In this final installment (for now), I’ll share more of my ideas about trading, and options trading in particular.  The purpose is to provide guidance for readers.  I’m not suggesting that you agree with, and adopt, all (or any) of these ideas.  Instead the purpose is to get you thinking about your own philosophy of trading and why my ideas may or may not be appropriate for you.

The bottom line is there’s more to option trading than merely slapping on a position and then waiting for the options to expire.

1) Make the best decision you can at the time the decision must be made.  Do not berate yourself if it turns out not to be the winning decision.

2) Stay within your comfort zone.  Never ‘hate’ any position you own. It’s easy to exit and find a better trade.

3) “It’s not good enough to find winning trading techniques; one has to continually adapt these techniques to an ever-changing environment.” So says, Dr. Brett – and I agree.

4) Don’t depend on ‘hope’ to salvage a bad position.  Use your intelligence to make a good trading/risk management decision.

5) I find that it’s too risky to try to earn every every last nickel from a trade.  Exiting a position early locks in profits and gives you a quiet period with no risk.

6) Don’t sell naked options.  The exception is for investors who want to buy stocks as prices decline.  For those investors only, writing naked puts is a satisfactory strategy.

7) Don’t use options to gamble.

There’s always more to say on any topic.  If you are so inclined, please share any of your basic trading tenets.

The latest Investor’s Intelligence poll was released today, and it showed the highest Bull Ratio since December 2007.  During the prior bear market, such spikes in optimism among the newsletter writers preceded a market deccline every time but once (that exception marked the end of the bear market).

Most interesting is WHY people follow those writers, or anyone else for that matter.  It isn’t because they’re necessarily right more often than not.  In fact, when they engage in group-think, they’re wrong more often than not.

More likely is that they gain a following because they appear confident.  The New Scientist posted an article today which explains that experts who appear confident get taken more seriously than those who might have a more persuasive argument, but who stress the uncertainties in their forecasts.

This is part of the reason why those who are always bullish or always bearish maintain followers.  They can be wrong for extended periods of time, but they’re very confident in their outlook.

And it certainly explains the Cramer Phenomenon.  He’s about as good as flipping a coin, but he sure seems like he knows what he’s talking about (who could ever doubt someone with a sound-effects board?).  Next time your advisor appears cocky, you might want to take a look at some history before just handing him your money.

Source:

Humans Prefer Cockiness To Expertise

The New Scientist, June 10, 2009