Let’s try to shift you out of that second category.
It is common knowledge that about 90 percent of all options traders
lose money. About 10 percent break even and 10 percent make money. I believe that the main reasons are psychological and a lack of capital leading to poor risk management decisions. Let’s look at these critical issues.
There are three keys to making money trading options.
They are:
1. The psychology of investing.
2. Controlling your risk.
3. Getting every edge in your favor.
You will not be a profitable option trader without a full understanding of these three factors even if you have a complete understanding of everything else in the book. I’m sure you can understand. But the three issues above are behavioral skills, not intellectual knowledge. As a result, they deal with your particular psychology or character. Character is much harder to control and/or change than the simple learning of a new skill. This chapter is critical to your success as a trader.
WHY DO YOU TRADE?
First, I asked them why they traded. They answered that they wanted to
make money. I asked them if they were sure. By this time they were
starting to second-guess their first answer. But, in the final analysis, they stuck with their answer that they were trading so that they could make money. I think that that is completely wrong. I think that people trade for tons of reasons and making money is a relatively minor one.
Nobody knows why each person trades but there are many reasons other than making money.
Back in the 1970s, I managed futures money with a partner. We offered two different accounts to our prospective clients. The first account traded only commodity spreads and was making 200 percent per year while the second account traded only outright positions and was making about 100 percent per year (please note that these returns were so high because I didn’t know as much as I do now about risk and money management and we were simply taking far too much risk).
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