Manage your emotions. More time on the charts. You got greedy. There are a million and one reasons to blame yourself for your trading strategies not generating the returns you expect (or hope) that they will.
Most traders believe this all boils down to some form of emotional control. If you master yourself, you will master the market.
In this blog, we’re going to shift away from this perspective and entertain the idea that trading is less about having some magical third eye that allows you to see the future, and is more about providing value in exchange for payment, just like a business does.
What does it mean to treat your trading like a business?
Being a profitable trader is very similar to running a business. As a trader you get paid for providing value into a market. And in options, the business we are running is very similar to that of an insurance company. Simply put, we get paid for providing protection against unexpected moves.
Example of trading like a business
For example, a pension fund needs to hedge a major holding around an earnings event. So they buy puts. They don’t really care about the price of the puts, since what they really need is that protection. So as traders we can come in, price out the options and provide liquidity where we think there is good compensation for the risks we will be holding on behalf of the fund. That is one example of the real world value that profitable traders add to markets.
Most traders tend to think that the market is a zero sum game. But when you read the above example, the most important thing to realize is that not everyone engages in a trader with the same intentions. The example shows us how some market participants are willing to engage with us even though it’s a losing trade for them.
As volatility traders, we are directly trying to generate returns based on the option prices. For others, they view options as insurance products. They are willing to pay us to hedge away certain risks.
Just like in our example, finding logical, profitable scenarios that persist over time is the foundation of good trading.
Finding a competitive advantage
Now.. What makes a business a good business? Having a competitive advantage. This is what we would call an “edge” in the trading space.
When we have an edge, it means that we thoroughly understand the reason we are getting paid. Having an edge means we no longer rely on luck to make a profit, because we have positive expected value, which is a topic covered early in our academy, but it basically means that on average we are supposed to make money by placing a certain trade. This is what allows us to grow our wealth and sleep better at night regardless of any single trade outcome.
Questions that help you find an edge
Now when we are looking for an edge. We should be asking ourselves questions like Where are others willing to give up lots of money? Is there some sort of inefficiency that we can exploit? Is there a logical reason why it exists and we can make money by helping to resolve it?
These are the questions that lead to finding profitable trading strategies, and profitable traders spend their time looking for these types of opportunities and then building strategies that can capitalize on them.
And that is why trading is so much more than just managing our emotions. There is an entire philosophy that goes into find winning strategies. And it doesn’t necessarily require you to be the smartest person in the world. It’s just being able to use logic to find opportunities, and then use data to validate them so we can be confident in trading them.
Why this is the best way to think about your trading
The reason it makes so much sense to think about your trading like a business is because you are no longer stuck in a cycle of blaming yourself and working on things that are so subjective that we have no idea if they work in order to try and improve.
All of a sudden, the time and effort we are spending has a great chance of a tangible payoff.
We are able to actually move away from emotional decision making and move into a world of logic and trade with confidence knowing the real reasons why we are getting paid.
The systems taught and adapted by Predicting Alpha embody this belief. We cater specifically to option sellers who are actively looking to discover systematic ways to run their volatility portfolios where the have a clear understanding of the reasons they are getting paid, the drawdowns to expect and the long term expected returns of their decisions.
I’m not big on doing outright promos in these blog posts, but this sounds like you, sign up and join our little community of volatility traders.
Happy trading!
