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25 Mar 10 “Five-Minute or Less” Things That Will Help Your Trading, Especially #10

When I first started trading, long ago in a galaxy far far away, I made almost every mistake possible. I remember buying and selling at MARKET values, trusting only one platform for quotes, thinking the commissions I was paying was fair, etc. etc.

I remember one time when I made my very first futures trade. I bought a contract on the /ES looking for a quick, one-point return. The chart whipsawed around like nothing I had ever seen before - I was dumbfounded - "How in the world could anyone trade futures??!". Well, come to find out, I was actually trading the wrong contract! The contract I was trading had almost expired and had very little volume, so traders were having a field-day with it. Needless to say, I lost money that day and many days after that day.

Looking back, I can't really say that I regret ANY of the mistakes I have made throughout my trading days. Once you start seeing those mistakes as opportunities for improvement, you experience a zen-like approach to making better and better trades in the future.

1. Trade in liquid markets

It actually takes way less than 5 minutes to check the bid/ask spread and volume of a contract or stock before entering the trade. Over the years, I've seen many inexperienced traders enter a trade in an illiquid contract - only to get killed on the wide spread. Even worse is when you've entered into a trade and cannot get a fill to get out at your predefined exit point because there was no volume on the other side of the trade.

2. Know your commissions

Take a few minutes to contact your broker and get a solid understanding of what you are paying for and why. "How much does a single contract, round-trip cost, versus a complex spread round-trip?" "Would I benefit from a flat-fee pricing or per-contract price at this stage in my trading?" "I've been trading with them for a long time, I wonder if I can ask for a commission reduction for them to keep my business?"

It's also helpful to take a few minutes to as a representative as to where in the platform/web interface you can actually view the commission breakdown (most brokers don't normally make this easily viewable - you have to really dig for it sometimes)


3. Know your margin

It only takes just a few minutes to look inside your platform to get an understanding of how much margin you have before entering a trade. I understand that most traders do this - however a lot of traders don't realize that margin is a moving target and will expand and contract based on how the trade progresses through time.

Here's an excellent margin calculator from the CBOE, and it's FREE!"

Learning how to not take a trade is a very important lesson. Unfortunately, when newer traders see that they have not used most of their buying power, they often look for trades and leverage their accounts to the max.

Always remember to leave enough buying power available to help you adjust out of losing positions (perhaps set a rule to only use 1/3 of your buying power for your portfolio), because there is nothing worse than having your BROKER decide that it's time for you to get out of a position.

4. Understand the "other" side

Ok, so you've entered a trade and you are bullish or bearish or neutral, but have you thought about the motivation for the person/market maker/algo on the opposite side of you? What are their motivations for going in the other direction?

Personally, I love taking the other side of a "hyped" trade, or a overreaction to something in which I feel the move is not justified with fundamentals. I'm not saying that you should always fight the market direction, however with option trading, we always look for opportunities to sell into an expansion of volatility and profit from mean-reversion.

So how do you find these opportunities? Well, you watch and wait for them to come to you. After a while, you start to get a feel what moves a certain stock and how long or exaggerated the move will be.

Here's my post on how to take advantage of "market news" sites

5. Learn Level 2, for options and equity

Let's face it, staring all day at a pretty chart can only tell you so much about what's going on. Don't be afraid to pull up a Level 2 screen and start looking for patterns: "Is the bid side stacking up orders at a certain support level?" "How many orders are actually being taken out when so-and-so market maker sitting on the ask side with small size - perhaps they are hiding their size and have a much larger order to sell".

This DVD actually provides a good foundation to using Level 2 in their trading

Here's a typical Level 2 screen (notice the "stacking at the 65.30 level - that will take a lot of buy orders to get through)

fb_level 2

Now most option traders will stop their Level 2 studies with only looking at the stock Level 2, but I would encourage you to always look at the option Level 2 as well. You need to get a feel for how many buy or sell orders are at what prices for the contract so you can focus your orders down to a precise price in which you will buy/cover/sell, etc.

Here's a Level 2 for an option contract. (notice the size at different bids/offers)

fb_contract_level 2

6. Have a plan for when it goes up, down or sideways

Here's where your option trading experience will help you "roll out" your losses and make adjustments when needed. As option traders, we have many advantages which help us get out of trouble and/or stay nimble in a trade.

Knowing what to do when a trade goes up, down or sideways is what I teach in my video course!

If you liken trading to the game of chess, you will find that your mind will "see" the paths to adjustments long before they happen, therefore reducing your stress level.

7. Know your risk (Duh..)

Ummmm...yeah... Probably the best 5 minutes you will spend is the analysis of your risk/reward ahead of time.

8. Use 2 different platforms for quotes, charts, etc.

This one took me a while to figure out, but I will never live without two trading platforms open when I trade. The reason is simple: Often times you will get stale quotes from one broker, which is very difficult to spot unless you have some sort of "check-and-balance" system.

Verifying quotes on two different platforms isn't full-proof, but it does lower the odds that you will mistakenly make adjustments, exits, entries, etc. based on false information.

9. Don't stray from your original plan on a trade.

In this day-and-age, information flashes at us in nano-seconds - not to mention the amount of pundits giving your advice to buy/sell. It's very important to form your own opinion and not deviate too much from it, unless something has fundamentally changed with the company, verses someone's opinion.

Here's my detailed post on why it's important to have your own opinion

10. Enjoy your life!!

This one is an easy one to forget sometimes when we are trying to focus on our profession, trying to beat the markets, or trying to recover from a recent loss. I know that I had a real struggle with this concept early in my trading and things in my personal life really suffered from it.

Take a moment to reflect on your motivation for doing what you do. Is trading something you would like to do as a hobby if there weren't any monetary benefits to it? Here's a great article about What Motivates Us At Work.

Like anything in life, trading is a means to an end, a means to capture more freedom in our lives, however it is a mistake not to step back and see the big picture.

If I were a doctor of trading, I would write a prescription for the following: The next time you win on a trade, take some of that money and take your partner/wife/boyfriend/girlfriend out for a nice dinner, or a movie, or a hotel night, etc. -- This will create a positive association in your brain and help you realize the purpose of staring at these charts and flashing little numbers all day long.

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