<\/p>\n
In \u00a0\u00a0\u00a0Friday\u2019s\u00a0\u00a0options \u00a0\u00a0post, \u00a0\u00a0we talked about the tendency of options traders to become enamored of a particular strategy\u00a0\u00a0simply because the trader is \u00a0\u00a0on \u00a0\u00a0a \u00a0\u00a0brief \u00a0winning streak with that specific\u00a0strategy.\u00a0 This propensity is particularly dangerous because market neutral income options strategies typically are entered monthly. So \u00a0\u00a0even a mere \u00a0four month winning streak\u2014only four successful trades in a row–allows the trader four full months to slowly convince himself that he has in fact found the holy grail and \u00a0that his picture will soon appear on the cover of Barron\u2019s as the next great options trader of our generation.<\/p>\n
I \u00a0\u00a0work very hard with my mentoring students to keep their capital levels under control until they have an adequate sample of results to be able to prove to me and more importantly to \u00a0themselves \u00a0\u00a0that they are ready to trade with more size.\u00a0\u00a0 The deal I \u00a0make \u00a0with them is very simple\u2014you can increase your capital as soon as you have a\u00a0 LOSING month utilizing the exact strategy \u00a0with which you \u00a0have been experiencing so much success.<\/p>\n
Why? Well, there are several reasons. First off, \u00a0\u00a0a loss allows the student a critical opportunity to take a fresh look at the strategy.\u00a0 Is the strategy\u00a0 perfectly valid and\u00a0have I \u00a0\u00a0simply experienced a predictable loss? Or did the loss itself show me a critical flaw in the strategy that must be corrected?\u00a0 If there is<\/span> something structurally flawed in the trade, and it is correctable, then I recommend\u00a0 that the student employ the same strategy, revised for the flaw, \u00a0for a while, at the same capital level, \u00a0until it is clear that the kinks have been worked out of the strategy.<\/p>\n Perhaps a more important reason to defer increasing size until a loss occurs, \u00a0\u00a0is the psychological implication of experiencing a \u00a0\u00a0loss \u00a0\u00a0on a trade where the student had \u00a0previously enjoyed\u00a0 a winning streak. \u00a0How did the student handle the loss? \u00a0\u00a0Was the student able to take the loss objectively as part of the game, or was he or she devastated?<\/p>\n No one I have ever met LIKES losing on a trade, but I have met many talented traders that can shrug off losses fairly easily.\u00a0 If the student is easily able to \u201cget back on the horse\u201d after a losing trade with a perfectly valid strategy, \u00a0\u00a0then the current capital level\u00a0 has proven to be appropriate for that trader, and it is safe to experiment \u00a0with \u00a0a \u00a0judicious<\/span> increase of capital size. \u00a0If on the other hand the trader is devastated by the loss, it may be a sign that the CURRENT capital level is too large and it might be advisable to actually reduce capital size.<\/p>\n So don\u2019t increase capital size until you experience a loss for a particular strategy.\u00a0 Then you’ll know if the strategy is valid and more importantly, that you can psychologically handle an expected normal loss at your current capital level.<\/p>\n You will save yourself a lot of aggravation, and money, \u00a0if you follow this simple rule.<\/p>\n","protected":false},"excerpt":{"rendered":"