6 Reasons Option Traders Fail

Bad habits to break 

to improve your option trading

 

Why Traders Fail

It’s a common question – Why do so many new option traders go bust before they even learn the business?

It’s not easy to become a profitable trader. In addition to learning that which must be learned, there’s the perpetual problem of fighting bad habits or allowing certain personality traits to get in the way of making sound trade decisions. 

Basically, there are a lot of things that can go wrong which destroy a person’s chance to become a successful trader.

Independent trader and blogger Mark Minervini recently spelled out to Charles Kirk of The Kirk Report why many option traders never find success.

Kirk:  Why do you think most traders fail?

Mark Minervini:  Here are six reasons:

#1.      Poor selection criteria; usually based on personal opinion, theory or tips and bad advice

#2.      They don’t stick to and commit to an approach; style drift

#3.      They don’t cut their  losses – the top mistake made by virtually all investors

#4.      Don’t know the truth about their trading – they fail to conduct in-depth post analysis of their trade results

#5.      Treat trading as a hobby and not a business

#6.      Want too much too fast; learning a skill takes time

There’s a lot of important meat in those few lines of text.

We all recognize that it’s not easy to cut losses, but I firmly believe that this results in more grief for traders than anything else. 

What causes a trader to suffer a big hit? 

I believe that it’s the unwillingness to accept that a trade is not working, and that it’s not likely to get any better if held longer. 

Under those conditions, losses mount. 

The only way to prevent that big loss is to cut it off at its knees — and the time to do that occurs when it’s a much smaller loss. 

The difficulty is sacrificing the possibility that the trade would turn profitable. 

My advice: Get over it. Many trades will be unprofitable.  That’s a fact of life for a trader.

I understand that on a rare occasion a gap opening may do irreparable damage, and not provide an opportunity to take the small loss. However, that’s also a preventable occurrence. 

If the damage is too great, then the position was too large. It’s that simple.

Mark Minervini’s tips and my comments may seem simple. That’s because they are simple — and that simplicity makes people doubt their importance.

How many of us look at trades after the position is closed? 

How many dissect the entire trade in an attempt to find out what was done correctly and what mistakes were made? Very few.

A mistake is not a trade that loses money. 

A mistake is making a decision that was clearly incorrect at the time, but the trader was unable to see it.  

Another mistake is avoiding a trading plan and not doing postmortems on your trades. 

Admittedly, that takes time. However, if you take trading seriously, and do not consider it to be a hobby, you must recognize there’s work to be done.

Mistakes are part of the game. Making the same mistake repeatedly is not. At least it’s not part of any successful trader’s game.

Mark Wolfinger has been a professional options trader since 1977. He was a CBOE market maker from 1977 through 2000 and has been an author and educator since 2000. Mark has written four books and writes the Options for Rookies blog.