Options Trading News

Keeping score in trading may seem easy, but doing it the right way can mean the difference between success and failure.

There are many places where keeping score isn't productive. Relationships are one of them. I also have to keep reminding my son that not everything is a competition, such as how fast you can eat. But keeping score in your trading is absolutely necessary.

That may seem obvious, but how you do it is also crucial.

The most important point is that being right doesn't matter; being profitable does. If you are looking for an ego boost, or have a compelling need to be correct, then you should look somewhere else.

Trading is about profiting over the long term, not about being right on Apple's next move. Too many people in the investment world are quite happy to boast about how they said that AAPL was going to $600, but they conveniently forget their wrong calls.

Ray Dalio is famous for being at the helm of Bridgewater Associates, the largest hedge fund in the world, and also famous for his "Principles." Those include "being wary about overconfidence and good at not knowing."

Like most of the very best traders, he doesn't care about being right, but about making money. Even the most successful directional traders are "right" only about 45 percent to 60 percent of the time.

Many of the best, including George Soros, focus on keeping score with a trading journal. This can be done simply by looking at your account value or your profit-and-loss statements, but the devil is in the details.

I have discussed before how valuable it is to keep track of every trade and every strategy. It is really what has made me a successful trader.
 
The beauty of the option market is that there are so many possible strategies at your disposal. You can be a seller or a buyer. You can play the longer term, the shorter, or one against the other. You can be "wrong" and still make money. (This is probably my favorite feature: My outlook doesn't have to be exactly right to profit.)

But just trying different strategies isn't enough. Keeping track of what has worked--or what has not--and why can give you an idea of where to focus your efforts, especially during different time periods. You may find that you shouldn't be trading in the Weekly options or around earnings season, or you may find that your credit spreads do best when the VIX is below the 20 level or maybe above it.

That may sound like a lot of work, but there is no magic formula for trading.

You should be able to say what your edge is. You should be able to look at your results and find the patterns. And if you aren't willing to do the work, then the people who are will be happy to take your money.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of April 18.)