Life’s not always fair…
You can work your butt off, but that won’t always guarantee success.
For instance, many people attend college, go thousands of dollars in debt … when they graduate, there’s no guarantee they’ll land their dream job … let alone a job.
You still have to pay your dues and work your way up.
Trying to make money in the stock market is not very different.
The reason why I created OptionSIZZLE is to help change people’s lives by empowering them with the knowledge to take control of their financial future. I’ve been in contact with thousands of people over the last 8 years.
I’d love to say that everyone that has come in contact with us has made money…
However, that wouldn’t be the truth. I hate losing money, but you know what I hate even more?
Hearing about one of our members losing a lot of money because they didn’t follow what we taught them.
I found myself thinking about why most people struggle making money or success… while only a few can make it work.
You probably heard that 80% lose money, which is an unproven statistic.
But… what are the common reasons why most fail at trading options?
After sitting back and reflecting, I’ve realized some of the main reasons why most people struggle when trading options… when you read them, you’ll be surprised to see how it resembles to most things in life.
Here are the three main reasons why, I think, investors lose in the stock market…
Depending on who you talk to, their opinions on risk vary. Some think it’s some kind of evil force, while others abuse it.
Most of the time, risk is just viewed as fear. What I mean is the absolute worse case scenario.
Risk by definition only means the exposure to danger, harm or loss.
Everyday you’re alive, risk always around you … it’s always changing depending where you are and what you’re doing.
However, you wouldn’t lock yourself in the closet all day would you?
No you wouldn’t, but people do that when it comes to their money.
Unfortunately, most people have a bad encounter with risk and don’t fully understand the probability of the worst case scenario occurring.
When you view risk you need to understand the probability.
There is nothing in the world that provides low risk/high reward ratio.
Sometimes in life, we don’t receive the instant reward we seek… some years you might not make as much as other years … that’s just life.
When it comes to trying to make money in the financial markets, most people get involved without the right education because they think it’s intuitive.
Most of the time beginning investors and traders start learning the basics with real money and end up losing a lot of money and shy away from the markets.
Some get by… until they start using the leverage of options… then things quickly go bad.
The reason this occurs is due to the fact that most start out with investing and trading stocks … stocks cost more money for a reason, they provide a 50/50 coin flip on being right.
Most are long stocks while in a bull market, they see their account value increase and so does their confidence.
They become very confident in their ability to invest and trade in the market.
They venture off into the options market because they’ve heard how options provide leverage, which allows investors to make more with less.
Without the right education and knowledge of market mechanics, they don’t understand the risk/reward.
The market has the ability to deflate and inflate an ego of a person, when they are looking at their account value.
When most get started with options, they buy options … thinking they will work the same way as stock, which they don’t.
They either see them lose value because of time or implied volatility. Because they didn’t understand the leverage, their accounts will take big hits. They sometimes continue down that road … until they draw down to a point where they just give up.
When you buy options, the probabilities of success could be around 30%. It provides the opportunity for unlimited profit. However, I have talked about this many times … there is no such thing as unlimited profits.
When you sell options, the probabilities change and can be 70% or higher. However, you do put up more principal than your reward.
You can do a lot for yourself just by sizing positions accordingly. By properly managing your position size, you’ve already managed a portion of your risk before entering the trade.
I approach the market by looking at probabilities and understanding my overall risk.
Here’s a great example on focusing on the obvious.
Let’s say I had a chance to play Michael Jordan in a game of one on one basketball. Let’s say you had a chance to bet on who would win the game.
If you took a $100 bet on me and I win, you’ll get $1,000 in return. Now, if you place a $100 bet on MJ to win, you’ll only get $10 in return.
One bet would provide 1000% return, while the other provided 10%.
Even though betting on MJ is a smaller payout, the likelihood of MJ beating me is more likely to happen.
Too many times, investors will focus too much on the risk vs. reward … without taking into account the probability of success.
Here’s the twist though…
…I don’t think you can always go with the sure bet.
However, I also don’t think you should go with the wild card shot either.
I think it comes down to people focusing on the probabilities, but also taking a few long shot opportunities without taking on so much risk, which would take them down, if they are wrong.
For example, I’ve recently found that under certain situations, selling straddles is a lot less riskier than selling strangles, on some time frames. This may sound counter-intuitive, but you’ll be surprised at how many preconceived notions we have about risk.
If you don’t know what to focus on or if you don’t have a process you believe in … you can easily get shaken out of a trade due to noise … and there’s a lot of noise in the markets.
Over the years, I’ve spoken to investors and reviewed their trades. One of the common frustrations I’ve heard them say, “I put this trade on and it went against me right away.”
The market is changing every second, that is going to happen. When you understand your risk and believe in your process … you’ll learn to be patient and let your trade ride.
Unfortunately, many traders lack a process and become impatient with their trades. Letting things play out, after you put on risk and properly manage your risk will provide you with confidence.
When most investors start to struggle and don’t see the pay off, they start bouncing around and drift from their process.
They start chasing the next big indicator, trading system, strategy or that “can’t miss trade” or “opportunity.”
I get it … I’ve been there myself. When I wrote my article on my two largest trading losses of over $150,000, I tried searching for that holy grail as well.
It doesn’t exist at all!
The reality is … there are no certainties in investing or trading. At the end of the day, you’re risking money in hopes that your idea has a strong likelihood of being profitable.
Of course, even high probability trades can end up losing. I like to focus on an approach that has been statistically proven to make money … I’ll follow my process to a T and let the numbers play themselves out.
Imagine a pilot waking up, heading out of the house to go to work … getting to the airport … hopping on the plane and preparing to fly …
… sounds scary right?
Well, it is!
Pilots have a checklist that they run over to see if everything is ready with the plane and if it’s in good working condition.
They need to make sure that every piece of their criteria is secured before deciding to take off. They are managing their risk and the lives of others.
Similarly, before any professional sports game … players prepare for the game by stretching, going through the motions, doing drills, shooting etc hours before the game even starts
However, this doesn’t guarantee that they will win the game … or even avoid an accident or injury … but their process helps with easing their worries and allows them to focus on the task on hand.
There is no guaranteed approach in investing … understanding that uncertainty is where the opportunities exists is key … I know from my 10 years of experience in the financial industry, firms or individuals, with long-term success, stick to their process … win or lose.
Unfortunately, many investors don’t have a process or checklist that they run through before entering a trade … their trades lack a game plan and are random..
If you fail to sticking to your plan … then it was your process that failed.
If you fail because you waffle on your plan … then it was you that failed.
Not having a plan … doesn’t work in business and it doesn’t work in options trading. You should identify ideas that have positive expectancies, develop criteria for them and create a checklist.
For my personal trading, there are a list of questions that I ask myself about the potential trade. These questions are answered before I place a trade … this systematic approach allows me to trade with focus and confidence.
If you want to see my 10 step option trading checklist, you can download it here for free.
I spent a lot of time thinking of these three reasons why investor lose money in the financial markets, but do you think I missed one?
I’d love to hear your thoughts below or do any of these resonate with struggles you’ve had before?
Also, who would you put your money on to win? MJ is 52 now…