A lot of traders will concentrate on their profit and loss statement, but this can be deceiving.
Why? Many good trades lose money and a lot of bad trades make money. Your goal as a trader is to follow your trading plan and take the best trades that make sense to you and hopefully put the odds are your side for a successful trade. With the new year just starting off, there is no better time to start then now!
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Record Your Trades
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The first thing an option trader needs to do is screen capture the trade at the moment of entry. This includes the stock chart and the option chain. If the trade is in effect for several days, screens shots can be taken periodically to help you understand what is happening on the charts and to the options. Once the trade is exited, screen shots should be taken again to compare the start and end of the trade. Lastly, depending on the strategy, screen shots can be taken after the trade was exited to help you analyze what could have been?good or bad! Some programs will even allow you o capture a video so you can methodically go through your trade thoughts from chart to option chain and everything in between.
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Review
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Now that you have the concrete evidence of your trading it’s time to look at the damage or lack thereof. Do this part after the close of the market so your full attention will be on the review process. Label the chart and option chain with what strategy was used. Where did your plan call for entry, stop and target? Then where did you actually enter and exit. Were there any discrepancies? If there were, you need to find out why. If the trade was stopped out but you followed your plan, was it just part of the odds or is there something you can do to improve the odds for next time?
Common Plan Violations
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This is the where you try to destroy the trading demons that keep you from being the trader you know you can be. Was the entry valid? Did you risk more than you wanted too? Did you remember to check implied volatility before the trade was entered? It really doesn’t matter what the violation was, it just needs to be recognized and taken into account for next time. Once a trader has recognized and corrected his or her errors, trading can become a whole lot easier.
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Real Eye-Opener
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One other option (so to speak) that can prove to a trader how important a trading plan is to simply put a contingent order like an OCO (one cancels the other) order on the trade. Have two orders, one for profit and one for loss and don?t do anything until one is triggered. The hardest thing to do is to not manage the trade and let the trade takes its course. In essence, you now have a trading plan and the odds are that it is a better plan then if a trader is managing the trade without a plan or letting his or her emotions do it for them. It might surprise a trader to find out how much better they do using this strategy then what they have been doing in the past.
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Trading Journal
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The last part of this review process is to keep a trading journal. This is where you will keep your statistical trading records. Review every trade and be your toughest critic. Work to eliminate your most common mistake the next day, week or month whatever it may be. Set a goal for yourself like to have five consecutive option trades without committing that same mistake. When you have accomplished that, you are step closer to becoming that trader you know you can be!
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The key to becoming successful and growing as an options trader is to learn to acknowledge your winners, but cherish and learn from your losses because that is what will make you profitable in the end. You will absolutely learn more from your losers than from your winners? I guarantee that!