Simplifying Your Trading Decisions
By Mike Parnos of Online Trading Academy*
Posted: Dec 8, 2006
Some traders like structure. The more hard-and-fast rules you can give them, the better they like it. On the other hand, there are creative thinkers -- traders who take concepts and experiment until they find a method that fits their personality.
Because we're still a little wet behind the ears in the experience department, let's leave creativity for a future discussion. Today, let's focus on the questions you need to answer that will help determine whether or not a trade is viable.
We've all heard Jim Cramer or some other analyst (notice the first four letters of analyst) howling about the next "hot" stock that's about to move. In the excitement of getting what people think is "inside" information from analysts like Cramer, new traders tend to rush over to the computer and start hitting the buy button.
Think about it. If the trade goes bad and they lose money, they can blame Jim Cramer instead of themselves (where the blame really belongs) -- an easy out. Their money is still gone, but it isn't their fault.
Why should a trader bother to think for him or herself when someone else has already done the thinking? It's uncanny how many people spend countless thousands of dollars in search of the Holy Grail. They typically end up with charting software full of little green and red arrows pointing hither and yon as buy and sell signals.
If that stuff really worked, we wouldn't need teachers to explain the "whys" and "hows" of trading. We'd only need people to sit and help us count the massive profits we'd all be making while we are out shopping for more swampland in Florida.
In this article, I've enclosed a checklist of sorts. This checklist is for those who are considering the purchase or sale of an option. It may take a few minutes to fill out the checklist, but, once you do, you'll know if you have a viable trade.
It should be a simple matter to copy and paste the checklist into an MS Word file. Then, you can print out as many copies as you need to help you with your decision-making. Punch three holes in the copies and keep them in a loose-leaf binder, and you'll have a convenient way to track your trades.
It's often recommended that traders keep a journal of their trades. That's an excellent idea, but writing your notes and thoughts onto the checklist is an organized and efficient way of accomplishing the same thing. In other articles, I will publish new checklists for most of the strategies I will discuss.
| Option Purchase or Sale Checklist | |
Stock / Index: |
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Current Price: |
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Option (Put or Call) |
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Option Symbol: |
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Action: (Purchase or Sale) |
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Expiration Month / Strike Price: |
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Option Price: (Bid and Ask) |
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Option Undervalued or Overvalued: |
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Delta / Implied Volatility: |
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Number of Contracts: |
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Purchase / Sale Price (Bid or Ask): |
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Total Investment: |
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Stock Target Price: |
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Option Target Price: |
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EXIT PLAN: |
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Support Levels 1 and 2: |
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10-Day EMA / 50-Day EMA: |
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Cut Loss Exit Price: |
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Stop Loss Order @: |
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Actual Exit Price: |
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Profit / Loss: |
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Reason for Entering the Trade: |
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Notes: |
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Your Assignment
In the next week, come up with some trades. Fill out the checklist and see what trades you can generate. Use the day's closing prices. It's a little easier to calculate when the market isn't bouncing around. It's okay to use puts too. Some of the best trades you'll ever make are to the downside.
Remember: Just because you would like to make a trade, you may not find one that meets the criteria you've established for a viable trade. Don't compromise! That's when you can get into big trouble. Make sure that you maintain the standards you've set.
It's very easy to rationalize a few points here and there -- and using an overpriced option, and so forth. It's like rationalizing that extra piece of cake -- pretending that those extra calories don't exist.
Picking directions when trading options is a difficult task, to say the least. You have to be right about three things:
- The direction
- The size of the move
- How long it will take for it to get there
The rewards can be substantial -- if you guess right. Use the checklist in this article. It will help.
*Reprinted (and modified) with permission from Mike Parnos of Online Trading Academy (http://www.tradingacademy.com)
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