Demark on Day Trading Options: Conclusion

CONCLUSION

For so many years the stock market has defied the laws of gravity. Any and all pullbacks were perceived correctly by investors as opportunities to buy. From the comer grocer to the teachers at school, everyone was participating in this meteoric market rise. Almost each and every stock market investor, regardless of gender or age was on an unprecedented historic financial roll, making money hand over fist in the process. Mutual funds, bursting with cash inflows at a record pace, were the vehicle of choice for most preoccupied investors; whereas independent-minded investor entrepreneurs challenged themselves to the task of investing their own money. The testimony to their successes is chronicled each and every day in the financial pages of the press.

Needless to say, a secular tide into the stock market of record proportions has been afoot and has made even the most reckless, unsuitable, and ill-timed investment decisions appear near genius. By definition, as the market records all-time highs, no previous buyer will have incurred a loss. The question posed by this audience of investors has not been how much longer this perpendicular market rise would perpetuate itself, rather it has been how long it would take the market to exceed each 1000-point threshold barrier. Throughout this unprecedented move, the only concerns expressed were those of veterans of past bear markets. However, it became clear that the barometers and the benchmarks these professionals applied successfully to markets past had no bearing, application, or relevance to this record-breaking stampede. Fortunately, for the sake of the public’s portfolios, the concerns and admonitions of these pros by and large fell upon deaf ears. Investing was never intended to be this lopsided and easy!

In hindsight, it appears to have been preordained and inevitable that many investors would perceive the evolution from investor to trader as a natural progression, requiring no additional abilities or experience, only more time and access to information. The first handful of defectors from the ranks of investors were described by their compatriots as pioneers. It was only a matter of time before other investors exhibited similar yearnings to become traders. The resulting success and wealth that investors have enjoyed has served to foster cravings to acquire more quickly even more success and wealth. The pattern is predictable and, unless properly prepared, a trader is doomed.

As Bob Dylan had groaned prophetically so many years ago, “the times, they are a changing.” Indeed, not only have the dynamics of the market changed but so too have the composition, mood, and outlook of its constituents. All the major obstacles of the past which precluded broad, active public participation in trading, such as high commissions and research costs, have been dismantled or removed. The supply of research information, news, and data has been made available on a timely basis to large and small investors alike. We have observed that a fledgling trader’s market behavior is initially subdued and controllable. However, the distinct risk to a trader exists that the lure and the expectations of large and immediate profits become irresistible. Unless a trader is properly prepared to deal with these temptations, failure is a foregone conclusion.

The accounts of a day trader who sits in front of a quote machine barking trading instructions to a broker and making obnoxious amounts of money have been embellished over time to include exorbitant cash payments for vacation villas, private jets, yachts, and other trappings of the rich and famous. While these and similar outrageous stories permeate this industry and infiltrate an investor’s psyche, no one has produced any documentation describing the process whereby traders can educate themselves to become such enviable market trading mavens. The mystique and reverence attached to these few legendary trading deities borders on a mania and hysteria which surpass those associated with modern-day cults. Such individuals do exist but their population is limited to but a rare few. Within the investment community, this frenzy conjures up fantasies more elaborate and personal than those enjoyed by children awaiting Christmas morning.

However, traders are human and are held victim by their emotions—this message is delivered every day by the ultimate judge, the marketplace. Don’t you think that if all traders were destined to be successful, trading would be the profession of choice? Despite the perceptions you may acquire from exaggerated media accounts, movies, or acquaintances, the potential rewards associated with trading are just too great for this exercise to be so easy. In life, as in physics, there is a direct correlation between energy exerted and productivity. Successful trading not only requires the intelligence and the knowledge to select suitable trading candidates, but it also requires the emotional wherewithal to act and react prudently and reasonably, independent of the activities of other traders. An element of street sense is a non-quantifiable but essential quality, which often distinguishes a mediocre trader from a great trader.

To graduate from an investor to a day trader is a feat accomplished by very few. It’s easy to construct a profile of a successful trader, detailing the trader’s skills and attributes, but just as it is difficult to reproduce a recipe for grandma’s famous apple pie, the formula for creating the ideal trader is likewise vague, inexact, and nondescript. Granted, it is virtually impossible to transform an investor into a trader by following a prescription in a book, but there are certain prerequisites which are obvious and essential and can be communicated.

One way to accelerate a trader’s education is to provide a series of objective techniques which should facilitate the trading process. That is our role and in order to fulfill it we expanded the original scope of our book to include numerous market-timing indicators. The best way for a trader to accomplish the implementation of these methods is to avoid as much external interference as possible. This includes prudent and sound money management principles. Above all, traders should avoid at all costs relying upon their trading successes to support their lifestyles. Adherence to such a practice invites tendencies and excuses to wander and deviate from one’s trading game plan. Other admonitions include the establishment of a trading structure, the refusal to be influenced by others, and the practice of trading discipline. We also suggest that a trader establish a psychological balance between the challenge of trading and winning, and the necessities of earning a comfortable living.

If you have read this book to this point, you are likely the type of individual who possesses the mental discipline, interest, and wherewithal to trade options successfully. We must admit that our first few perusals of books on option trading were bland, dry, and unappealing episodes. We recall using a magic marker to highlight those areas of text which we believed to be the most important or were unclear and, lo and behold, upon the conclusion of the book we realized that we had unknowingly painted the entire book yellow. This was certainly a backhanded testimony to our lack of understanding and utter confusion. Hopefully, by providing an option trading process from the perspective of the option buyer, we have piqued your interest in the subject matter of day trading options and, at the same time, kept the discussion sufficiently simple and educational.

To simply declare oneself ready to pursue the profession of day trading is the easy part. To be disciplined and control one’s emotions and to install the necessary money management skills are essential components of success and are difficult to acquire. To install trading indicators and to apply and follow them objectively is likewise difficult. Day trading stocks or futures is no simple task, but to day trade options on these securities poses other greater risks since these instruments are more leveraged and can expire. Timing is the key to success, as is the preservation of capital. We believe success in trading options is a result of timely anticipation of trend reversals. Prior to the reversal of a trend, if a trader wanted to position him- or herself against the prevailing trend, option premiums would be low since trading interest is concerned with the outstanding market trend. That is the ideal time to evaluate trading opportunities. We have presented a series of indicators we believe to be helpful in identifying pending trend reversals. Although no person or market model is infallible, we believe following an objective game plan or strategy gives a trader a tremendous edge, as well as reduces the strain he or she would likely feel blindly trading without a market-timing compass.