Throughout my options/futures trading career I have made just about every mistake an Independent Trader could possibly think of. From foiling order execution to trading overly large position sizes, I have been through it all. I thought that it would be beneficial for everyone to read about the mistakes I made, so that you WON’T repeat them. Below, I’ve compiled a short list of the top 3 crucial lessons I learned the hard way during my 5 years of trading in the market:
1. Make sure you Understand Probability and Expected Value- Whenever I talk to someone who is interested in futures trading or options trading, I always try to suggest they learn about expected value and basic probability. I wish someone would’ve taught me this when I first started. Expected Value is simply (probability of a win * avg win) – (probability of a loss * avg loss). If you plug in the values with your strategy numbers and the answer comes out to a negative number then your strategy has what’s called a negative expectancy. This means that over the long run, you will lose money. Understanding the odds of the strategy you trade can save you tons of money. When I first started, I knew nothing about EV or probabilities outside of what I learned in college. I proceeded to lose thousands of dollars buying leveraged options that had absolutely no chance of making money. It was a complete train wreck. But along the way, I discovered that the option greek delta could be used to get a reasonable probability of the option’s chances of making money before expiration. From there, I started learn about options spreads and time decay. After about 6 months of wild account swings, I stumbled upon Option Volatility & Pricing 
2. Selling Far Out of the Money Options is all good until Crisis Hits- I admit it. I became a premium selling addict when I was first introduced to options selling. It seemed like an annuity. How could I ever LOSE MONEY? The FED and the TREASURY were printing money like crazy and I was selling puts so the slow easy rally could never end right?? Wrong, I was fooled by a Bull Market. Mark Sebastian, from optionpit.com, taught me that most traders suffer major losses during the transition period between low to high volatility. Boy was he right. This is the main reason why it’s so important to understand EV. For example, if you sell an out of the money put spread that has a .15 delta, then you win 85% of the time. However, when you lose you lose 3-4x’s what you made. Selling those options is still a great strategy, but you MUST trade small and actively hedge your delta and gamma risk. It’s also a good idea to sell options when implied volatility skew is high not just robotically without any analysis. Remember, No trader is better than the probability math. The accuracy of the pricing models is incredible. In August 2011, I suffered a substantial loss that wiped out most of my years gains. At that point in time, I knew better than to be trading 500-1000 lots in the $SPX when IV is in its lowest percentiles historically. But guess what? I’m a greedy bastard who sold premium at the absolute lows of implied volatility and got spanked hard by the market. Options that I sold with a .10 delta for $.50 ballooned to $35. The market humbled me and I’m fortunate that it wasn’t a knockout blow. Lesson Learned.
3. Stop Losses will slowly bleed your account – I have always been fairly profitable at trading the s&p futures. Its the first market I ever traded, so its where i’m most comfortable. However, I didn’t really learn how to accelerate my profits until I ditched the tight stop losses. I read all these different books by all the “Gurus” who claimed that placing stops above and below key pivot areas was the most prudent way to “manage risk”. Consequently, I always got stopped out over and over again only to see the market reverse and go my direction shortly thereafter. The absolute best insight I have ever read on stop losses was from the truly GREAT trader Don Miller: “ People who don’t trade preach about stop losses. In real life, they don’t work. You will miss the move every time. You won’t make any money in this business placing stops below support and above resistance.” I actually got better results in the futures market by taking smaller positions and removing the stops. If the market proves me wrong, I exit, but I’m not going to get stopped out of trade prematurely. Plain and Simple.
I could continue this list forever, but I’m sure the point is clear. Early on, I didn’t know how to adequately measure the risks I was taking. I was unfamiliar with the nuisances of implied volatility and position sizing, and eventually I paid for my ignorance. The goal of this post is not to be discouraging, its to give an honest voice to struggles that many traders have but don’t discuss publicly. I want this blog to help people. I think there are too many in the trading community who don’t tell both sides of the story. Additionally, I don’t think constantly gloating about making nice sums of money on my good trades would be nearly as effective as reading about my mistakes.
Feel Free to share your experiences in the comments section!
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— Darrin