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Derivatives traders at a New Zealand-based hedge fund, 36 South Investment Managers Ltd., scored a 236% gain in the last 12 months trading long dated options contracts. The co-founder, Jerry Haworth, stated what should be obvious to options traders when he said that trading options contracts is “an amazingly lucrative niche and there are few players in it.” This gain is documented and is legitimate (READ FULL STORY HERE).
On the other hand, you have Bernard Madoff, who promised just a 10% annual return and now those returns are now being scrutinized as pretty much impossible to achieve over a long period of time. The difference, of course, is pretty obvious. Bernard Madoff, by his very admission, is a fraud who obviously could not face his own mortality as a trader (i.e., pain of loss) and took advantage of investors. 36 South Investment Managers Ltd. developed a trading edge and took advantage of it and, in turn, enriched its investors. Can their success continue with another edge? We will just have to wait and see. In the meantime, here are some lessons for THE CROSSHAIRS TRADERS:
1. Finding an edge or a high probability event (such as a historically tested trade set up) is essential to long term trading success. There is non-random behavior hidden within the randomness of the markets, you just have to find it and exploit it over and over and over…again.
CROSSHAIRS TRANSLATION: In order to fight another day you must have your battle plan in place-a battle plan that has proven to work on similar battlefields before.
2. Success is found in taking full responsibility for your trading habits. These habits include the willingness to admit when a trade or investment is not working. Admit it, close it, and get on with it. Wait for your next edge and then trade it again. It is not your fault if the trade does not work; the fault is found in not admitting it soon enough. A loss of 10% is much easier to overcome (and to admit) than a loss of 70%.
CROSSHAIRS TRANSLATION: The general takes full responsibility for his battlefield decisions. If the decision proves incorrect, then he retreats from the battlefield and waits for another fight.
3. Do not focus on the percentages, instead focus on the patience it takes to wait on your next edge to develop. One of the deadliest mistakes an inexperienced trader can and will make is that of overtrading, wherein the only one making money is the brokerage house. Test your edge with historical data on a particular stock and see how often your edge has occurred over a period of time. For example, when using a daily chart you may find that your edge for AAPL occurs, on average, twice a month and you have already traded AAPL 6 times this month with little success, then you might be overtrading.
CROSSHAIRS TRANSLATION: Focus on what has worked on previous battlefields. Over committing soldiers can deplete your ammunition. If a soldier has just fought, then let him rest.
There are great lessons to be learned from the failures and successes of others, if we would only listen.
“Listen and be led.” L.M. Heroux.
TRADING IS WAR. PREPARE YOUR WEAPONS.
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