just have to accept "what is" and take life on life's terms.

I see this a lot in traders who always want to be somewhere else when they are doing fine right where they are. If this sounds like someone you know, listen in...

In this episode, Michael Martin discusses the evolution of your trading rules and system design.

Although it takes a bit of time and effort, building a systematized set of trading rules is worth it in the long run.

Instead of reading charts to come up with trading ideas subjectively, each evening you'll run your trading rules to generate orders which you'll enter the following morning.

In this episode, Michael Martin recounts how he developed his original model and how it evolved into what he's doing today in trading and teaching building models and systems.

Start with long-dated Call options and turn them into a Bull Call spread by selling the upper strike when the underlying reverses down. Cover that leg when the vol crashes.

You can create other structures too, such as condors or butterflies all based upon a core holding of long dated calls.

If you put every dollar you have to work, you don't give yourself any room when Murphy's Law kicks in.

If you keep some dry powder, you'll be able to able to withstand some shocks to the system, as well as have capital to deploy when something falls into your lap.