Podcast – Episode 029 – Improve Your Trading By Doing a Trading Review

Podcast Transcript

Hey Genius Nation, so I’m still here at the beach and this episode is going to be a continuation of the last one. If you haven’t listened to the last episode, it’s called, “Working on your business.” Go ahead and listen to that one first so you’ll have a better idea of what I’m talking about here. If you can’t find it, that’s okay. You can listen to this one because it’s similar topic, but it’s different. I’m going to go more in depth into this topic in this episode and so what I talked about last time was what exactly is working on your business and different ways that you can do it to improve yourself as a trader. In this episode I want to talk about my trading reviews. What I do is every so often I will set aside some time to get away from the office to go by myself and to take all of my trading records and then review them to see how I’ve done over the past however long it’s been since the last review.

What I want to do in this episode is actually go through the questions I ask myself, go through the things I look at and then, you know, you can take some of that, maybe tweak your own, add your own stuff and then you’ll see patterns. You’ll see ways that you can improve, you’ll see instances where you’ll have revelations and epiphanies about your own trading that you can tweak to improve. I’ll show you some of mine later on as we go along. What I like to do is for my review is to go to a quiet place to be alone. It has to be away from the office, away from my normally trade for the most part of it. I personally, I like to go to the beach and I like to go on a cloudy day when it’s not so sunny and not so hot. Then just sit back either you can grab a chair, sit on the beach and listen to the waves and review everything or sit in my car with the windows down.

I’m in a sense old school when it comes to trading and when it comes to record keeping and I guess old school is better than calling it old fashion, right? Old fashion has a bad ring to it, but I’m old school and so I write everything down on paper. Every trade I do is on paper. Depending on the strategy, if it’s a simple credit spread strategy then I will have several trades on one piece of paper. All the information for each trade will be there. If it’s a more complicated, like an iron condor or a butterfly or something like that, then I’ll have one sheet of paper for every trade. That way I have all the information about what happened. What was going on when I got into the trade? What I was thinking about when I did the trade? What happened during the trade? What adjustments I made? Why?

I keep records, I keep notes of all that stuff and then what eventually happened at the end. I take all of these trades. I take them with me and I like to do this at least at bare minimum should be done once a year and if you’re doing, if you’ve been trading a lot, you’ve been trading for years and if you’re doing really, really well then you go one year between reviews. If you are a newer trader, I would do it at least every three months. I mean, if you’re brand new you should probably do it every month. You won’t have as much to go after but at least three months. Then if you’re more experienced then you can push it out to six months. I like to do it at least every six months but at a minimum I’ll do it for a year. Normally, like I said, I like to go out and not have it be nice weather outside. Nice and cool.

I like to go springtime or in the fall, something like that. That’s just me, but you can go anywhere. You can just go in the kitchen table and do it. You can go to the coffee shop, you can go wherever you are where you can just spread out with your paperwork or if you have all your stuff on a laptop, take your laptop, open it up. Be careful not to be doing any trading. We’re not doing any trading, we’re not watching the news, we’re not on Facebook. We are only focusing on our trades and reviewing them and going through them. That’s all we’re doing. Okay? Make sure you do that. Now, one thing I want to look at is I look for patterns. What trades did I lose money on? Why? What was the reason? I should have written that down but I want to go through all of them.

Let’s take all the losing trades first and I’ll set them aside and say, okay, what happened? Was this something that was my fault or was it something that was out of my control? Was there some kind of surprise announcement that made the stock a little crazy? Was it something else? Something in the economy, something the president said or something some other country did or anything like that. Was it something in my control? Did I not follow my trading plan? Did I mess up? Was I not feeling well? Was there an emergency and I couldn’t go to the office I couldn’t drive that day and I messed up? Was it that it was out of my control? Now if it’s out of my control, I’m not so worried about it because those things happen. You’re going to take losses. It’s just the nature of the game, but you also have to look at how many times that happens.

