Hey everyone.
This is Kirk, here again at optionalpha.com.
And in this video, we’re going to talk about developing a daily trading routine.
Now, it might seem odd actually to start here in Track #3, but I believe that habits and
routines are insanely important to your success, maybe not only as a trader, but also in anything
that you do in life.
And it really comes down to the difference between what to do versus actually doing it.
The analogy that I use all the time when I coach people is, “We know that to be healthy,
you have to eat right, you can’t have sweets, you have to go to the gym and workout or exercise.
That’s not important.
We know what to do.
It’s actually doing it that actually makes a difference.
It's going to the gym, it’s eating right, it’s not having sweets, it’s not doing
X, Y, Z.
That's the difference between being successful and not.”
And the reality is that options trading is just a game of math.
I’ve said it a million times until I’m red in the face that it's just a game of math
and probabilities.
Therefore, the only way we win long-term is by being consistent and persistent.
My two favorite words in this business is being consistent and persistent.
You have to be consistent in how you place trades at the same probability of success
level, on the right side of volatility, using the right strategy with the right position
size.
And then you have to be persistent in doing that over and over and over and over again.
It's usually not hard for people to understand what to do, that you have to be an option
seller, that you have to do X, Y, Z position size.
That's the easy thing.
The hard part is being persistent in doing that over and over and over again.
And hopefully, we can help talk you through developing your own trading routine today
that will help you get to that next level.
Aristotle once said, “We are what we repeatedly do.
That excellence then is not an act, but it's a habit.”
And I truly, truly believe this.
I’m actually a big student of learning about habits and psychology and what makes people
tick and think, including myself.
Now, here's the reality though.
Our brains cannot actually distinguish between good or bad habits.
Most people don’t know that.
Most people think that it’s some psychological thing that, “Oh, it’s just a habit that
I smoke or that I do something.”
It’s not that.
Your brain has no ability to distinguish between habits.
All it’s trying to do is use up as much energy or use as little energy as possible
to complete outcomes.
Now, you have to forcefully create different habit loops if you want to change your outcome
or your circumstances.
And it basically works like this and all habits work in this 3-part reward or habit loop cycle.
The first thing that starts off this habit loop is the cue.
Now, the cue is everything that the brain uses to automatically trigger a series of
events, so like you don’t actually think about in the morning maybe necessarily brushing
your teeth and the actual brushstrokes that you have and brushing your back teeth and
then your front teeth or whatever.
You don’t think about.
That's the routine.
That's the physical or mental or emotional sequence of events that your brain has automatically
done.
But it only does that after it's been cued to do something.
For example, your routine of brushing your teeth might come after you wake up in the
morning or after you eat breakfast or whatever the case is, or routine of going and checking
your email in the morning might come when you turn on your phone.
It doesn’t really matter.
What you have to understand is that the most important aspect of this entire loop is understanding
what your cue is.
What is the thing that makes you do whatever you do?
As a trader, some of these cues might be a drop in the market or a position going bad
or some earnings announcement.
A drop in the market might cue you into a routine because you're so used to it of not
doing anything, of selling your positions, of getting out, of going in cash or a million
different other things.
But the cue is what you have to understand, is that the drop in the market might have
been your cue.
That’s what you historically use to then develop this routine of doing whatever you
do that maybe doesn't work.
That’s why you’re here at Option Alpha.
You have to understand this cue and routine process.
The last thing that you have to understand is that everything has a reward at the end
of it.
This is what your brain is telling you.
This is why it's worth the routine.
This is the endgame and your brain or your emotions have to have some sort of reward.
And it doesn't have to be monetary, but it can be a feeling that you have or an emotional
response or something like that.
To use that brushing our teeth example – If we wake up in the morning, that’s our cue
to brush out teeth, we go through the routine of brushing our teeth, our reward is that
we feel good that our teeth and mouth feel clean, that we smile, that we don’t have
that film on our teeth.
That’s the reward.
