There are any number of reasons why a trader hesitates before a trade.  The main one is lack of planning.  Without a plan, there is no degree of confidence a trade will be successful, it’s all wishful thinking. Unless they are outright gamblers, traders usually have a strong need to protect their assets and avoid risk. This is especially true for beginning traders. It can take a long time to build up sufficient capital for serious trading. By that I mean sufficient capital to be able to trade for a living. It is quite understandable to fear losing all or part of your initial capital. Beginners tend to seek absolute certainty before taking a risk, and gaining true confidence in you ability to trade successfully can take time. Unscrupulous marketers of mechanical trading systems and methods take advantage of the beginners fears and lack of confidence by advertising “sure-fire” “magic” ways to trade, instead of revealing the truth about the difficulties in becoming a consistently successful trader.

When it comes to short term trading, there isn’t very much time for long deliberations. Market conditions are in continuous flux. Decisions need to be made relatively quickly, and if one waits too long to execute a trade, he or she may miss a significant opportunity. The reasons for hesitation are everywhere, and traders must be aware of them, and create a plan to prevent them.  Let’s look at a few of the things that cause traders to hesitate:

The complex charting software available these days tends to increase hesitation.  Traders think that the more confirmation they can get from indicators, the more certain they can be that a trade will be successful.  However, all indicators lag the market. The notion that an indicator can somehow predict what will happen once a trade is entered is nothing more than wishful thinking. An indicator may give some degree of confidence about entering a trade, but the indicator cannot trade the trade, only the trader can do that. Once a trade is entered, it becomes entirely a process of management. It’s tempting to look at as many indicators and signals as possible. Doing so, however, can be very time consuming. That’s why seasoned traders advise looking at only a few if any key indicators.

Hesitation is often related to a lack of confidence in the trader’s trading strategy or trading ability. There are numerous reasons for such lack of confidence. Some of the reasons are shallow and mostly on the surface, like being distracted by watching financial TV while trading.  Other reasons are more deep-seated, and actually reflect psychological problems dating all the way back to early childhood.  A trader may not believe that his or her trading plan is adequately developed.  Nevertheless, they are determined to trade, so they muster up their courage and finally jump into a trade almost guaranteeing that the outcome will be a matter of pure chance.  Some traders may question their trading plan because they know that they did not spend enough time preparing it. Sometimes hesitation is intuitive, warning the trader to avoid the trade. All too often, traders are not tuned into their own intuitive feelings.  In the case of intuition, hesitation can act as a motivator. If the trader feels the hesitation is because of lack of adequate preparation, then that trader must learn to spend more time preparing for trades. By studying the markets a trader can come to see new higher probability setups, thereby reducing doubt and indecision, and in turn stop the hesitation because of more adequate preparation.

Hesitation sometimes reflects a deep desire to be right and a fear of being wrong. It has been our experience that many of the people who are attracted to trading fit into this category.  Great care must be taken by physicians, engineers, scientific types, and mathematicians, who seem to be the most prone to this type of hesitation. They are often perfectionists afraid to face their inadequacies. By putting off a decision, they don’t have to face their limitations, and can pretend they are better traders than they really are. If I had the time and space, I could give you dozens of examples of this kind of hesitation.  The perfectionist’s reality states that everything must be in order and follow rules.  They think strictly inside the box.  They want everything to be perfect, so they continually second guess and doubt themselves and what they are doing. They believe that they cannot cope with being wrong. This occurs in trading decisions as well as other life decisions. Extreme perfectionists often think that once they make a bad trade, it will be the start of a downward spiral and a complete blowout of their trading account.

Hesitation very often relates to low self-esteem or other deep-rooted psychological issues. We see these more times than we would like to.  Traders with low self-esteem usually lack confidence, not only in trading, but other areas of life. Beneath it all, they doubt their ability to trade, and hesitate making a trade until they the guilt of not doing so overcomes their fear.  At that point in time, they enter a trade out of pure compulsion driven by guilt.  This exposes them to a trade with no real plan to support it.  They become victims of pure chance.  We also find that traders who hesitate may have a conflict regarding their success. They can actually fear success.  They have been told by parents or others that they were no good, that they would never amount to anything, that they were “bad.” These people strive for success at one level of their consciousness, but at a deeper level, they secretly believe they cannot attain it, or do not deserve it.

Identifying, directly facing, and eventually eliminating a problem of hesitation is the only way to truly deal with it. Chronic hesitation will eventually destroy the confidence a trader needs for success. If the problem is not dealt with and the traders continues to hesitate, miss important market moves, and see his or her equity begin to dwindle, that trader runs the risk of becoming a phantom trader, a pretender, becoming convinced that the imaginary trades being made are real. If you are prone to hesitation, it’s vital that you deal with this problem early in your trading endeavors. Identify the reasons for it, confront the problem, and make changes as soon as possible. These are changes you have to make within yourself.  If you will truly engage in self-examination with the object of eliminating hesitation, you can trade become consistent and successful in trading profitably.