If you’re doing 10 trades and you lose on or if you have 10 losing trades and six of them were outside of your control, you need to find out, dig deeper. Is there anything I can do to limit that? If it’s the same thing, if it’s, oh they had an earning announcement and the stock loss, oh there was an earning announcement. Well then if you see that, that happens repeatedly that you’re losing money on earning announcements, then maybe you shouldn’t be trading during earnings announcements, right? That’s just common sense. This is the kind of things that you might not see while you’re in the trading day to day, while you’re doing it every day, every month trying to get better. You might not see this, but when you take a step back, when you’re looking at the forest, when you’re in the forest, you can’t see all this stuff.

When you’re out of the forest looking at it from a 10,000 foot view, you can see, oh wow, okay, this happened good, this happened bad, oh look at that mistake I made over and over and over again. Let’s not make that mistake anymore. Right? These are the kind of things that you’re looking for. The other thing I want to look at is how have I done. Right? We all want to know that. What’s the profit and loss like? Am I up money, am I losing money? What’s going on? You definitely want to know that. Right? Am I up, down, sideways? What? I want to know this, but in fact, this is the most deceiving number when it comes to how well you’re doing in trading. That’s the first number everyone looks at. “Oh yeah. How’d you do last year?” “Oh, I made a million dollars.” “Okay. That was great. You’re a wonderful trader.”

No, that doesn’t mean anything. You could have two traders, one lost 100,000, the other one made a million. It doesn’t mean that the guy who made a million dollars is better than the other guy. Maybe he just got lucky, maybe he just bet the moon on one trade and he got lucky. That’s not the thing that we want to look at. What we want to look at, if you made money, that’s great, that’s the goal, right? That’s perfect. That’s wonderful. Keep doing it if you can, but what we want to look at is, did I stick to my plan? Did I stick to my trading plan? That’s what makes me happy when I have stuck to my plan, when I know I have a system that works over the long-term and I’m sticking to it. Whether I’m up or down, doesn’t really matter because eventually the odds are in my favor. It’s going to turn around.

If I’m losing money but I’m sticking to my plan, I know that it’s going to turn around and eventually I’m going to come out ahead. Right? That is why it’s more important to stick to the plan if you know the plan works. Does that make sense? I learned about this in poker. If you play poker, you know that you could play a hand perfectly and you can still get beat and that’s when people go on tilt. They’re like, “Oh, I played it perfectly. This and that guy beat me.” Well, you know, that’s part of the emotions of it. You can’t go on tilt, but it’s okay. That happens and it happens in trading. You could do everything perfectly. You can still lose money. That’s okay. That’s why we have stuff like asset allocation. That’s why we have stuff like diversification.

That’s why we have, we don’t just put all our money in one single trade every single month. You can spread it around so that if one thing bites you, you’re okay because you got other lines in the water. You got other things that are going to make up for that, and eventually even if that one thing bites you, eventually in the long run, you’re going to come out ahead because you’re following the trading plan and the odds are in your favor and the strategy just works right? That’s why it’s important to have a good strategy. Follow the plan and that way you don’t have to worry about anything else. If you lose, you lose. Next month you make it back, the month after that you make it back. If you have a good record and say, “Hey, if I lose this much, I’m going to get out.”

If you follow that, then you should be able to get it back. That’s one of the things that’s really important. One of the things people tell me was iron condor, it’s like, “Oh yeah, you know, if you lose it on a condor you lose nine times what you could have made.” No, that’s ridiculous. If you’re going into an iron condor trade or any kind of option selling trade and you’re going to say that, you know I’m either going to make this amount or I’m going to lose the maximum amount. It doesn’t make any sense because if you lose the maximum amount that just wipes out all those trades, all that work for no reason. You need to have a stop loss. You need to have an amount that says, “Okay, if I lose this much then I’m getting out because the trade is not working in my favor.” Right? You figure that out. What that works for you, is it 20%, 25%, 30%, whatever it is per trade that works out for you, that’s what you have to set it at.

You have to figure that out based on your trade temperament. Are you okay with risk? Are you not okay with risk? Do you want to be really, really close? And say, “You know what, if it goes against me even a little bit, I’m going to get out.” Whatever it is, you have to find out what works for you and create a trading plan that works for you. You take a trading plan that you know works. Take one of mine or whatever, and then you can do it the way it’s supposed to be done first so you understand. Then once you’re good at it, then you can start tweaking it to go with your own risk appetite, your own risk temperament. That’s another thing I look at. Some of the questions I ask myself, is my win loss record acceptable?

