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10 Tips for Improving Your Trading in 2022

by | Dec 29, 2021 | Portfolio Management, Strategy

1. Don’t Overreact to One Trade

There are 252 trading days in a calendar year. When you take out holidays, there’s an average of 21 per month or 63 per quarter. You will have bad days but good weeks and sometimes bad weeks but great months. The key is consistency and that involves keeping a level mindset when things are good or bad. That is not learned overnight but with time you learn how to use your intuition more as a separate tool based on observations you compile in the trader database known as your brain. Often when things are going very well in the market that euphoric feeling can overcome you and make it feel like nothing can go wrong. This is precisely the time you should sell some or be wary of a change coming in markets. The market has a very good way of humbling traders that get too high on themselves, the same way markets tend to capitulate into lows right as the last seller exits because they couldn’t take the pain any longer. 

There is a saying in the trading world that “You are only as good as your last trade”. This rings true because every trade you take has the potential to be the best one yet or a complete swing and a miss. Each trade should promote positive habits and consistency when it comes to position sizing and the strategy employed. There will always be good trades and bad trades from a profit and loss perspective but as long as a trader follows his or her own trading risk plan the process of becoming a better trader builds on itself. Often a good trade or series of trades can be the product of a strong bull market uptrend and simply following your trade criteria can allow you to participate in the move. Don’t overreact to hitting a homerun when the pitch is right down the middle and conditions are perfect. That will only lead to overconfidence and ego. If you make money on 5 consecutive trades, that doesn’t mean you have it all figured out and should double your position size on the next series of 5 trades. A Lot of this game is random in the short term so don’t get too irrational thinking you’re invincible and remember to stick to the process. 

Similarly, after a bad week, don’t get too down. Every trader has very bad days or weeks, and sometimes even months. I try to judge myself on a monthly or quarterly basis and not worry too much about day to day or weekly performance since I am more of a swing trader focused on catching multi week trends when the market allows. You will have days when you get unlucky, it’s part of trading. Don’t dwell. Understand that overreacting to one trade will limit your potential on the next batch of 10 or 20 trades that are coming. A baseball player might have 5 at-bats per game and if they struck out the first 3 times in the game, that should not affect their 4th and 5th time at the plate later in the game when opportunity to score runs might be more optimal. The same thing in the markets. Don’t miss out on the next trade because the last one lost. Not being ready for what’s next in the markets is what can really cause problems. Which leads me to my next tip. The separation is the preparation.

2. Prepare to Trade or Prepare to Fail

The biggest separation between pro traders and amateurs is time spent in preparation. One of the easiest things you can do to improve your edge in trading is to prepare. I know it sounds like common sense but having an idea or explicit plan of action while markets are not open and moving will help avoid emotional decision making once the markets are open. There is something about a closed market that helps me think clearly about potential scenarios and how they might play out. Not being influenced by flashing numbers and moving charts, you are able to plan the best trade ideas and what you will risk. It’s hard enough to be a short term trader, why make it harder by wandering into the jungle without a road map? Running some custom scans I create in my own time and scrolling through charts for patterns and trends is one way I like to get prepared and in sync with what the markets are trying to do. I also try to understand what potential catalysts are on deck in the market for the coming day or week and how that might impact my positions if I am holding any shorter term options, long or short. I would characterize anything under 45 days to expiration as a shorter term option because once you get to that amount of duration you see the rate of theta decay accelerate. It’s always important to know your timeframe and plan around that but in general on most of my short term swing trades I have a profit target either set as a GTC order or a price alert ready to tell me when a key level is tagged so I can scale out of a position when it hits targets. Same thing goes for losses, I want to have in mind where I am wrong and if I am exiting a trade at a specific level that is breached or risking the premium paid on more of a binary trade like earnings. A lot of times options trading makes this easier because you can trade smaller sizes for swing trades and let the option spread do its job since its defined risk.

Planning when to not trade is just as crucial because part of market awareness is knowing when risk is higher and not worth the reward. In volatile markets it pays to be in trades for less amount of time which avoids big emotional swings and provides more mental clarity as well. Often throughout the day or week when I am exercising or doing something mundane, I am going over market scenarios in my head and hypothesizing what my plan is if the market does scenario A or B. The market does what the least amount of people expect at certain turning points so be sure you’re ready with a plan of action by proactively hypothesizing what might happen next or else you’ll freeze at the worst time when execution is required.

