Seven Essential Credentials of Successful Optionetics Students, Part II
April 14, 2008
I was happy to speak to many students in our 2-day intermediate seminar last week in Singapore. I also got to know Ryan, Gustavo, and Ted better when seeing them face to face. We had lots of fun during the class. I personally enjoyed it. It is also interesting to note that this class had many first-time participants. While I did not have a chance to speak to every first-time participant, I ponder why our marketing campaign is so successful that we manage to sign up quite a lot of new students. Or is it true that everyone in Singapore is desperate to learn how to generate additional income stream due to a rise in the cost of living? Anyway, only God knows.
During these two days, I shared with some of our new students the story of my journey as a trader, which began in 2004, and what steps I have taken to bring me to where I am today, as a trader-cum-writer and instructor for Optionetics. It has something to do the first essential credential (a strong sense of self-belief), which I talked about last week in my article (see Part I).
I wish to congratulate all our new students who did a great job to complete their inaugural 2-day class. In a way, your life has just begun and you will face a lot of exciting challenges. For those who purchased the trading tools we discussed in class, and promised me to use these tools to practice the Optionetics trading systems taught in class, we had a deal, remember? The deal is that you shall use these tools to practice, practice and practice by paper trading, and report to me how well you do when we next meet in class.
The early stage of your trading journey is just like riding a bicycle. You bought a bicycle (trading tools). You learn how to ride the bicycle. You will fall hard on the ground. You will get hurt. You will try again, until you are able to balance. You are then able to ride forward for a short distance. You are able to turn left and right. You learn how to brake… Trading is the same. But if you don’t take action right after the class, you will never learn. You need to keep the momentum going because if you don''t, it may be too late—i.e. the momentum is “crushed." You may never take action and will have wasted your investment in the 2-day class.
Last week, we discussed the first essential credential: Strong Self-belief. This week I will discuss the second essential credential: Good Trader’s Habits. I want to relay this credential to my 7-year son, Sam. Some of you may have seen him walk around in the Santa Clara Convention Center last year. You will see him again this year in the same place. He started his Akijutsu class last year (and by the way, he is now a yellow belt). I remember when he was a white belt, he learnt the basic kata. As a parent, my role is to accompany him to class every Sunday. I observed how he practiced his kata but I had no clue whether or not he did it correctly. So, at the age of 38 and without any experience in martial arts, I signed up for the same class last week (and thus I am now a white belt). I can tell you how painful it was in my first class. I thought the basic kata is easy but in reality, it is not the case. I suffered lots of pain on my knees and could not really stand.
My son laughed at me and said “Dad, you are wrong. It is not like that. See, it is like this and like that.” Do I have any ego problem? Am I afraid of being laughed at by my son? No. Otherwise, I would not have signed up for this class in the first place.
Why is my Akijutsu class experience relevant to you? Essentially, I see a lot of relevance. Akijutsu class is new to me. Trading business is new to you. Very often, my kata is wrong because I bring in my bad habits when practicing. You may likely do the same by bringing in your own ‘habits’ and some of them can be harmful in this trading business. So, your task is to identify the good ones and keep them. Do away with the bad habits if you are serious in this business. Obviously, I cannot give you a full list of bad habits in this article. However, I can give you a few to start thinking about.
How much profit can I make from this trade if I am right?
It’s very common for a new trader to ask how much he or she can make from a trade. As you recall from our 2-day class, this is a mindset from the 95% Club (those who decide not to continue). If you want to move to the 5% Club (those who keep active), you need to think first about how much you can lose in this trade if you are wrong. You then evaluate the potential reward and if you are comfortable with the risk/reward ratio, you then decide how much capital you should allocate to this particular trade. Never take a trade if you have no clue how much you can lose, and if the maximum loss is not acceptable. This reminds me of a takeover saga that took place in Singapore this week. A few people gathered together to buy many shares of a Singapore-listed company in anticipation of a major shareholder who controls some 46% in this company and will take over the shares of others. These few people thought that it must be a good deal and a sure win. Guess what. The deal fell through and the share price tanked more than 70%. These few people lost all together some S$5 million. They did not blame themselves but the substantial shareholder and the Singapore Stock Exchange. To me, there is no free money on the table. They failed to work out the maximum loss they could incur even if the probability of winning this trade is close to 100%.
In order to make lots of money, do I have to do a lot of high-risk trading?
In Finance 101, you may recall the sayings "no venture, no gain," and "high risk, high reward." Please forget the concept of "high risk, high reward" in the trading business. In fact, the correct way of thinking is "high risk, low reward" and "low risk, high reward." This is due to the concept of probabilities.
In our 2-day class, we discussed how to look for low-risk trades with a potential risk/reward ratio of 3:1. The thing you need to understand is that such low-risk trades carry a low probability of success. Due to the low probability of success, you will be rewarded more than the risk you assume. You may think that by taking trades with a low probability of success, you will be out of business soon. This isn''t correct because our instructors have shown you how to use the trading tools to create an unfair advantage over others who do not use them. For example, our Wave 4 and 5 trading systems taught in the 2-day class help us to determine the time and price target [TAPP] of a stock.
Without Profitsource, you may be able to pick the direction but you will find it hard to work out the TAPP. With Platinum, you will be able to pick the best option that gives you a chance to double your money. These tools can be useful if you give yourself a chance to use it. As you gain experience, we will introduce in our advanced classes the concept of high probability trades, which carry high risk and low reward. Some of our students ask why we do not discuss high probability trades in the 2-day classes. My argument is that junior traders have yet to acquire the requisite experience to manage their trades/portfolio. If they start doing high-probability trades early in their careers without the proper money management skills, a single losing high-probability trade can wipe out their accounts in seconds. Hence, you will notice why my BMIC system is designated as “Intermediate” Level in OASIS. There is always a reason for what we are doing.
I don’t like to ask others because I think my questions are stupid.
Are you sure your questions are stupid? Who decides if your questions are stupid? Again, you have already imposed subjectivity into what you think it will be. The reality is that no one claims to know everything in the planet. If you don’t understand something in class, ask the instructors, ask your peers, Roger or myself. If you don’t understand what Joe discussed on the early assignment issue in his bull call spread example, ask him to explain it again. Don’t be shy; Joe won’t know if you understand the concept. In Singapore, some of our traders meet at Brewerkz every Saturday afternoon (unless a public holiday falls on the weekend) to talk about their trades. New students are encouraged to join this unofficial gathering to mingle with more experienced traders. Don’t feel bad if you are asked to buy a few jugs of beer after you get your answer. That small tuition fee (i.e., beer) is less costly than what Mr. Market will charge you. At least when you buy a jug of beer, you can have a few sips. It’s a win-win solution.
Obviously, I realize that this ‘afraid-to-ask-a-question’ syndrome is common among our Asian society. This may be partly due to the fact that we are afraid of being wrong, and we will lose face if we are proven to be wrong. Do away with any ego issue. Understand that even if you hold a doctoral degree in any field, it does not mean anything in the trading business. Let’s explore together and share our knowledge.
I shall discuss the third essential credential (Smart Goals) next week. Have a good trading week ahead.
To access previous articles written by Jack Wong, please click here.
Jack Wong
Staff Writer
Optionetics.com ~ Your Options Education Site
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