Okay. If I’m doing, let’s say credit spreads with a 80% probability of profit, I should be winning eight and losing on two, that’s what the math tells you, right? If I’m winning on six and losing on four, that tells you there’s something wrong here. My win loss is not acceptable. I need to do more research, I need to find out why. Right? If you’re doing straight out buying puts and calls, and if you’re doing it on a 50/50 coin flip, you shouldn’t be winning at least 50%. If you’re not, then something’s wrong with your strategy, your trading plan, what you’re doing, and you need to go back and adjust that. Another question I ask are, am I keeping my losses manageable? Now we all are going to have losses, can’t get away from it. No way about it.

You could do everything perfectly, you can still lose money, but are you keeping them manageable? Like I said earlier, do you have a stop loss in place that you are being strict with? If I’m saying that I’m not going to lose more than 25% on a trade and I have three or four trades in three months where I loss 50% or 60%, that means I am not keeping my losses manageable and I need to improve on that. I need to work on that. I need to focus on that. That tells me right away, oh, bing bing red flag, hey, it didn’t just happen one time. It happened multiple times. Right? One time, it could be an anomaly, you know, maybe you fell asleep at the switch. I don’t know. Multiple times, we have an issue and it’s systemic and we need to fix it.

Okay. Another question I ask are, are there any months or are there any circumstances in which I do better or worse? This is something you might not normally think about. Are there any months that are better off? Is some kind of seasonality coming into play? This doesn’t just happen with commodities. It actually does happen with stocks as well. There are certain stocks that do better in certain months for option sellers than in other months. There are certain months that are better off for option sellers and it varies by trader, depending on your strategies, depending on your risk tolerance. For me, this is when I found out, you know, going back through a few years of records, I found out that my best month is December.

That is the best month I have. That is when I make the most profits and most of my trades turn out to be winners. The way I trade, I do the best in December now. I don’t know exactly why that is. I assume it has to do with how many days off, there are a lot of days off. There’s the Thanksgiving break, there’s the Christmas break, there’s a New Year’s break in there so the markets are closed many of those days. There’s also the thing about, you know, people are taking time off for the holidays, they’re not really at the top of their game. They’re not really motivated. Right? Everybody has that, “Oh yeah, you know, I’m going on holiday,” kind of mentality. A lot of the traders on Wall Street, a lot of the floor brokers, a lot of the hedge fund guys, they take off.

A lot of them take off the whole month of December because they already know what they’re going to do for the year. Maybe their hedge fund or whatever has already made good money so they pack it up and they say, “All right, we’re done for the year. Let’s go. Let’s go on vacation, let’s go to the beach.” Then there’s also everybody being happy because, you know on Wall Street at least because people are spending money left and right for Christmas. There are many issues where it’s a lot of positivity in the atmosphere. A lot of relaxation in the atmosphere. I think that is why my particular style that I like to do works better in December. That’s just something you would have to figure out for yourself after checking your results for a while.

I’ve noticed that there are some months that are worse. Obviously if there’s a best month and there’s going to be a worst month, right. Some months I don’t do good as well. I don’t do as well. When I want to take a vacation, guess which month I’m choosing. I’m going to go in those lower months. Knock on wood, every month overall has been positive. Going back over the years, it’s not like, okay, every October is horrible for me, but I do have more losses in October than normal. Is it October? I think it’s September actually. In September or October I will cut back on my trades. I will trade less. I will go in with higher probability, I will be more on top of the ball, I will pay attention more, I will take on less other commitments. That’s just because I know my own trading habits. I know my own records, right?

I’ve been doing the reviews, I know where I’m strong, where I’m weak, and so if I’m weak in a particular month for whatever reason, maybe the market is just more volatile that month. If that’s the case, then I need to be on top of it. It’s not a normal month, you know, you’ll see the seasonality, you’ll see all these patterns when you do these reviews and then you’ll realize how you can adjust so that you can flat line it, because every month you want to have a winning month. Right? The way I do it as I go month by month by month, those are my little subsections of the year. So I want to have a winning month. Every month. Doesn’t happen all the time, but most months should be winning months. Most year should be winning years and if I find these patterns that can help me turn a losing month into a winning month, then that’s all better. Right.