3. Don’t Overtrade and Chase

Simply put, just like dogs who chase Amazon Prime trucks, they eventually get run over. In the markets there are so many trade opportunities on a weekly basis, there is no reason to chase one that is beyond the optimal entry point. Trading is about finding your edge and protecting it. If part of your edge is buying on pullbacks to a key moving average or VWAP in a strong trend then you wait for that moment in time and be content to not participate in a trade that runs away without you. If you are an options seller that focuses on selling put spreads whenever the market retreats to a value area low on the volume profile then there is no reason to chase extended breakouts on the 4th up day in a row just because you need action. You are not giving your edge a standing chance. Having multiple strategies for any given market environment is also helpful to stay active when your primary edge is not present but it depends on each trader and what goals they are after. 

Trading out of boredom is a recipe for disaster especially if you are more directional in nature waiting for specific market generated price signals. Casual traders especially get into trouble when they chase the hot stock of the day, which seems to happen a lot in the recent “meme market” of 2021. It can be tempting to participate in a stock just because everyone on Twitter is talking about it but if it wasn’t a trade you planned then let it go. You are likely chasing based on emotions and herd mentality, which can lead to more aggressive position sizing and larger losses. Also if you are entering into trades you normally wouldn’t just because you had a really great day or week then you’re likely only getting yourself into trouble based on ego or overconfidence. Your trading edge or strategy is what will keep you consistent in the long run. You just need to master it. It’s why I say most traders should keep a fixed position size risk per trade until they get more confident and have the experience to assess whether their edge is worth betting more on in key situations. Avoid overtrading bad setups and chasing hype and you’ll one step closer to consistency.

4. Avoid Buying Out of the Money Options

Similar to betting parlays in sports betting, always buying out-of-the-money options is a less than 50% probability of success. Often much less when you factor in shorter dated weekly options and implied volatility contraction. When you first start trading options it’s often the first mistake a trader makes. Buying the cheaper option makes sense at first glance right? Well that’s not how options work. Since they are priced off an intricate pricing model, there are many factors that are in play. Long story short, cheap options are cheap for a reason. Because there is a small chance they will expire in-the-money. 

If I am buying options, spreads or not, I generally focus on buying the 40-60 delta option because being near the money gives me a better chance at seeing price move in my direction if the delta is already near 50. Everyone’s trading plan should dictate what risk they take on but my main point here is that I’ve seen way too many newer traders get caught up in buying options with a 25 delta or less and then being down money quickly or even seeing the option expire worthless because the odds were against them from the start. A 25 delta option essentially means there is about a 75% probability it expires worthless. Sure it can move and be profitable before expiration but it still is usually less than a 50/50 chance that a 25 delta option strike is touched. Go out to a 15 delta and it’s that much harder to be successful if buying those options since they expire worthless roughly 85% of the time.

Of course now and then there is a great opportunity to trade shorter dated options since they tend to be underpriced at key turning points but even then, staying closer to the money with ATM strikes is the best idea. This is also where spreads and advanced strategies like credit spreads, butterflies or calendars shine. I sometimes like to buy the 50 delta monthly call and then look to sell a 20 delta weekly call into a rally to leg into a calendar or diagonal spread. So these cheaper options are cheap for a reason but also a great way to use them in spreads instead of just outright buying of “cheap” premium. If consistency is your goal, then looking to trade something that offers the best odds and risk/reward makes sense.

5. Stop Trading Only Weekly Options

Another similar tip to the above idea is to stop trading weekly options as your only strategy. This will get some counter arguments I’m sure and it does come down to experience but for most traders who are still learning and building that market awareness skill, it’s best to avoid trading options that expire in the next two weeks. Yes, they can work quite well when utilized correctly but a lot of the time they will cause pain and frustration to traders who are not disciplined. With weekly options that have a higher gamma risk profile, you need to be right on directional trades pretty fast. Since the delta of a weekly option changes so quickly (aka gamma) that means you really need to nail the timing of each trade very well. Sure that’s possible every now and then but the shorter term aspect of these options lures in most newbie traders and chews them up as they grind their accounts to zero. I personally remember losing quite a bit with weekly options when I started out years back trying to hold them overnight especially for multi day moves. The theta decay alone can bury a newer trader and then getting direction wrong is a double whammy.

