Today I would like to discuss one of the most important aspects of being a highly skilled trader, adapting to changing market conditions. Trading is hard, and an essential trait is resilience. As a trader goes through their trading journey, they will find, as I have, that you learn the most from mistakes. Taking losses gives you energy when the survival instinct kicks in. 

The great traders come back from taking hits more focused and stronger because they need to in order to survive. Great setups can make you weaker and more comfortable. That is why I am always taking my temperature into my mental state and reviewing my trading.

I was in the Masters’ Club with my guest Kyle talking about trading mistakes we’ve made over the summer. Don’t forget, RagingBull now offers free stock market education and training in the after hours starting at 4:30 PM ET. 

Reviewing trades is an integral part of my process. It is a requirement for me to see what is working and what is not. I want to do more of what is working and less of what is not and that requires an analysis of my trading. 

Sometimes what worked in the past may not work in the current market, and I have to be able to adapt. It is this ability to adapt that keeps great traders in the game. 

Today I will discuss 8 mistakes from the last few months of trading that I will focus on improving. 

1. Betting too big on directional trades. Getting over-confident and looking for “home runs” in the market is a dangerous thing to do. Making bets using calls and puts for directional bets should be used sparingly. 

I can overcome this by either using call or put spreads which would limit my risk. By selling an added out-of-the-money call or put I have less dollars and thus less risk in a trade compared to buying calls outright. I should reduce size in directional bets as they are much higher risk bets and thus less likely to work. I want to be trading the least size when I am trading at my worst. There is nothing wrong with taking high conviction trades and getting bigger, but I need to be very selective and take directional size on only the best setups. 

2. Betting against the market has continued to be a losing trade. 

While I haven’t made many bets against the market in the last few months, a majority of those bets went against me unless I closed it out in a very short period of time. Those losses have added up. I’m not done betting against the market yet; I will just wait for better timing!

3. My bread-and-butter trades have not been working. I am finding that selling At-the-Money (ATM) put spreads has not been working. I will adjust by moving to sell Out-of-the-Money (OTM) spreads which have a higher amount of opportunities, but less of an opportunity. I’ve been losing more on spreads more often than not. I need to adapt to the current environment and not what worked in the past. 

In addition, when I sell OTM spreads, I will look to capture more of the premium. When I sell ATMs, I try to capture 50% premium, when I move OTM I try to capture 80% or more. Selling OTM spreads means I will be selling options at strikes that are further away from where the stock is currently trading. 

Most of the stocks I’ve been trading have not had big uptrends. They’ve been consolidating flat or selling off, going through periods of weakness. Selling put spreads works very well in clear uptrends, a great strategy when stocks are trending higher. When stocks are sideways and going down like they have been recently, results are mixed. 

4. Too Greedy! 

I have not been good about being ready for my opportunities. Instead, I’ve been betting on HUGE opportunities which haven’t gone according to plan, and ended up giving back a lot of upside in the process. The market is not respecting multi-day runs right now, there has been a lack of follow-through in a lot of stocks I have traded, so being ready for opportunities earlier would have been a better option. If I would have stuck to my pre-defined stops and price targets, I would have had better results. Instead, I have allowed most if not all of my paper gains to deteriorate, which is inexcusable. 

To adjust to this, I will tighten my parameters and be ready for opportunities earlier on trades that are working. I don’t care how long you have been doing this, greed can get you, especially when you are seeing the market and trading well.

5. Not consistent with trading size. Scaled too big in losing positions and too small in trades that go according to plan. Doubling down on losers has been terrible, while I should have been scaling into good setups. 

The size I’ve had on some of my losers recently has been bigger than on my good setups. This is the reverse of what needs to happen and must be corrected immediately. This is one of the most important aspects of good trading. I should not be adding much to losing trades, I need to keep those losses tighter.

6. Overtrading. I’ve had too many scattered trades and have not been focused enough on my core favorite stocks. I had a lot of good opportunities on my “favorite” ideas and if I leveraged more into those and held for longer periods of time it would have been great. Instead, I have been scattered and trying to manage too many positions that I was only in for weak, technical reasons. 

I’ve had too many trades and I haven’t been managing them right. Moving forward I want to be focused only on my very best setups. I will also give myself more room and more time to let these trades work. I will increase the timeframe on my options trades from 2 weeks to 4 weeks.

7. Why only trade options?

Only trading options in Total Alpha has been a mistake. I have been doing well, trading stocks in other accounts. I need to add a mix of stock trading back into the overall mix.

8. No Friday “Lotto” Options!

Ok, I admit this is my drug of choice. I am not going to walk away from them…but all things in moderation. After some trades that went according to plan, I have been too aggressive on Fridays and have suffered some large losses. I need to have better risk management and position size on those trades. 

I will reduce my size and risk on these trades in order to limit my losses as this has stood out in my recent trading results. I’ve been adding into losers looking for bounce trades, and for the most part, this has not happened for me on Fridays recently. 

Bottom Line

Go back and look at trades and keep a trading journal. Be aware that the market changes, things that may have worked in the past might not be working now, your job as a trader is to adjust. I want to be doing more of what is working and less of what is not working. Opportunities will take care of themselves; I need to focus on and limit losses. 

An old adage that should be heeded is “It is not the strongest of the species that survives, but rather, that which is most adaptable to change.”