That makes a big difference on my whole return for the whole year. Another question I would ask myself is, are there any stocks that I should stay away from or are there any stocks that I should go all in on? Stocks do change their patterns from time to time. A stock could be a great stock for a year, two years, and then something happens and it changes where it’s not good to be selling options on anymore. That happens a lot. A new CEO might come or they might go in a new direction or they might sell off part of the company or they might get into financial issues. Who knows what, there’s stuff that goes on. For example, Chipotle, I’ll give you that example. This one for me was an awesome stock for a long time. Chipotle was awesome. It couldn’t do no wrong. It was just going higher and higher and higher and I made a lot of money trading Chipotle.

Then they had their health food scare, you know, they had the E. coli breakout and some people got sick, so they closed down one store. All right, one store. That’s an anomaly. It’s a blip. It’s okay, everything will be fine, but then it happened in another store and another store and they had to … They had a whole big issue and for a while Chipotle was a stock that could not be traded in my view in selling options sense because it was too unreliable. It was too volatile. You didn’t know what was going to happen. You don’t know if they were going to shut down more stores, go out of business, you know, get shut down by the FDA. You didn’t know what was going on. That was a stock that we had to stop trading, before it was great but then all of a sudden, boom, it switched, it changed. That happens. You have to go through your results and say, okay, you know this stock was great for a long time.

Now it’s changed so I need to stay away from this stock. Let me take it off the radar. Let me take it off my screen so that I stay away from it. Because if you say, okay, hey, I traded whatever, Apple every month for the past year and the probabilities just didn’t work out. I should’ve won eight out of 10 times and I only won three out of 10 times. Okay. If I’m following my trading plan, then maybe it’s the stocks problem. Maybe it’s a stock that’s the issue, not me, not my trading. I can take that money, take it out of Apple, stop trading Apple for a while and put it into some other stock and hopefully the numbers will change and I’ll start making money. You can’t fall in love with a stock or a trade. Like I fell in love with Chipotle for a long time. I loved it.

I did it all the time. I did it every month, but then it changed and I had to realize that and I had to look at it and say, this is not a one time thing. This is not a one month thing. This is a fundamental change in the stock movement. I had to stop completely trade again. You have to stay on top of those things. Then there’s on the other side, there’s the stocks that you want to put more money into because they just happen to work, you know, month after month they just happen to work. They’re very calm, they’re very reliable, they’re very steady and they just work. Chipotle was like that. That would be something that, okay, I’m going to focus on this stock, I’m going to go all in on this stock, and by all in I don’t mean like 100% of your money.

I mean like a little bit more than the other ones, you know, but you focus on it. You read the headlines, you listen to the conference calls, you know what’s going on, you know how many stores are opening, you know what their dollar per customer is, you know all the details about that particular company so that you can tell if something changes, right. When you know a company, you know, okay, hey, there’s no big surprises coming up. I know what’s going on. You can put more money to work in that company, you can maybe buy some shares, sell some covered calls, do some spreads on it and make more money while the going is good. Keeping in mind that the going could change at any time. While it’s good, time to cash in, time to do that. You might not realize that until you do your review.

One of the stocks that I realized I was doing really well with last year was Intuitive Surgical. This is a stock that has been doing really well, but it wasn’t on my radar. I was trading it and I was like, oh, this is a great chart. I was trading it every once in a while but until I did my review I didn’t realize. I was like, whoa man, that’s done a lot of trades and they’ve all worked. They’ve all done really, really well. Okay. Maybe I need to do this a lot more often. Okay. Maybe I need to go researching more, learn about it more what’s going on with this company and maybe I need to put more money to work. That’s another thing that you would find in your reviews on. Well those are the questions I would ask and then after I’m done with all my questioning, after I’m done finding whatever patterns I could find, then what I do is I go back to the office.

