I recently had the honor of being selected as Trader of the Month (got The Hat!) and was asked a really excellent question at the end of the webinar. Alas, my response was mediocre. Happily, I have this opportunity to expand upon my thoughts and hopefully redeem myself.
The question was how did I define “being efficient” when I was learning to trade? This is a rather fascinating topic to me since I have always been keenly aware of my time constraints. Life is just way too interesting to waste even a minute!
My time management skills were honed many, many years ago out of necessity. There was so much I wanted to accomplish in a fairly short amount of time. My career depended upon my being able to make quick, accurate decisions.
Bringing that same level of efficiency to my trading would be critical if I were to meet my trading goals. The challenge of my goals wasn’t how much money I wanted to make (though that seemed daunting when I started because my goal is to triple my trading account every three years) but rather the length of time I’d given myself to become proficient in my chosen trading system.
I wanted it and I wanted it NOW!
I’m a naturally curious person with a strong tendency to go merrily down any available rat hole that looks interesting and EVERYTHING looks interesting. Early in my career, though, I found that the Pareto Principle really does apply to learning. By recognizing that learning 20% of the important stuff will give me 80% of the results, I can advance much faster. The trick, of course, is figuring out which 20% will give you the 80%.
If you’re creating your own trading lesson plan, it can be fairly obvious. However, if you’re looking around at what other people are doing, it’s easy to get distracted and go down that rat hole. For instance, a lot of advanced traders spend time analyzing different ways to hedge their M3 rather than just using a DITM long call. Futures, weeklies and other alternatives are reviewed. This makes a lot of sense for them because they’re looking for the last 20% of the results. They’re trying to eke out every last bit of profit from the M3, after already tuning and tweaking the butterfly and its adjustments to death.
(As an aside, why would they do that? Well, because the DITM long call is overcapitalizing their M3. They’re looking at long call alternatives for capital control measures and to even more finely improve their result.)
But if you’re starting out…think before you worry about the call. You may pay, for example, $9 for your butterfly and it has a maximum profit of $50. The long call, meanwhile, probably has about $100 of time premium in it. Which one will give you a better increase in your profit if you manage it? Yep. Go with the profit-laden butterfly. At this point, it’s far more efficient to deal with the butterfly than it is to tweak the long call.
The key is always to ask if what you’re working on is really important or if it’s just an interesting rat hole. Just because everyone else is diving down the hole doesn’t mean that you should. There is so much you can do to improve your trading, especially when you’re starting out.
Which brings us back to the definition of how to be efficient when learning to trade. It’s simple – figure out what you need to learn, then prioritize based upon how much it will impact your trading and the length of time it will take you to complete. (The latter will help you break ties in priorities.) Then – and here’s the important bit – stick to it, even if everyone else is merrily headed down another path.
When you first start trading, there are several relatively simple things you can do to improve your trade. There are also an infinite number of rat holes you can dive into that will help…but not very much. (And sometimes not at all!) Making sure you know which is which will let you progress along the trading path in the most efficient manner… and make money while you’re doing it!
Written and contributed by Cynthia Sarver