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The ingredients of success in a stock market are very basic namely surplus money, risk appetite, intuitive skills, rational approach and a flexible strategy.

Anyone can earn money if he can predict the trend and take a position accordingly. However, the art of trading or investing may not come naturally to one. We need to practice in order to develop the art. We need to be chivalrous, understand the market makers psychology and out-smart him.

Asset Allocation: implies balancing your exposure in various asset classes of Equity and Derivatives. One may invest 80% of their portfolio’s worth in Equity and the remaining 20% in Options (Derivatives). As the risk appetite increases and the understanding of market dynamics unfolds, the % of asset allocation may be tilted but not beyond 60% equity and 40 % Derivatives.

To elaborate more on the Strategic part of investments I shall quote an example.

Nifty50 is composed of stocks of top 50 most reliable and consistent Blue chip companies of India. Nifty50 is a diversified index and thus has companies from different sectors like FMCG, Oil & Gas, Metal, Realty, Bank etc. The fluctuations in the index may be because of Market news, Sector specific news, Stock Specific news. One sector may go up leading the Nifty50 index higher whereas some other sector may pull the index down. Herein you may have the following kinds of trading strategies.

The profits earned should be reinvested suitably to maintain the asset allocation ratio. Always remember that ‘Discipline’ is synonymous to success in the Stock Market. For any queries please email to Abhinav5884@yahoo.co.in

The above article is a brief for people who understand the terminologies of stock market.

Profit is all about to understand the market conditions clearly, before trading and doing right things at the right time. This is said easier than done. For a new investor, the beginning has to be on cautious premises. Choose blue-chips companies, whose reputation is above board and which have been consistently paying dividends and bonus/right issues. Alternatively, in the course of your research, you spot some companies whose share prices are low, it means that you have managed to beat the market and this investment is likely to fetch you good profits.

When you are unable to catch the trends of the market, and move away from them, instead of beating the market, you are beating the retreat. In such conditions, take advice from reputed stock analysts, who can tender appropriate advice, on the basis of the inputs secured from the fundamental and technical analysis. No method provides one with 100% guarantee of success, but workout such plans so that the odds are in your favor. The results of the research before you provide confidence, you understand the market better, and catch the right signals. In addition, your psychology and sentiments are important part of your trading and they are the practical elements in making money. When you provide suitable cut loss limits, they will keep you off trouble and you are able to prevent major losses.

Profit from share trading is not a profound science. The methods to deal with the exchange are amazingly simple. Only you need to employ them effectively and in a timely manner. If you are able to catch the signals of early stage of price rise movements, one can take advantage of the maximum profit opportunity with minimum chances of risk and losses.

Any condition is a good condition for a shrewd investor. The market bows before such investors, and provides them with a series of profit opportunities, whether the shares are moving up, down or sideways. Those are the masters of option trading. Such people wear ‘all weather proof jackets.’ They are mostly stock trading millionaires.

In any given market conditions, as far as possible, avoid day trading. Howsoever great are your strategies, risk looms large in such trades. Intra-day trading in the same security is fraught with great risk. Some one with limited resources and trading experience and with low risk tolerance should not enter this trade zone at all. Those who claim large profits from day trading, are perhaps are conducting their clandestine business to promote a particular share of the company, with some hidden agenda. Even in the normal course of day trading, your competitors are professional licensed traders engaged by securities firms, institutional finance companies and the commercial banks. A small investor stands no chances of engaging them in voluminous trades.

For immediate profits, option trading strategy is less risky and the chances of profits are more. There are many kinds of option trading strategies. Call Option, Sell Naked Put Option, Bull Put Option, Bear Put Spread, Straddle, Covered Call, and Short Straddle etc. Use these strategies as per your specific portfolio needs.

When you think of making profits in all market conditions, it is important for the investor to know, in which condition the market is passing through at a given moment. Unpredictability of the market is well-known to all investors. It so happens, when the well is full, you do not have the drums to store water, and when you have enough empty drums, the well is empty! Such are the tantrums of the share market; one fails to appreciate, its behavior. You can not question it with your reason, only accept the fact and respect the trends. There is no other way to do business dealings in the share market.

REIT’s, commodities, large cap, international, emerging markets, convertible bonds, defensive stocks, took severe beatings in 2008. Every company that was considered “too big to fail”, or so conservative that it shouldn’t have failed, did just that. Whoever said “No two bear markets are alike” certainly got that right. Even Warren Buffet’s Berkshire Hathaway stock (Symbol: BRK) experienced a -54% peak-to-trough trading range in since December 2007. There has never more uncertainty among Investors approaching retirement, CFA’s and mathematically minded financial services participants, as the market’s nervous reaction to every “take it to the bank” arbitrage in 2008 became temporarily disconnected.

Author Roger Lowenstein has spent considerable time analyzing those who come to trading by way of the traditional route. In his book, When Genius Failed: The Rise and Fall of Long Term Capital Management1, Lowenstein wrote that “those who are attracted to mathematics and analysis are drawn to fixed income and convertible bond arbitrage because much of what determines their value is readily quantifiable.”

