Why Disciplined Trading Improves Performance

Often we're asked about performance. People say: 'How can I guarantee the best results from my trading?'

The answer is that there are no guarantees. Inevitably the market will go against you. The question is how you manage the good times and the bad. Here are some capital-management guidelines we've found useful while trading on the floor and 'upstairs' (just as you do):

Upside

• When option premiums double, take off 50 percent
• If the options run further, give a cheer and scale out at higher prices
• If the options slip back to the entry price after they have doubled, hit the exits

Downside

• Cut the losses when an option loses 50 percent of its value
• Do not ride losers into the ground. Forget about the stock and wait for the next opportunity
• One exception: calls or puts purchased for $.50 or less. We're often willing to hold these 'cheap shots' without hitting the exits on a 50 percent drawdown, as they were so cheap to begin with

More About How We Like to Trade

• We try to surf the markets. We don't bully them, we ride 'em! We jump on when we feel the wave picking up and we feel the odds are in our favor. That's when, like a surfer, we paddle like mad to make the wave.
• Stay disciplined. When trades are working for you it's ok to trade bigger, but realize you are doing it. In case you missed the section above: DO NOT JUST LET PROFITS RUN! We take profits at prescribed levels, according to our style and our discipline, and we share those with you because after all, they've been pretty successful for us over the years. But you need to develop your own style and discipline. No matter what you decide, we assure you that you will have better success trading if you use discipline when you are taking profits.
• Conversely, when trades are not working, cut back your size. We never trade more than 10 percent of our equity in any one trade - some folks here at optionMONSTER® won't go past 3 percent - and you need to manage your own money and decide what's right for you. When Derek Jeter is in a batting slump, he shortens his swing to make contact and that's the principle we apply here as well.
• NEVER TRADE BIG TO CATCH UP! That's gambler's ruin, friends, and has cost more traders their livelihood than margin calls ever will!
• If you are late following a trade idea, then you might have to do what we do when an option gets away from us - watch from the sidelines. We don't chase $.30, $.50, or $.80 higher just to get into a position, no matter how much we like it. If the option, whether call or put, is running too fast we either spread it or watch it. Chasing is for chumps.
• Set your exit on your entry. If you don't set a mental stop, you will be played by the market rather than playing the market.
• Don't confuse brains with a bull or a bear market. Some people can make money only when the market is screaming up, or falling down. When that's happening it seems easy to make money, but that doesn't mean you are smart. Great traders in any market all know that you have to trade what the market is giving you.
• Know what kind of investor (trader) you are. By that we mean if you are not comfortable with short-term, fast in-and-out trading, then don't try to make yourself fit that mold. If you're more comfortable with investing than trading - we consider investing to be more in the 'buy and hold' mode -- employ the trades in an investment way: do consider bull call spreads rather than naked purchases of calls. Consider put spreads rather than naked put purchases. By knowing what style you are comfortable with, you will be more successful and experience less stress.
• Sometimes a no-trade is a trade in itself. Don't trade just for the sake of trading!
• If you enter a trade for a specific reason, such as earnings, product announcement, or litigation settlement, then exit when the news event happens. Do not overstay your welcome, as the volatility will contract after the news and your window of opportunity to profit will shrink dramatically.

Have a plan; don't chase the market; size your positions according to your taste for risk; and lose your emotions. At the least, you may be able to stay longer at the table.

--Pete and Jon ('DRJ') Najarian, Guy Adami, and Fahad Khalid

To reach the guys directly, email:

ask-jon@optionmonster.com, ask-pete@optionmonster.com,
ask-guy@optionmonster.com, and ask-fahad@optionmonster.com

We can't guarantee individual responses, but 'the Monsters' do read their emails assiduously.

optionMONSTER® also retains a trader support specialist, Mike Bourdos. Every day, Mike works directly with the Monsters and you. His role is to help you understand the service, not just to solve account problems. Email him at mikeb@optionmonster.com, or call (312) 253-4207.

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