in a different expiration that could offset the
loss? Finally, is there an unexpected reason
the trade is losing money? Maybe it’s not
just the stock price moving against it. Maybe a change in volatility or time is hurting
it. Maybe the position is too big. In a word,
take an honest inventory. Give the loser a
long, hard look—the position’s greeks are on
the Position Statement. See how implied
volatility might have changed by looking at
the ImpVolatility study on Charts. Is there
something to avoid in the future?
WAITING FOR THE PERFECT OPPORTUNITY
A NALYSIS. Rely on criteria that let you separate bad trades from potential opportunities.
That criteria could be something like reward
versus risk. Or positive theta* and defined risk.
Or strong financials and diversification. You
might also consider charting patterns and
technical analysis if that’s your thing. Your
goal is not perfection. Should you add too
many variables, you might never find the right
spot to dive in. Do your homework but avoid
waiting for a perfect opportunity that may
AC TIONS. Above
all, it becomes a
question of how
you have in your
core strategy. Use
platform in thinkor-
swim (Figure 1) to
trading without real
money. It allows
you to put on that
trade and gauge
its progress. This
practice run could
help you refine your
approach, kind of
like the golfing sim-
ulators that let you
swing a real club as
you watch a digital
ball. If you make a
mistake, you hit the
SUFFERING FROM ANALYSIS PARALYSIS
ANALYSIS. This pops up in trading often.
Markets are infinitely complex. You can
always ask one more question about a stock,
company, or strategy. If you could just answer one more question or run one more test,
you’d do the trade. This is related to number
three above, but there’s a difference. Your
indicators line up, but you’re still not going to
put on the trade. At some point you may need
to put on a trade.
AC TIONS. Look at your account’s Net
Liquidating Value (Account Info section) in
the upper left-hand corner of thinkorswim.
The “net liq” shows how much your account
is worth. Now assume a potential trade has a
max possible loss. If you don’t know what the
max loss is, load the trade up as a simulated
trade on the Analyze page to find it. Now
divide that max loss by the
net liq of your account.
What’s the percentage? This
puts the potential loss in
perspective. If your net liq is
$5,000, and the max loss on
a short vertical, for example,
is $70, the loss would represent 1.4% of your
account value, not including commissions.
You don’t want to lose 1.4%, but is that a risk
you can accept for a given strategy? If you
have confidence in your strategy, you should
be able to answer that question.
Engagement = A Sharper Trader
If you do more than just trade and pay
attention to the underlying conditions of
the trading course (as it were), you’ll build
knowledge, experience, and a much deeper
understanding of how the market expresses
itself. It doesn’t guarantee profit, but over
time, you can gain a certain amount of expertise, wisdom, and instinct.
It’s not always just about buying and
selling, but about how you take control of the
investment process. If it’s sunny and windy,
your trading “ball” could end up in the next
county. Be prepared.
FIGURE 1: Look familiar? It should. The paperMoney trading platform in thinkorswim is just like the real thing—
almost. You can test your not-so-sure theories without risking real money.
The covered call strategy can limit the upside
potential of the underlying stock position, as the
stock would likely be called away in the event of
substantial stock price increase. The paperMoney®
trading application is for educational purposes only.
Successful virtual trading during one time period
does not guarantee successful investing of actual
funds during a later time period as market conditions change continuously.
Waiting for Godot?
That perfect opportunity
may not present itself, but
just in case, one option is
to set an alert to notify you
when it does and go on
with your life. You can set
alerts on everything from
price targets to drawings.
Go to Alerts in the
Market-Watch tab to set them up.
Stop Market Order Upon activation, a
stop market order becomes a market order.
The benefit of a stop market order is that
it will seek immediate execution once the
activation price has been reached. The
disadvantage of a stop market order is
that the client does not have any control
over the price at which the order executes.
There is no guarantee the execution price
will be equal to or near the activation price.
Stop Limit Order An order to buy or sell a
stock that combines the features of a stop
order and limit order. Once the activation
price is reached, a stop limit order becomes
a limit order that seeks execution at the
specified limit price or better.
The benefit of a stop limit order is that
the investor can control the price at which
the order can be executed. However, a
stop limit order also carries the risk of
missing the market altogether because
it may never reach or it may surpass the
specified limit price. In a fast-moving
market, it might be impossible to execute
an order at the limit price, so you may not
have the protection you sought.