Editor’s note: If you haven’t heard, Jeff’s putting on a live Q&A later today, at 2 p.m. ET. Click here to watch it when we go live.
In the meantime, we dug through the archives and found one of Jeff’s Friday Mailbags, where he answered questions on option trading and the stock market each week.
As you prepare for today’s trading session, and this afternoon’s Q&A, enjoy this “sneak peek” at Jeff’s market wisdom…
When a stop loss is hit like with [a recent trade idea], why exit the trade on the following day? Why not immediately or ATC (at the close)? And when the following day? ATO (at the opening) or anytime?
And to echo all of the complementary emails, this is an incredible service and thank you for providing your insights.
Hi Jonathan. Thanks for your question, and the nice compliment.
Whenever I make a recommendation based on technical analysis – which is the primary basis for most of the recommendations I make in the Delta Direct blog – I base the stop-loss on the trade on the timeframe in which I recommended the position.
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For example… A stop loss for a trade recommendation based on a pattern on a 15-minute or 60-minute chart will likely be set intraday. In other words, if the stock moves below (or above) the stop loss during the day then we’ll close the position immediately.
On the other hand, if I make a trade recommendation based on a daily chart, then the stop loss on that position will almost always be based on the closing price. It is the closing price of a position that gets plotted on a daily chart. The intraday moves are of no consequence. It’s only the final closing price that gets plotted on the chart. That’s the price that affects the pattern.
Of course, there’s always the possibility that a stock will gap sharply, one way or the other, the day after it has violated our stop price. That’s just part of the risk of trading. Most of the time, though, especially when dealing with trades on an ETF, the difference between selling at the close one day or at the opening the next day is only a matter of a few pennies.
Personally, when a trade of mine has hit its stop, I try not to overthink the exit. I just get out of it sometime within the first hour of trading the next day and then move on. My energy is better spent trying to find the next winning trade than in trying to finesse the best possible outcome on a losing position.
That said, I have several trader friends who will argue that 10:00 ET is the best time to exit a losing position. And they have statistics to back it up. So… there’s that.
Hi Jeff, thanks so much for the WONDERFUL trading advice this year, as well as the great sense of humor and in-depth technical analysis in your blog and reports! Both entertaining and profitable. I have done well following your trades this year and look forward to what’s next in the years ahead!
Your trading philosophy and conservatism are exactly what I need as I learn more about options. I realize, however, that if you were to ever “leave” your current position (writing the Delta Report and Delta Direct, and making recommendations), I would be utterly lost in trying to create my own options trades.
Bottom line: I want to delve deeper into options trading and become more self-sufficient in analyzing and discovering profitable trades on my own. I am motivated enough to take a year off of work and devote myself full-time (40 hours) to learning and slowly implementing an options trading career as my main source of income.
Based on your obvious trading experience, success, and my own intuition, I know your advice would be extremely valuable as I contemplate my own future in this field. Do you have any recommendations on what specific steps/process/system I should learn in order to become a conservative trader full-time?
Hi Nicholas. I’ve been trading options full time for over 30 years. It is the most exciting career I could ever imagine. But, like any other profession, it has its challenges.
For example, this is the only career I can think of in which you can bust your tail for 10 hours and then leave the office with a lot less money than when you started. It’s also the only career I can think of where you can earn a month’s worth of income in an hour.
The monetary swings can be wild at times. So, it’s important to have a strong understanding of your own emotions and how they influence your trading.
Most of all, though, the No. 1 attribute of most folks who successfully trade for a living is the ability to do nothing for several days at a time. Patience, and the ability to wait for the right trade to set up, is a key characteristic for successful traders.
It’s harder than you might think.
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In volatile markets, I’m used to trading six or seven positions every day. But, in the low-volatility market of 2017, there were often times when I would go several days without doing anything.
It is remarkably difficult to stare at a computer screen for several hours every day, just waiting for something to come together. It’s like a guy who’s wandering through the desert in search of water. Eventually you start seeing things that aren’t really there. And you start making trades that don’t really fit within your discipline.
Most of the time, those trades are going to be losers.
But when your mortgage payment, your grocery bills, and your family vacation rely on you to be able to trade… you’re going to be tempted to do something, anything, to justify your time in front of the computer. And that’s usually when you’ll make mistakes.
If you can avoid doing that, if you can be patient and wait for trades to fall into your preferable setup, then you’ll be successful as a full-time trader.
So, my suggestion to you is this…
Take a one-week vacation from your regular job. Spend the entire time in front of your computer every day. But, do NOT make any trades. Watch the action. Take note of the trades you would like to do and note the profit and losses you would have made if you did actually trade them. Be honest with yourself. Only count the trades that would fit within your discipline.
Then, at the end of the week, tally up your paper profits and losses and ask yourself if the result was worth the effort.
It’s not the same as trading for a living. But, like the prospective pilot who goes into the flight simulator and crashes the plane time after time after time, the exercise will tell you whether this is the career for you.
On the other hand, if you can spend a week of your vacation time staring at the computer screen and doing absolutely nothing, and still be excited about it… then you just may have found your calling.