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.The same thing applies on the downside.But if the market behaves as I expect it to, staying in a 1 - to 2-percent range, then I'll lock in a nice little profit.I makemoney even while the market virtually sits still.That isn't a great trade, but it isn't bad either.The risk is very low, the chances for reward are good, and theleverage is excellent.The average investor will have to put up about $2 thousand in margin for each set of straddles andwings of this type.A profit of just $200 per setup makes for a handsome 10 percent return in a month-not bad for a flatmarket.This is just one example of many possible applications to use options for strategic trading.They can also beused for hedge, arbitrage, and insurance purposes not just in the equities market, but in the futures as well.Too manybooks have been written on various options strategies for me to go into more specific details.CONCLUSIONOptions are, many say, the riskiest game in town.Certainly they are by far the most challenging, flexible, andpotentially profitable financial instruments available.But if you trade them prudently, if you apply sound222Table 12.3 Dow Jones Industrial s-Absolute Monthly Percentage Changes,May 1982-june 1993This table shows the distribution of monthly moves in the Dow Industrials in low-high order.Only data sinceMay 1982 are used in this table since that is when the S&P futures began trading.The median percentage move listed is2.2 percent.Less than 4 percent of the time will the market end the month more than 10 percent from where it beganthe month. 223principles of money management, trade only when the risk/reward ratio is highly in your favor, and execute your tradeswith diligence and patience, then in all likelihood you will be profitable over the long term.I can say, conservatively,that at least 40 percent of all the returns I've made in my life have been with options.Remember these critical points:1.High premiums always indicate impending news.2.Never use more than 3 percent of your capital to trade one option position.3.Always know the odds and risk/reward ratio of your trade.4.Do not use models that are typical.5.Writing options will make you money most of the time, but you will lose in the long run.6.Build a strategy that limits risk but has a risk/reward ratio of at least 3 to 1, with 5 to 1 preferred.The key to my success is focusing on risk with a combination of economic and fundamental analysis and statisticallife-expectancy profiles.When you use these tools, you can play the odds effectively and end up winning. 13A Professional Method of Day Trading*Lorenzo Ghiberti, the fifteenth-century sculptor, had all the character traits necessary to be a great day trader:dedication, focus.concentration, determination, and willpower to complete a task.Ghiberti spent 48 years sculptingfour bronze doors for the Baptistery of San Giovanni in Florence, Italy.Imagine working on a single project for 48years.With no one to talk to for most of the day, the painstaking work would seem endless.In many respects, the willpower and mind-set of a trader is not too different from that of a master sculptor.Both work alone.in focus.concentrating on minor detail, forming the details in their minds.then bringing it forth.Theyare both very individual, solemn businesses.and the results are rather slow and plodding, yet they can add up to amasterpiece.As I began to watch the ticker tape at Filer Schmidt & Company in 1968, I became in effect a day trader, and Iremained one for the next 18 years.By 1986, I had developed an amazing pace: 30 trades a day in the S&P futures.Ialso developed high blood pressure.so I switched to trading the intermediate trend.After all.it*s not a meaningfulaccomplishment to become the richest man in the cemetery.In 1987.I made only 5 trades, made 168 percent on my,capital, worked out With a personal trainer five days a week, and got my health back to normal'.This chapter is dedicated to Howard Shapiro who was the best daytrader I ever knew225226Where is the moral of the story? Well, after the Gulf War in January 1991, the stock market turned into the dullestmarket in the past 97 years (see Chapter 7), and intermediate market trading became next to impossible.So, I wentback to day trading for a while.In this chapter, I hope to add some insight to this very difficult, very intense business.THE PSYCHOLOGICAL REQUIREMENTSOverall, day trading has always been very easy for me, because I have a personality trait that lends itself to thisparticular business, and that is the ability to take losses and never let it bother me.Most people hate to be wrong.No one I ever knew relished saying, "You know, I'm dead wrong in this." Ego is thekiller here; ego in the psychological sense, rather than in the philosophical meaning, is the opposite of self esteem.Ego(or false pride) says (subconsciously) "I can never be wrong, or make a mistake, because I am great.If I do make anerror in judgment, I will not be respected." But human beings are not gods, and traders are not omniscient; they mustbe wrong sometimes.To be unwilling to accept this would be illogical.To be a day trader you need self-esteem, the healthy sense that you are competent and worthy.If you don't feelconfident with your own judgment, you can't execute your trades properly.In order to trade, you must be able to takelosses, thousands of them, and yet come back and trade again with confidence.Just remember: Don't let ego (falsepride) take the place of self-esteem.Ideal day traders are deeply introspective, and know who they are as deeply as possible.To he a successful daytrader means to be real and honest with yourself at all times.Without the ability to be honest with yourself, forget thischapter-you cannot day trade.You must be at a stage where you do not try to lie to yourself.The simple fact is, youwill lose sometimes.You don't have to rationalize it away; you don't have to hide behind typical defense mechanisms.Just stand up and say I m wrong." This admission does not mean that you are stupid or incompetent.Being wrong ispart of this business, and a part of life.In day trading, you are your only enemy; you are your own boss, and you deter-mine your own destiny [ Pobierz całość w formacie PDF ]