Short-term trading can be lucrative and personally rewarding, but it can be costly and emotionally taxing if you make common mistakes.
I know first hand what it’s like to blow up a trading account.
In the late 1980’s I felt on top of the world as I was learning about and trading short-term options.
Then, Black Monday hit in October, 1987.
Needless to say, I had to take some real time off to recover, contemplate my future in option trading and to learn more.
Short-term traders commonly make three mistakes.
- Going it alone instead of enlisting help from experienced traders
- Trading without rules, and
- Letting emotions dictate trading decisions
Each of these mistakes can be costly, but they’re also avoidable.
Don’t Do It Alone
Although I knew a lot about option trading strategies, I didn’t know what I didn’t know – if you know what I mean.
That’s why I got a mentor. Not only was George Fontanills a great mentor for me, but I was able to work with him and create Optionetics – the world’s biggest option education company at the time.
Now I’m the mentor to thousands of traders.
One of the most important things a short-term trader can do is have a start-to-finish trading plan.
All short-term traders should be able to answer the following questions – before entering any trade:
- Why am I entering the trade?
- What is my potential for reward?
- What is my potential for risk?
- What is my exit strategy?
These four questions above may not be an all-inclusive trading plan, but they are the critical to every trade.
Using technical analysis tools and other repeatable processes is also very important.
Be a Mechanical Trader, Not an Emotional Trader
There are traders who will sell covered calls against stock shares they own in their portfolios, but only when the stock’s price has fallen below a 20-day moving average line.
A mechanical trader seeks to follow a set of rules that can be repeated trade after trade.
It’s called rules-based trading.
In the example mentioned, when a trader sees a stock fall below its 20-day moving average line, a covered call is taken. If the stock’s price rises above the 20-day the trader simply passes on the trade.
The trader is simply following the rules of “If this, then that.” Simply put, the trader is not basing the decision on whether he or she thinks the trade is good, but rather, taking the trade when specific conditions are met.
This is what differentiates a systematic, mechanical trader from an emotional trader.
The benefits of being a rules-based trader is that when something goes wrong on a trade, it can pay off later simply by following the process over and over.
Success Through Rules-Based Trading
My success has come by learning about the mistakes traders make and then taking action by not repeating those mistakes. I relied on the knowledgeable mentors, along with my own hard work at understanding complex topics.
I will always appreciate the mentors I’ve had in life, which is why I’ll say it again – Don’t do it alone!
By having mentors, I was prompted to apply rules-based trading in my option trading.
Now, trading with emotions is just a distant memory. It’s important to acknowledge and accept that losses will occur. When they do, it’s simply time to move on to the next trade – stick to your plan.
Once they’ve been pointed out to you, avoiding the mistakes short-term traders make is much easier.
I succeeded in trading based off rules and not emotions, and so can you!
See you soon,
America’s #1 Pattern Trader