A Year of Paper Trading


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[responsivevoice_button rate=”0.9″ pitch=”0.5″ volume=”0.8″ voice=”US English Female” buttontext=”Play”]This week ends a full year of studying options by extensive paper trading using a variety of approaches. I’ve learned a lot about what kind of trader I am and the ways I can make a profit, at least on paper. It’s far more than can be thoroughly covered in a single blog post, but I can write a few headlines.

First, what I’ve learned about myself as a trader:

  • I am risk averse.
  • I’m better at predicting what will happen today and tomorrow than what will happen next week.
  • I am impatient to see results in my trading.
  • I will spend too much time on the trading platform.
  • I have become disenchanted with all the financial pundits and self-proclaimed experts.
  • Success in paper trading has given me a great deal of confidence that I can avoid losing. Still, I worry that I may not make a consistent profit.

Now, a random list of what I’ve learned about trading:

  • Vertical spreads are a good way to define the max risk of a trade. They also simplify determining a profit target.
  • When a trade turns bad, abandon it before you reach the max loss.
  • Always know what your acceptable risk is and at what level you will take a profit.
  • As the value of your trade increases, keep track of how the increase in value affects the trade’s risk profile. Adjust accordingly by scaling out of the trade or closing it.
  • A 2% return on a trade after a single day is better than a 10% return after five days.
  • Technical analysis of price charts is a belief system. It works only when a critical mass of traders think it will work. Volume can indicate if belief has hit a critical mass.
  • Think of those you trade with as customers. Try to understand their thinking, and use that understanding to your advantage.
  • Treat a trade like a negotiation. Submit limit orders at levels that work the range of premiums in the current market to your favor.
  • Learn how various order types work. Rely on conditional orders such as OCO (one cancels the other) orders, sequenced orders, etc. to simplify and organize trading activity. Doing this also adds a bit of automation to your trading process and helps provide some emotional distance to coolly analyze your trading plan away from the heat of the front lines.
  • Pay attention to corporate actions such as earnings reports, distributions and splits.
  • Understand volatility–both historical and implied. Volatility can be your friend or your enemy. Know if it’s on your side.
  • Trade the issues that others are trading. High open interest, high volume, and tight spreads make for successful trades.
  • Control risk on the portfolio level as well as on the trade level. Learn how to beta test your portfolio against an appropriate benchmark.
  • Review you’re trading activity frequently. Trading is a data-centric activity and the data you create as you trade may be the most valuable data you have for improving your acumen as a trader.
  • Find a small group of traders that you can meet with to discuss your progress and theirs as traders. Like many other things, enlightenment takes a village. And hanging out a bit with those who prosper in this curious trading game will broaden your understanding of the financial market and its potential for growing wealth.

Key take-away: Hopefully this year’s lessons can be a springboard to next year’s success.

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