If you’re a trader and the market drops and that’s your cue to then sell all of
your positions, well then your reward is comfort or is some sort of emotional response that
you are comfortable because now you've done something and you’ve acted on it.
It may not have been the right thing, but your reward might not have been monetary in
this case, but it may have been some comfort or emotional response that you’re now feeling
safe or steady or secure or something like that.
You have to understand how these things work and realize that options trading is just a
game of math and that if we can control our habits and our routines with how we place
trades, manage trades and execute trades, then we can really predict the outcome that
we want as far as monetary or quitting your job or whatever you want to do at the end
of the day.
That's the important thing.
Now, make no mistake though.
Everything you have either done or haven’t done in your life can likely be traced back
to some habit or routine.
Your brain doesn't distinguish between good or bad, so if you’ve done something bad
in your life or you haven’t done something that you wanted to do, it's likely because
you haven't developed the habit or the routine to do it.
And it's no different when it comes to options trading, investing, whatever you want to call
it that we’re trying to teach you how to do here.
Now, the good news is that you can recognize and change it.
That's really good.
The bad news is yeah, it takes a lot of hard work and it's tough.
This is something that most people don't want to do because they realize it takes a lot
of work.
It’s not easy to understand how options work.
It’s not easy to go into the market every single day and look for trades.
But the reward is worth it at the end of the day when you can control your own portfolio,
when you’re not dependent upon the market moving up just to make money, when you can
generate a consistent stream of income with your options trading on a limited amount of
capital.
It is worth in my opinion, the work and the hard effort that you have to put into, but
you do have to recognize and change some of the habits that you’re currently in right
now.
Now, I'm not saying that my routine that we’re going to talk about is the perfect example.
It's what has worked for me and hopefully, it gets you thinking a little bit more about
your own trading routine.
Now, the first thing that we’re going to do here is talk about my routine in the morning.
Now, I can tell you honestly that this entire routine that we're going to talk about from
basically step #1 or the first thing that I do, all the way to the 5th thing that I
do basically takes no more than maybe 15, 20 minutes at the most.
That's about as close to or sort of a timeframe as I can possibly make, about 15 to 20 minutes
to go through steps 1 through 7.
And the whole idea here is that you're developing cues and habits of sequential sequences or
processes that you go through.
And this is just an example and I want to lay this out for you, so that you can start
to develop your own because likely, what you're doing right now is maybe a little scattered.
You might have your own routine about what you do, but it might be a little bit scattered.
You can probably hone in and focus in on a more efficient process.
The first thing that I do in the morning right away is check futures.
Now, this is where I want to see where the market is likely to open.
Is it higher, lower or the same as yesterday?
Now, when I say the first thing I do in the morning, this is not the first thing I do
when I wake up.
The first thing I do when I wake up is get my kids up, get my wife up, sit and have coffee,
talk with them, go through the day, to plan our day, whatever, have breakfast, whatever
you do in the morning.
I do not wake up and check markets.
That's crazy.
I don't wake up and then check markets.
But about 15 minutes before the market opens, I’ll check futures.
That’s when my day really starts.
The second thing that I’ll do is I’ll quickly scan the headlines.
Now, this is important.
I’m not reading the news.
I’m scanning the headlines because I want to see what are the major news stories driving
the market.
Did someone get bought out?
Did someone file for bankruptcy?
Did two companies merge?
Is some company accused of insider trading or fraud or accounting or did some company
buy a new product or get a new endorsement?
What is really moving the market?
What do I need to be concerned about or aware of as I enter the trading day?
Because it's not that I have to be necessarily attached to that new story and know exactly
what's happening, but if I know that somebody basically got bought out or went bankrupt,
maybe I might know how that might affect my portfolio.
The third thing that I do after I’ve looked at the futures, checked and scanned the headlines
which can literally take 3 minutes or less, is look at the impact of whatever I've just
learned on my portfolio or on individual positions.
