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Who is a better teacher? Profit or Loss?

July 6, 2007

(For details pls visit www.OptionPundit.net)

Option trading is not easy, just like any other business. Those who think it is, thank you. I surely don’t think so.

It takes a lot of time and efforts for one to understand this new century’s investing and trading style. Just like any other business, option trading needs to be treated like that and and one needs to understand rules of the game and how this game is played. Before I converted into an income spreads trader, I have been fascinated by 100s of % points gain overnight. I generated over 1000% returns in single day, not one time but several times. Now think about it for a second, 1000% in one day, isn’t that amazing? Those huge gains filled my chest with super duper confidence, so much that I can win the world and I am the new trillionaire on the block (huh..pun intended).

Profit was surely not a good teacher for me, at least. There was hardly any portfolio guideline that I followed as everything was making money. Till that time I haven’t had really tasted the darker side of option trading. Greed was high and success was “by chance”. Though there was a lot of hard work involved before I made those trades, but when I look in retrospect, it was hard work but not smart work. It took only a few meltdowns to tear me apart.

And these initial losses were the best thing to happen to me in trading.

To me loss was the best teacher amongst all. It forced me to think hard and smart, design risk management plans, research and develop portfolio guidelines. I spent considerable time on educating myself and thousands of $$$ on books (yes one of those books costed a fortune, my most expensive book). While I was educating myself, I also lowerd my expectations from 100% per month to 5% per month to be realistic. I committed to add more trading capital only if I can consistently make money for more than 2months. If one month is loss, the new money is delayed for next month.

Now-a-days before I dive into any new strategy, I virtually trade it for at least 3months. Sometimes I even trade the “underlying for 3 months” to know its character. A trading system is very important. Even though within a few months you may find your system working very well, give it at least a year before you move on to new strategies. 5% per month for a big portfolio, is an excellent result by any standard, if you can do it consistently, month after month, year after year. The key word is “consistent”.

Since I became spread trader, the results have been extremely motivating. Since I started tracking my results I am about to double my overall capital in less than a year’s time while significantly reducing my trading time. I have over 10months of successful RUT Iron condors’ track record (past performance is no gurantee of future performance), and many more to add (OPN subscribers know that).

I think therefore it is important to have clear objective in mind, be realistic in goals, have a tool box of strategies in place and do have rigourous measures in place that allows you to track your progress/performance.You may also want to record your trades to analyze why you made money or why you lost money.

There are no free lunches (thank you Mr Warren buffet for paying for my lunch:)) and it takes hard work before we can taste consistent success. Do get quality books, sign-up for good services, its worth paying to them as “they” have done hard work. Learn it, prove it and then trade it.

Now who are “they”, that’s an interesting question. Before you sign-up with anyone, google their names, find links related to them, go to forums and see what people are saying about them. Don’t just satisfy your desire with mediocre performance and always run a qualifying question, if I had $1 millions to invest today, can I sleep comfortably if I invest the way “this” guru is suggesting?

Here are my new year’s resultions, and thoughts on consistency, and a retrospect of my past six months of trading tells me that I am pretty much honoring my resolutions.

Cheers, have fun and have profitable trading, OptionPundit

8 Comments

  • azamaniac says:

    i tend to agree with u that loss is a better guru than profit. i used to aim earning high % but ended up refunding my options trading acct – not good. i started reducing that expectation for consistent growth instead, at same time, reading and monitoring what others do and see if those fit my appetite.
    i am happy so far with slow consistent growth. slowly but surely.

  • Chris says:

    What book did you purchase that was so expensive? Was it worth the money?
    Thanks, Chris

  • Hi OP,
    Great post! Very inspiring too.
    Thanks!

    Regards,
    OTB

  • OptionPundit says:

    Thanks OTB, azamaniac.

    Chris, I don’t wanna mention the book here as I am still digesting the concepts and currently going through paper trading period. I have not yet opened a real-money single trade based on that book yet so I can’t really say if it is worth the money.

    This is a business expense and the books, subscriptions, association fee, etc are part of the business. I treat those as my education fee 🙂

    Profitable trading, OP

  • […] asks “Who is a better teacher? Profit or Loss?“. A thought provoking […]

  • gricey says:

    OP, you story sounds so similar to mine, except I never really had the success you started with. As I have discussed with you in the past, I have been tempted to become more speculative but your post has reassured me I am on the right path.

    I would love to know more details about how you look and search for your candidates, what rules you follow, etc. Your returns are like ‘super charged’ income trades!!!!!

    Good luck and I wish you continued success.

    Cheers, Dave.

  • dan says:

    What books do you read? Give us few names please.

  • […] reminder of need for balance between “Fear” and “Greed”. I followed a trading system and made it mechanical, took the emotions out from it which often are cause for […]

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