Why It’s Important to Stick with Your System

Before I get to my "Ask Andy" question of the week I want to go over a few key thoughts.

Last week I spoke at length in my monthly webinar about the 40 ETFs I use exclusively in my options trading strategies.

The questions were plentiful. In fact, the response has been overwhelming. I just wanted to thank all of you for your gracious words and, more importantly, your keen interest in what is undoubtedly one of the best ways to grow wealth over the long term.

During the webinar I presented the two strategies I use in the Options Advantage portfolio:

  • Credit Spreads (click link to see how I use the strategy)
  • Directional Call and Put Buying

Educating retail investors on some of the best techniques in options trading can be challenging, but only because people don't want to spend the time to learn about how they can grow their money in a completely different and unique way. It's not that everyone can't learn about options. Quite the contrary, actually. We are all smart – okay there are a few exceptions (the ones that refuse to learn about the power options can provide to their overall portfolio).

Inherently, the financial service industry wants you to buy and hold. So far they have succeeded. But, as most of us already know, that mentality is slowly changing. Given the paltry market returns over the past 12 years retail investors are becoming acutely aware of some of the techniques that professional investors use on a daily basis. Why? Technology.

Technology has provided an efficient marketplace and now the products are following suit, which brings me back to my last webinar on the 40 most efficient ETFs in the options market and why they should be your focus.

Your focus as investors or traders should be on the most efficient products available because these products (SPY, DIA, QQQ, IWM, etc.) offer you the best chance for being a successful long-term investor/trader.

Again, you can watch my monthly webinar for full details or read the following article for a brief summary on the importance of bid/ask spreads.

Okay, now onto the options question of the week.

Regarding trading systems, I have heard that if you have experienced a string of losses with your system, you should push on and continue to trade according to it. When or how do you determine if you should stick with the system, or if it is time to pack it in and research another type of system? I enjoy reading and find great value in your articles and look forward to your answer on this issue. – Tom K.

Dear Tom:

First of all, thank you for the kind words.

Every trading system goes through losing periods. If you have a proven system but are going through one of those rough periods, there are several steps you should take. Your first action is to stop the bleeding. That means reducing the size of your trading units to a minimum. Then begin to analyze why you have suddenly started losing.

A losing streak can come along for many reasons. For instance, a common occurrence happens during a prolonged winning period. Traders get overconfident and increase their risk. Then a couple of losing trades wipes out most or all of the profits and traders have a hard time getting back to their basic system. Another common mistake is increasing the size of your trades after a couple of losers to try to get the money back, usually just digging a bigger hole. Sometimes the market changes and the trader is slow to recognize it. When volatility increases, it means adjusting risk and widening stops. Traders are often slow to react to this change. If the market turns from a directional market to a choppy one, momentum traders often get hurt. Outside factors affect trading and can cause a trader to execute his system poorly. It could be problems with family or illness.

I suggest keeping good data on your trading. Keep records of every trade like I do in the Options Advantage service. Make notes of market factors. Analyze your win/loss ratio. Just think: a trader that has 55% winning trades and whose winners are 50%bigger than losers will make a lot of money over time. Those statistics leave a lot of room for losing streaks. So if you have a proven system and it goes bad for awhile, look hard at the factors that might be causing the tough period and make adjustments. You should soon be back to your winning ways.

Remember, this is a long-term endeavor. Expect drawdowns in every system/investment. Remain patient and disciplined in your approach and you will be successful over the long term.


Editor and Chief Options Strategist
Options Advantage and The Strike Price


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