If for example some company goes bankrupt or gets bought out or merged or whatever the
case is and I have a position in there, I should probably know that that's happening.
And that can be as simple as just scanning the headlines and knowing what’s going on.
But it's also important to know – How does all this stuff impact my portfolio?
Is my portfolio balanced, meaning that if the market opens up higher, then that’s
still good for my portfolio or maybe my portfolio is a little too bearish right now, I’ve
got too many bearish positions, so if the market opens up higher, that's maybe a bad
thing and I need to start thinking about that?
It's just asking yourself what is the impact on your portfolio.
Most of the time for what we do here since we’re neutral traders and we have a neutral
portfolio, if the market opens up 1% or 2% higher in either direction, it’s not going
to dramatically impact our portfolio.
And as long as we don’t see a huge pop in the market or a huge drop, we’re going to
be in good shape to move forward.
And that’s some of the things that we’ll talk about as we get further through Track
#3 here.
The fourth thing that I look at is my trade hierarchy.
And I look at trades and positions in this order and that is closing positions first,
then adjustments, then new trade entries.
And it's in that order for a reason.
This is usually now after the market has opened up, maybe 30 minutes after the markets opened
up or 15 minutes after the markets opened up.
I first am going to look at which positions can I take off, so which positions have now
reached a profit target or at an acceptable level that I feel like I can take those trades
off.
I’m first going to bank some profits and clear positions that need to be cleared off
if there are any, then I will look at adjustments to any trades that might need adjustment.
Now, hopefully I’ve already had trades on the horizon that I know are starting to go
against me or that started to move against me, then I’ll start looking at adjusting
those trades and I’ll work through adjusting those trades quickly.
I’ll quickly close trades then I’ll quickly go through and adjust any trades that need
to be adjusted.
And usually if we’re making adjustments, it’s already something that we’ve been
thinking about and looking at.
And then finally, we're going to look at new trade entries.
And the reason that we look at new trade entries last is we want to see what the impact of
closing and/or adjusting other trades first has on our overall portfolio, so now we get
a clear picture of where we are at the current moment moving forward and what new trades
we should be looking for.
Should we be looking for new bullish trades, new bearish trades, some strangles, some straddles,
iron condors, credit spreads, calendars?
What should we be looking for now that we’ve closed out things that are profitable, now
that we’ve adjusted things that might be going against us?
This is what we can be focusing on.
That's why in my case, that’s the trading hierarchy because it forces me then before
I look at new trades to check my overall portfolio balance and Beta weight it.
Number five or the fifth thing that we do is walk away.
Now, I can tell you right now that you have to get up and walk away from the computer.
You’ve got to find something to do, you’ve got to schedule it now or you'll never cut
the cord.
Now, some of you out there that are watching this video know exactly who I'm talking about
because you love looking at the markets all day.
But the reality is that the more you look at the markets, the more you “see things
that aren’t really there.”
And we all know we’ve done this before, myself included.
In my case, what I do is I get up and I go play with my kids or I go on a walk with my
wife or we go to the gym in the morning.
More often than not, we’ll usually schedule time to go to the gym around 10:00, 10:30.
That forces me to get up and go away from my office, away from the computer, away from
the markets.
And for me because I love the market so much, because I love trading so much, I love doing
this, I have to have something that forces me to get away, that is on my calendar as
something I need to do a priority and that's my cue to then develop a new routine to get
away from the markets.
I think that's really, really important.
Now, the sixth thing that we do and the last thing that we do in our routine or I do in
my routine is my end of the day review or EOD review.
And I can tell you this honestly.
Most of the time that the markets are open, I'm not watching, I don't care.
We are not day-traders.
I don't care if the market is up 10 points and then down 10 points.
I just don’t care because at the end of the day, it's a game of numbers.
What I do is once I've made my trades in the morning, do what works around my schedule
with my kids and my wife, then I will come back in later at the end of the day, usually
45 minutes to an hour before the close of the day and basically ask myself a couple
of questions like, “What’s changed during the day?
