Introduction To Options Trading

Every Tuesday Chuck releases a new Trader Tip video on YouTube. This episode goes over discovering what kind of trader you are. Do you fall into the 1.) the over trade camp, or 2.) the afraid to trade camp? What does it mean to fall into one of these camps?

You can read the episode transcript below or watch the video that follows.
If you have any questions, please reach out to us. We look forward to being a continued part of your trading education!

WHAT TYPE OF TRADER ARE YOU?

I have been training traders to trade successfully for over 30 years, and in my 30 plus years of working with traders, I have noticed that traders fall into one of two camps. Either 1.) the over trade camp, or 2.) the afraid to trade camp. What I mean, when I say this is that on the margin, are you more likely to take the trade or skip the trade? Every trader in the world falls into one of these two camps, the greatest traders in the world are the ones who struggle the most. But if I were to go to George Soros, if I were to go to Paul Tudor Jones, or go to Steve Cohen, they would fall in one of these two camps.

So why is this important to you?
Well, understanding what type of trader you are will help you in setting up your trading rules and your trading processes to support you to become the best trader that you can be.

Let’s talk about the overtrading camp.
People in the overtrading camp tend to be optimists. They see every trade working out to fantastic profit. Some trades even lead to visions of retirement, getting out of debt, or even buying a Ferrari. Traders in this camp love the action. They’ll have money on the Bills Titans game last night while they’re sitting at their desk trading Bitcoin.

It’s important understand that many of the traders that sit in overtrading camp are led by greed. Greed is interesting because it’s actually a form of fear. When people are greedy, they’re fearful that there’s not enough. They feel like they need to be as aggressive as possible at every opportunity, and they need to do as many trades as possible because they might miss out. There’s a fear that there’s not enough for them if they are patient, or if they trade less. So this camp of traders is often stressed.

Traders in this group often make many trading mistakes. If I look at their p&l, distributions, their p&l distributions are composed of some great trades, some great trades that could have been great but they were sloppy, and a lot of mediocre trades. Even when these traders have great trades, and they often do, the great trades are eroded by many mediocre losing trades.

This is the camp where you’ll hear about the trader who struck a big end GameStop or an AMC theaters. But when you hear about this trader, what you never hear about is the dozens of losing trades where they give it all back.

When we talk about the over trading camp. These traders need to slow down. These traders need to trade less. They need to insert a pause between their ideas and when they take action. So how do they do this? Well, a straightforward technique is to create a document of your trading rules. Once you document your trading rules into what we call a trading plan, then the trader needs to create a trading checklist that outlines all necessary rules that need to be met in order for them to take a trade. Anytime they make a trade, the trader needs to fill out the checklist beforehand. And once the trader fills out the checklist, it sees that it has met the rules, then the trader can take the trade. This discipline of filling out the checklist in advance slows the trader down enough to see if the trade does in fact meet the rules. This discipline will result in fewer high quality trades.

Afraid to Trade Camp.
People the afraid to trade camp tend to be pessimistic, either in the market or in their abilities. They see trades going bad quickly, and they’re scared that they’re going to lose money. Traders in this camp always need one more rule. They always need one more class to feel confident enough to make a trade. They desire to avoid being wrong and they’re always in search of the Holy Grail. That will lead them to know that losses will never happen.

People in this camp often see a trade setup via the rules and at the moment of truth. They fail to pull the trigger. They see the trade take off in their favor without them being on it. Missed trades can be a form of massive frustration. So much so that in some cases after missing a trade and having this frustration, that trader then will jump right in the next trade, and it’ll quickly get stopped out. And they’d be like, see, that’s why I’m afraid to trade. That’s why I’m scared to make trades. As soon as I do, I’m wrong. And they’re actually now validating what they were thinking all along. Traders in this camp are led by fear, fear that they will be wrong. Fear that they will lose money.

This group will actually have few trades that are p&l distribution, because they don’t take action, because they’re always afraid that they will lose. A quote that I often like to say to my students is that failure is inevitable in trading. Your ability to succeed will ultimately be determined by your ability to be comfortable with failure. The great news is that you get to choose how you will fail. Will you fail in the heat of battle? Or will you fail on the sideline? The path to failure on the sideline always leaves a doubt about what could have been. So what this means is people are afraid to trade. They think they’re doing themselves a favor by not taking trades. But they’re actually failing by not trading. It’s actually the worst kind of failure. Because people who don’t trade can live with the illusion in their mind, the fantasy, that if they actually just traded, they would make money. Meanwhile, they’re spending expenses. Maybe they stepped away from their job, and it’s costing them money, and it’s costing them time, even more so than the money because they never take action, and they never get the growth for placing trades.

Traders in the afraid to trade camp need to develop rules that support them to take trades. When the moment of truth comes, and it’s time to take a trade, their trading rules in their trading processes need to help them to take action. Traders in this group need to document the rules into a trading plan. See a theme here? And once they create their trading plan, they also need to create a trading checklist that outlines all the necessary rules to take a trade. Anytime that they make a trade they need to fill out the checklist beforehand. Once they fill out the checklist, and they see that the trade has met their rules, they focus on taking the trade. The difference here is versus the overtrading group is that afraid to trade camp needs to define success as following the rules. If they fill out a trading checklist, and all the criteria are met, they must take the trade. If they didn’t, they broke the rules.

Over Trading vs Afraid to Trade
The overall theme for both camps is that follow your rules equals success and breaking your rules equals failure. The difference is in the application. Over traders use the rules to slow down to make sure that they follow the rules. The afraid to trade traders use the rules to promote taking action, because the rules take priority over their fears.

So, what type of trader are you?
My question is, what type of trader Are you? Think about it for a second. What type of trader Are you? Are you an over trader? Are you afraid to trade? Once you’ve answered this question, then the next question is what changes are you willing to make to support the type of trader you are?

One of my core beliefs, when I work with students, is I need to see who they are, and I need to meet them where they are so that they trade consistent to their identity. I want them to have a positive identity for how they’re going to trade, and I want to support them with how they’re wired. If you are somebody in the over trading camp, we would handle you differently than if you’re in the afraid to trade camp. So, I want you to leave a comment (on the Youtube video) about what type of trader you are.

We will see you next Tuesday for our next edition of Trader Tip Tuesday. Have a great week.
– Chuck Whitman