Weekly options that have less than 2 weeks of time left can actually be effective tools for pro traders and strategic options traders around key binary events like earnings reports or FOMC meetings. When certain events are near, the implied volatility will be bid up on the near term options and that offers more opportunity to trade spreads in the short term or even speculate with buying a long call if you anticipate a larger than expected move. Overall, newer traders should try to not be wooed by others on social media flashing big profits made with cheap weekly options. This is hard to replicate consistently and repeat over time if you are trying to trade as a serious focus when it comes to income. If you want to trade weekly options for the lottery ticket aspect, there are structures that can be used like butterflies or debit spreads that take advantage of theta decay and still allow a trader to outlay just a small debit paid. Otherwise focus on options with 30-90 days til expiration and you’ll see you have more margin for error.

6. Only Hedge When This Happens

Hedging is an interesting topic that many have different views on so I wanted to touch on how I look at it and when it’s the right time to hedge. Overall my rule around hedging should be only to hedge if you are protecting life changing money or gains. What is life changing is surely subjective to each trader. Maybe it’s one trade that you have been in for awhile and it’s made your whole year for example. Losing that profit would be devastating. So hedging makes sense here. But a lot of people hedge too much when they don’t have to. The whole idea behind hedging is to protect a position you don’t want to let go of or can’t exit for some reason. But as shorter term traders that tend to hold positions for less than a month or two, the simple solution ahead of a pending correction is to just sell and go to cash. 

For longer term investing accounts the same can be said but it obviously depends on different factors. Many funds that need to hold a certain stock position for at least a year for tax purposes definitely need to hedge at times based on changing market conditions. But as a trader why would you waste money on often overpriced put options to hedge a trade you can just exit? Most of the time hedging is not worth it in my opinion but if you happen to be sitting on a large gain which would most likely be a longer term trade or investment, it makes sense to perhaps put on a collar trade, which is selling covered calls to buy downside puts, ideally for zero net cost. Also index put spreads are a decent way to hedge overall market downside risk since the put skew in the options IV makes put spreads trade cheap most of the time.

I have learned from mistakes myself as I have liked to hold several small positions in my short term trading account the last few years and even if I feel a 3-5% dip is likely in the SPX. I usually would buy a put spread or calendar spread in the indexes to minimize costs for a hedge. This tends to work alright but often not as well as you would expect, especially if the actual index does not pullback as much as you planned for but then your single stocks get smashed. This was a common theme in 2021 as sector rotations moved violently and hedging your account with the overall SPY or QQQ was useless. It all comes down to what your timeframe is as a trader or investor. If you are sitting on a massive gain in TSLA or some other growth stock then hedging through covered calls or collars can make sense.

7. Monitor and Respect the Market

This might sound vague but the more you watch and observe the market and develop your intuition around it the more you respect the marketplace for its behavior. Over time you’ll pick up important tendencies that make you more informed as a trader. Let’s say you are waiting for a stock to reach a certain level to signify its breaking out above space. You want to be aware when AAPL breaks above 170 for a momentum buy level. So you create a price alert and make sure it’s set to alert you via text or audio at your computer (side note: using price alerts is a solid tip by itself to be able to remain disciplined and wait for your price instead of staring at it all day). The next day the market opens on a stronger note as it gaps higher and you get excited because you might get that price level breakout in AAPL you were eyeing. The news is positive and many key stocks are also gapping higher. Your price alert gets triggered in the first 10 minutes of the day as AAPL gapped higher with the market and is now above 170. Great news because you can buy the breakout right? Once you get in and buy, the market immediately starts to fade and fill the gap lower. AAPL falls faster, eventually going red on the day. This was not what you had in mind so why did the stock fail to sustain higher prices? 

Often where a stock comes from is just as important as where it’s trying to go. If the market uses up all its fuel at the opening gap with a large higher opening there is a decent chance it fades lower to fill that gap. Overnight moves are tough to trade if you weren’t already positioned for the move. And if this move is coming after a series of days or weeks with higher price action, there is likely someone willing to sell into a gap up opening. 

Watch the market as much as you can and reach out to other experienced traders you know to gauge overall sentiment around market moves. This can give you a great perspective on where the market is in relation to where it has come from and how stretched public sentiment might be. This is what fuels the next move, up or down. Always be monitoring conditions as they change but never forget to respect the market for what it is trying to do, especially when it goes against the views of the crowd. 

8. Wait for Your Pitch and be Patient

Wait patiently for your pitch, use alerts to know when to execute. Staring at charts all day is not healthy even if you do work at the computer most of the day. The more you watch a price chart moving intraday the more you will want to be involved. It’s just human nature. One of the simplest things you can do to improve your edge (and overall profitability) as a trader is to slow down and wait for optimal setups. After doing this awhile you should be able to pick up on certain situations that are less common and be able to strike when that moment comes. Whatever your trading style might be, it pays to be patient and wait for your criteria to be met before entering a trade. If that means you are waiting 3 days to enter a stock on your watchlist because it still hasn’t met your criteria then so be it. Go for a walk/run, do other work, get away from the screen if it will help you be patient with your pitch. 