What's changed from the morning to the afternoon?”
I don’t have to watch the market all day to see what’s changed.
I can see if the markets rallied or maybe not rally or rallied early and then it fell
or whatever the case is.
What's moving?
What’s moving late in the day?
Is there anything that is new that we could be trading?
Did implied volatility pop in something that could create a trading opportunity?
I can adjust my order.
Any orders that I had placed earlier in the day to enter a new position or close a position
or adjust the position, I can tweak or adjust those orders if needed.
I can look at new trades and I could look at new exits because sometimes there’ll
be an opportunity that’ll come up in the afternoon that wasn’t there in the morning.
And likewise, you might have an opportunity to close a trade in the afternoon that wasn’t
an opportunity in the morning.
Now, the whole process here is to be in, make some changes, make some adjustments, some
trades, whatever you need to do and then get out of the markets.
Not get out of your trades, but get out in front of your screen or logout of your broker
platform, whatever you need to do to get out of being in this routine of being sucked to
the screen and our eyeballs glued to each and every chart.
In my personal opinion, I think that I do this well because I setup time in the morning
to go through my trades and my positions and then I get away from the computer by going
to the gym or going on a walk with my wife or going to the park with my kids or whatever
the case is, and then in the afternoon, I forcefully come in before the close of the
day, so that the close of the day becomes my ending time for the markets or even earlier
if I don’t need to do anything.
Here’s the deal.
I realized that if I get too emotional and attached, I’ll make stupid decisions and
that’s just the reality.
I'm self-aware in that sense and I know that if I get too emotional or attached to the
markets, I’m just going to make really, really bad trading decisions.
I deliberately limit my analysis and trading time to force myself into rational, habit-based,
non-emotional decisions.
And I feel like most successful traders can tell you that this is exactly how they work
as well.
It all has to be rational, habit-based.
You got to do the consistent things that we talk about, high probability trades, low order
size, etcetera, etcetera, great pricing, etcetera, etcetera.
Now, if you are currently working full-time, you actually have a huge advantage because
your job will force you to make efficient decisions quickly.
And frankly speaking, there is no excuse why you can’t be successful working full-time.
I basically work full-time as a dad and running this website, coaching people and doing software
updates and writing articles and doing videos like this.
I do not spend the full amount of time that I have in the day actually trading.
Selfishly like I’ve said, this is also one of the reasons why I run this website because
it keeps me occupied helping others which I love to do.
Otherwise, I would just be staring at charts all day long until I saw what I wanted to
see.
And again, do whatever you want to do, have something that you like to do, have a hobby
that you like to do.
You do not need to be at this misconception that’s out there that you have to be staring
at the screens all day and you have to understand every little movement in the market.
You don't.
It's just a numbers and probability game.
And you have to actually develop a habit to keep yourself away from the market because
as traders, we’re tied to the market, we’re attracted to it, we love it.
You have to develop a habit to get away from it.
Again, try to remember cue routine and reward cycle or this habit loop because it's really,
really important to understand what has gotten you into the routines that you’re in right
now and how you can change those.
Try different cues in the morning.
Try using my process.
Use a kitchen timer to time the amount of minutes that you have to analyze the markets.
You know what I mean?
Just give yourself 10 minutes and then turn off your computer or whatever the case is.
But you got to try something different to get into a new routine.
In my opinion, I think the best traders that are out there have very efficient routines
to keep themselves rational and math-based in their approach.
And they don’t really care where the markets go as long as they're making money because
their portfolio is neutral and their position sizes are small.
That’s what I think is really, really important as you start to develop your own trading routine
and daily routine.
As always, I want to thank you for checking out this video, for watching.
If you have any comments or feedback, I’d love to hear them, especially as we get further
into Track #3 here.
If you loved this video and thought it was helpful, thought it gave you a little bit
of insight into how you can become a better trader, please let us know, share this video
online with your friends and family.
And as always, happy trading!