I suspect financial planners and sophisticated investors in general, are a similar breed. The financial planners I know are well educated, mathematically minded, and contemplative. They’re attracted to the certainty of planning, and their vocabularies are peppered with terms like annuity, CAGR, estate planning, efficient frontier, MPT, asset allocation, risk-adjusted return, and diversified portfolio.

On the other hand, those attracted to floor trading, like me are typically emotional, anxious, and highly intuitive. Like hungry street urchins, we rely on quick reflexes and the general belief that it’s more important to be first on a trade than it is to be right. And like any self-respecting trader, we thirst for a little excitement. In fact, we can be described as the liar’s-poker-double-espresso-filled-undiagnosed-ADD-patients-who-trade-triple-beta-ETFs-because–anything-less-than-a-Volatility-Index-level-of-70-is-too-boring orphans of the industry.

Terms that an options floor trader may use on any given day are a bit different than those of a typical financial planner and include skew, kurtosis, theoretical edge, risk reversal, I-Wham (Russell 2000 ETF; Symbol: IWM), implied volatility, assignment, dollar-weighted deltas, and slop.

When I started on the trading floor of the CBOE in 1982, I was 22, and the majority of the traders in those days were from blue collar, Irish families who treated day-trading with the same mentality as a plumber who lays pipe or a carpenter who frames a wall: it was a job.

I spent the majority of my years at the CBOE in the OEX pit, where the practice of hiring MBAs was discouraged – even derided. Why? It was believed that you couldn’t teach a business major anything. And that might have been true: they weren’t pliable enough to mentor. Floor traders needed to have an intuitive sense of risk management and quick reflexes to maneuver around short term market moves. With an eye toward disaster, they frequently owned out-of-the-money puts. Countless arguments erupted between the quants, who understood the mathematical impossibility of a 23 standard deviation move during the Crash of 1987 and the floor traders who had no idea what a standard deviation was, but who did know that they would lose their homes if the market dropped substantially.

And they figured – without the aid of a calculator – that their wives would be really, really mad.

Lowenstein cites how Nobel Prize winners Fisher Black, Myron Scholes, and Robert Merton, who created the famous option pricing model known as Black-Scholes, disagreed with the fat tails or steepness of volatility skew that floor traders priced into out-of-the-money put options. To the creators of the Black-Scholes option pricing model, volatility was a constant, log-normal distribution.

“Merton carried the assumption a step further,” Lowenstein says. “He assumed volatility was so constant that prices would trade in continuous time, without any jumps.”

Today’s options traders need a firm grasp on the nuances of volatility skew, kurtosis, dollar-weighted deltas, and Vega. Yes, we have high speed computers that process tens of thousands of theoretical values in hundredths of milliseconds and seven billion stock and option quotes per day sent from exchanges.

But can the emotional and often volatile pit trader offer anything to the structured, well educated financial planner? The answer is yes. The truth is that you don’t need anything other than a simple calculator, the right kind of experience, and often, a little out-of-the-box thinking to achieve a terrific rate of return. After all, it is said that some of the best inspirations come from outside the box.

And who is more outside the box than an options trader?

I was struck by a comment made by CFA Adrian Cronje, who was quoted in the Journal of Financial Planning, January, 2009 issue, as saying, “The good news is that for the first time in many years, investors are now being paid to take risks.”2

Investors are being paid to take risks. Imagine that.

Nowhere is that statement truer than in the current environment of options trading and covered call writing. To be more accurate, investors are getting paid handsomely to take less risk. Recent market volatility has created a once-in-a-generation perfect storm, a history making blizzard favoring the individual investor and featuring:

1.  Unprecedentedly high option volatility levels due to the credit crisis

2.  The inability of investment banks to participate in trading due to their de-leveraging

3.  Clearing firms uniformly reducing risk across all market participant

4.  Continued fear of the downside

Cronje, Adrian, Journal of Financial Planning, “Is Markowitz Wrong?” ;(Jan 2009)

5.  Massive de-leveraging of hedge funds and 130/30 strategies

6.  Generational low interest rates

7.  Pensions and endowments rumored to be selling assets to meet cash obligations rather than rebalancing strategic allocations

Financial Planners and investors may want to brush up on basic option theory especially covered call writing tactics and read the academic white papers on the higher risk adjusted returns covered call writing provides as the nations 76 million baby boomers will be looking to planners and advisors for help in rebuilding their portfolios and simultaneously converting their “buy and hold” portfolios of growth stocks to a vehicle that delivers substantial retirement income.

Retirees are tired of hearing the endless droning from pundits discussing the benefits of greater asset allocation, cutting monthly expenses or promoting the benefits of being a Wal-Mart greeter.

Endnotes:

Lowenstein, Roger, When Genius Failed: The Rise and Fall of Long Term Capital Management (New York: Random House, 2001), 67-68, 76-77.