The Key Tenets of Trading

The market can be scary.

This active trading stuff can be scary.

I’m still reeling from some burns. I’m still nervous to get back into the market. (side note: I will be getting back into the market, and documenting my trades on here for everyone to see) But I have to remember the key tenets of trading. The tenets that make the active trading ideology SUCCESSFUL.

So in order to remind myself, I’m going to write them here so they will be cemented in the world of the Internet.

MARKETS ARE RANDOM (most of the time)

Markets respond to information, but on the aggregate, they just sort of flop around. This is why we need to stay mechanical and keep emotions out of the picture. If we base a trade on our assumptions, it always seems that the market tends to do the opposite of what we think it will do.

The Law of Large numbers is our friend

Going along with the fact that markets are random, we find that the law of large numbers balances things out for us. Over time, the more trades that we put on, the closer we get to the “actual” probability of success. When we only have 2 trades on, there’s a lot of room for deviation from expectation. But when we have 22 trades on, there’s an increased chance that what we expect to happen will happen (at least, on the aggregate). Basically, the more we trade, the more likely that we will be successful.

Selling premium increases our chances of success

Take advantage of an overstatement in IV. This one is a literal no-brainer. Look for high IV. And trade it.

Managing winners early increases our profit

DO NOT WAIT FOR THAT EXTRA DOLLAR IN PROFIT. TAKE YOUR MONEY AND RUN. Sure, we might lose out on some profit, but it is usually pennies. And those pennies are not worth the increase in risk that comes from holding on too long (hello gamma risk)

Overall, I have to remember to stay mechanical. This is all a numbers game, and the more we can remove our emotions from it, the better off we will be. So, very soon, you will see some of my trades, all based on the key tenets of trading.

No more excuses!