I’ve always had trouble trading when I wanted to be in a trade just for the sake of being in a trade. Wanting that participation can be tough to overcome. There is nothing worse than being in a bad trade just because you wanted to do something and now it’s going against you. But once you start to see that one or two big trades timed very well with patience and conviction can make your week or month, then you understand why patience keeps you out of trouble if the market is not giving clear signals based on your criteria. Especially if you’re a trend follower, that means you only need to catch a few big moves per month to be profiting overall very well. It starts with being patient and not swinging at every thing that comes your way. I really believe 80% of trading time should be spent preparing and planning. The other 20% is the execution which becomes easier once you have confidence in your system.

9. Try Specializing in One Strategy 

Speaking of confidence in your system, if you are struggling to be consistent it might be because you are focused on too many strategies or too many stocks overall. Trying to specialize on one strategy that defines clear entry and exit parameters is a good way to become mechanical with trading and less emotionally charged. If you are trading with any bit of bias or emotion you are likely losing money or at least not doing as well as you could if you just let the system you trust guide you. Let’s say you have a system that focuses on buying dips to key moving averages or volume profile support zones. If you try trading breakouts on top of that it might become tougher mentally to navigate two completely different styles, especially if you are a newer trader still with less than 3 years experience. 

The same way pro sports bettors specialize in one sport like the NFL, a trader might be better off focusing on one market such as Nasdaq tech stocks or the SPX/SPY index ETFs. Starting with one area and mastering it can go a long way towards consistency. I always try to remind myself that at the end of the month or year it doesn’t matter how many different stocks I traded but did I come out ahead? Some traders thrive on trading whatever is in play each week, going from sector to sector is a great idea if you are experienced and already consistently profitable with a proven trading system that gives you an edge. But if you are still learning your craft then narrowing your focus on one group of stocks or one strategy that you know like the back of your hand, can help you develop even further with the confidence and market awareness needed to trade.

10. Track Your Trades and Your Mindset

Finally, the last tip that can help improve your trading is one that should probably be the first one on the list because it’s that important. Track your trades in a spreadsheet each week and make sure to know what your mindset was during that time. How else are you going to know if you’re really any good at this without tracking results? If you don’t at least track results on a weekly or monthly basis you are missing out on identifying trends or weaknesses that you continue to fall victim to. Similar to tracking your exercise or calories when you are trying to lose weight, it can be a great motivator to see visually what is happening and that progress you make will feed on itself.

This really goes for all styles of trading and whether you are short term or long term. If you focus on day trading then tracking your trade by trade results daily using a trading journal can help. If you are more into swing trading and multi week trades then at least tracking your weekly progress could help you see if your account value is too volatile or at least trending in the right direction, from the lower left to the upper right. Being able to plot these numbers in a spreadsheet can visually show you if you’re advancing as a risk manager or if your positions are causing too much volatility in your account. 

The psychology of short term trading is crucial to master as well and it helps to note when you have mental distractions around that could hurt your trading. Sometimes life gets in the way and emotions run high outside of the markets. If you aren’t in a strong mental frame of mind then don’t trade. This goes for good times and bad. If you are as high as a kite after a string of positive trades and feeling euphoria, that is often a great time to go flat and take a few days off from new trades. The market has a great way of reminding you that you aren’t brilliant just as you convince yourself you are. Tracking your mindset each week in a spreadsheet as you log your trades is a great way to assess if you were poised and non-emotional that week. If you are dealing with outside issues in your life then they will show up eventually in your trading. This is a hard game to master, it’s even harder when you’re not all in and focused 100% on markets.

Overall, it’s much more useful to track your mindset and thought process instead of win percentage on trades. Your win rate can still be 50-55% but if you follow trends and let your winners run while limiting losses to smaller amounts, you will outperform in the long run. It takes time to define your system and edge in trading but once you have it then it pays to track your performance and pinpoint how to constantly improve that edge. You could easily get very lucky for a month or two as the market creates geniuses in bull trends. One way to measure your true skills as a trader is to track your gains and losses and understand if you are maximizing your potential or taking too much risk. Hopefully these 10 ideas can become a focus of your trading goals for 2022 as I will also be using them to improve myself and make sure I am constantly learning from my mistakes because I sure made plenty the past year. Good luck trading in the New Year!