Investing in Options
As we settle into the young year, I always take a step back and really examine the previous year (actually, the previous five). I look at personal as well as professional issues and see where I am and where I am going.
I closely examine all of my trades for all of my portfolios, as well as a journal of all the trades I wanted to do but for whatever reason did not. Paul Tudor Jones would call those “missed opportunities.” Maybe, but sometimes it was better that I “missed” them. Hindsight is always 20/20, so it’s important to take this examination with a big grain of salt and some Alka-Seltzer.
You Can’t Know Where You’re Going Until You Know Where You’ve Been
My first book has in its title “A Not-So-Crazy Road Map to Riches.” The reason I use the term “road map” is because I feel it is a must for every trader, big or small, to have a trading plan and to follow it. Let’s face it — there is no GPS for trading.
Wouldn’t that be great if there were? I think the GPS is one of the best inventions ever, and I have units in my cars and even one on my cell phone. Imagine if there were one for trading:
“In 20 minutes, sell gold and buy wheat. Then in two hours, short copper and buy soybeans, and then you will have reached your destination.”
That would be so sweet, but alas, there is no such thing. The closest we can come is to sit down and map out where we have been and where we are going and then — most importantly — follow that map. Many people make a plan; they spend countless amounts of time and money studying the resource markets, learning about trading systems, even buying newsletters like Outstanding Investments, and then they make the cardinal mistake. They stop following the map they invested so much in. It makes no sense, but it’s very common.
Get the Balance Right
I had a guy come to me recently and offer me $1,000 per hour to teach him exactly what I do and to let him sit in my office and watch me for a day. I thanked him, but I told him that he could come by my office and sit in for free for a few hours. I would be happy to talk to him as a professional courtesy. He did. I was trading grains that morning, and he showed up at my office. He glanced around and saw all 12 screens and five computers in my office.
As he sat down, his eyes transfixed on the big 60-inch plasma trading screen in the center of the room. Green and red flashing all over the place and me on the headset. It was a busy morning already; soybeans were limit up, and wheat wasn’t far behind.
As I put some orders into the trade desk, he began firing questions at me. “How many are you trading? What month’s? Do you have a stop order in? Are you on with the trading floor?”
Whoa, boy! Maybe I should have taken your $1,000 per hour, I thought to myself. I said, “Slow down, slow down.” I would have offered him coffee, but I think he had had enough.
Plan Your Trades and Trade Your Plan
I said, “I am trading my plan that I made yesterday after the close. See, it’s all right here.” I showed him the sheet that I write up each day after the close. I showed him that I had made a few changes based on the overnight trading, but more or less, this was my “road map” for the day. He seemed puzzled, but intrigued.
I let him examine the list, and he asked, “So how do you put this together?” I explained that I look at the technicals, the settlements and my notes on activity during the day that I hear about from my trading contacts all over the world. I rank each of the markets I am watching and then cut this down to my top five. Then I really go to work.
I see which markets made higher highs or lower lows, and I look at the moving averages very closely. I also examine trading volumes and open interest very closely. I do many other things too, but those are proprietary, and I told him $1,000 an hour wouldn’t be nearly enough.
So Easy a Caveman Could Do It… Probably So!
He said, “Well, this is easy!” I laughed. I took the sheet and crumpled it up and then put it in the shredder. He was horrified. He burst out, “Why did you do that?” I paused and then said, “The problem isn’t that you need my list, it’s that you need your own, and then, more importantly, you need to stick to it.” He seemed confused.
I explained that he can use my advice to create his own map, and then when he is confident with it, he needs to follow it. That’s where most traders fail — they may have the intelligence (maybe too much), but they lack the skills of discipline and confidence. What’s the old saying? “Give a man a fish and you feed him for a day. Teach him to fish and you feed him for a lifetime.” So true. I am giving fishing lessons here at Whiskey & Gunpowder, but once you learn, you are responsible for putting those lessons to work.
Putting a Plan Into Action
If you’ve read this far, obviously you realize the resource boom is far from over. In fact, the fat lady is not even clearing her throat yet. As trudge through 2008, only one thing is crystal clear to this trader: There will be many wild swings in everything from oil and gold to soybeans and sugar, and certainly all the resource equities too. Having a well thought-out plan and clear-cut approach is essential to weather the tough times, as well as the incredible profit periods. Not only is discipline important when you are taking a loss, it’s actually even more important when you have a runaway winner. I have seen many a great trader blow out on a massive winner that turned into a horrific loser, usually because discipline went out the window and greed took over.
Make no mistake, there are many pitfalls on the road map to riches. People like me are committed to helping you avoid them and make the right turns. We will be there for you, but only you can decide if you follow the map or not. I sincerely hope you will.
Yours for resource profits,
February 29, 2008