I have this software that’s called OptionNET Explorer, OptionNET Explorer. It’s a back testing software. What you can do is you can actually go back in time to a certain day put, you know, I take all my losing trades. Let’s say I lost money on my Chipotle trade. I’ll type in Chipotle. Go to the day I put the trade on, I can look at the chart from that day. I can look at all the options prices from that day and then I can put my trade on as if it’s that day and then I can walk it forward day by day by day and I can see what my trade was doing. I can see what the stock is doing, I can see how my trade is doing, how much is it up, how much it is down, what the Greeks are for that day for those options. It’s basically as if I’m going back in time and walking through the trade day by day by day.

Since this was a losing trade, I can take a look at it and I can say, okay, this was happening, this was happening. I should have adjusted here, but I didn’t. I should have done this here, but I didn’t. Oh wait a minute, I did this instead, or I just did too late, I just did too early. I can try to figure out why the trade didn’t workout. If it’s my fault, then I can take notes and I can work on that. Now, not every trade can I actually learn something, from some trades. You just leave it up to fate and you know, they just didn’t work out. That’s fine. But a lot of the trade, especially in the beginning when you’re learning, you can go back and realize and say, wow, I really messed up here.

I needed to do this instead, and it just didn’t work out because I didn’t follow the plan or I didn’t do that particular step or maybe I used the wrong type of adjustment. You could do one type of adjustment, maybe it didn’t work out, but what if you had done a different adjustment, you can go back in time in the software and do that. That’s what I like to do with all my losing trades. This is how I like to do my reviews. Just sit back, take a few hours, go through all your paper trades, go through all your paperwork. If it’s on a laptop, it’s not as … That’s why you can have computerized stuff to track all your trades, but you got to have a good bit of information on every trade. You can’t just say, the stock was at 100 and I did the 110 calls. No, what was going on with the stock? When is earnings?

How volatile has the stock been? What’s the delta on the stocks on the options that you’re trading? What do you think is going to happen with the stock? Is there any news coming out? How many days to expiration? All of these types of information you have to know and you have to record it so that when you go back and you do your review, you can actually tell why stuff happened and why it didn’t happen, why it worked out, why it didn’t work out. Was it your fault or was it not your fault? If it’s your fault, why was it your fault? What did you do wrong? Then how can you change that to make it better? That’s the name of the game. That’s how we play. Put on a trade, record everything. Do the trade as best as you can, and then once it’s over, record the final results.

Then after a while, go back and look at all of them together because if you look at a trade that happened a month ago, you still remember why you did what you did. You still have some bias, like oh yeah, yeah, yeah, I remember. I didn’t adjust because this guy came on the radio and he said this, this, this, this, and I believed him so that’s why I didn’t adjust. Okay, but six months from now, you’re not going to remember why you didn’t adjust. All you’re going to remember, all you’re going to notice on your records is I did not adjust on time. I messed up. It doesn’t matter what the reason was. It matters that you did not follow your trading plan. I mean, if you want to write down, you could write down, hey, this guy came on the radio and I didn’t adjust because of him.

Well, if you have that in your paperwork and you realized that you’ve been listening to this guy regularly, you’ll have an idea of when he’s right and when he’s wrong. Actually you’re logging it down. If you go back and you say, you know, I lost money on these eight trades and on all eight of them I was listening to this one guy. Well dang it, I got to stop listening to this guy. There you go. You found your pattern and then the next time that you’re going to review, you’ll be like, oh, I didn’t have any losses because I stopped listening to that guy. That’s the purpose of the review. You go back, figure out what you did wrong, see if you can improve upon it and eventually you want to get to a place where you don’t have to review ever. But because we’re human, because we’re people were emotional, that never happens.

You can always learn by going back and reviewing. It doesn’t matter how many years you’ve been doing this, you always have to go back and review and then you can take it even a step further if you want. You can have somebody else review your stuff. Somebody that knows how you trade, somebody that knows the strategies, right? Then you give them all of your documents, all your paperwork, and say, I would like you to review my stuff while I’m not in the room and see what kind of conclusions that they draw from your trades. I mean, that’s taking it to the whole next level, but you don’t need to do that right now. Just focus on yours. I’m sure you’ll learn a ton every time you do this. I still do and that’s why I do it on a regular basis. That’s it. Pretty simple. All right guys. Talk to you soon. Bye.



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