In this video, I'll present a simple analogy that might help you understand how you can protect yourself and survive black swan events, and the steps you need to take in order to become a more profitable trader long-term.
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In this video, we're going to talk about fearless, confident options trading. And some of you are probably wondering, why are we starting with this, right?
It seems kind of odd that a options education website, especially if you're starting track two with us here at Option Alpha, that we'd first be talking about how to be fearless and confident in your trading versus actually placing trades and figuring that out.
And so we'll get to all of that in track two here, but I want you to understand that there are five things that you do not control. You need to stop, trying to control them if you want to be wildly successful trading options. It all comes down to this fear of losing, and how we can overcome this.
See, this is what most people do in the market. They always look behind. They're always fearful of the drop or the rally, or the crash or whatever may happen. They just have to understand that there are things that you don't control the market, and there are things that you do control. You have to focus on the things that you do control.
This is a favorite chart of mine. We use it all the time in coaching with people here at Option Alpha. This is really how most people go about their investing career. They are greedy, and they bought when they feel confident and assured that the market is stable, or whatever the case is.
When they're fearful, they sell, or they just make stupid decisions because they just do it out of fear. Then they repeat this cycle until they're broke. But, once I can get you to recognize and accept these five things that we're going to tell you as truths, your confidence, and courage as a trader is going to explode.
Mark Twain famously said, "Courage is resistance to fear, mastery of fear, but not the absence of fear." I love this quote because it's not saying that we need not be fearful. Fear is a good thing.
Fear is what keeps us alive. As human beings, we have been fearful all of the existence that we've been around. We're fearful of predators. We're fearful of losing people. We're fearful of, whatever, the dark, whatever you're fearful of.
That keeps you alive. But we need to understand and recognize what things that we control that make us fearful, and what things we don't, right? So, here's the thing. These are the five things that you cannot control.
And I promise you, you tried to control one of these things, or at least one of these things, before in the past. Obviously, you can't control the weather. We can put a bunch of things up here, but I wanted to start off with something simple. You can't control the weather.
You can't control the disease. You can't control if you get cancer or not. Number two, you cannot control other people, especially in the stock market. There are millions and millions of other people with different opinions, different backgrounds, different philosophies, different ideals, different risk profiles.
You can't control other people. That's a hard concept to understand because you think you can control them. All the other stuff you've ever probably been taught about the market assumes you can control other people and their behavior, but you just can't.
Number three is you can't control the math. What I mean by this is, for casinos, because I use casinos a lot as an example, you can't control the math that casinos have an edge in every game and gambling scenario that they put out there.
The casinos have an edge. You can't control that math. You can assume you're a better player than some people, but the vast, vast, vast majority of people cannot control the math behind the ability for a casino to end. It's impossible.
When it comes to the stock market, there are hard facts about what math works and what doesn't. About the probability of making money or losing. About correctly pricing a trade or not, based on risk.
About the likelihood of a stock going up or down, based on its historical trends. That math, you cannot control. You can assume that you can control that math, but you can't.
Number four is direction and reaction. Probably should have been number one, but it's number four on our list. Doesn't mean anything, one through five, on this list. You can't control the direction of stock, ever.
No matter how many times people assume that they can. You can never control the direction of stock. More importantly, you can never control the reaction of the market to that stock, or some news event, or some industry report. It's impossible.
Back when I was working at BB&T Capital Markets, and I was in research, we would meet with the CEOs and CFOs of these streets. When we met with them, we knew that they were going to have a really good quarter. Their numbers were really good. Their earnings were really good.
Their costs were down. All of this stuff. Everything that tells us that the market should react favorably to that quarter's announcement and earnings announcement and that the stocks should rally.
In most cases, the stocks might fall, or it might rally. But in most cases, it might fall because maybe the market assumption was that the company would've done even better than it did. This happens all the time in Apple.
Apple is a great example of this. The company will have amazing earnings, great profit, great revenue, and the stock fall after earnings. You can't control the reaction of the market. What you think is really good news, somebody else or a group of other people might think is really bad news.
Again, unless you understand this and accept it as the truth, you really can't move past anything that you do here, trading stocks or options or any investing. You can't control the market.
Number five, the most important one here for sure, is you cannot control black swan events. I was doing some research before doing this video and setting up these slides, and I had a look around and read a bunch of articles on how to prevent a black swan, or how to protect yourself from a black swan.
The reality is, you have no idea when they're coming, and neither do I. Nobody does. That's why they're black swan events because they're unforeseen. If they were known, or if there were some way to see them coming, then they wouldn't be called black swan events.
You can't control a black swan even, and that's okay. That's an okay assumption. That doesn't mean that you shouldn't invest. It doesn't mean that you should take all your money out of the market because you don't know when this thing is going to happen.
It just means you have to control the things that you can control. Black Swan events are some of the things that you cannot control. Again, you have to accept these facts as truth, because they will happen again, every single one of them.
It's not a matter of if, but when. Meaning, you're going to have losing trades. It's not a matter of if, but when. You're going to be in a black swan event. It's going to happen again in the future. Mark my words, a black swan event will happen that is "unforeseen" that nobody saw coming.
You're never going to be able to pick the direction all the time. You're never going to be able to predict the reaction of the market. You can't control other people, and you can't control the weather. Bad storms will come again and again.
You cannot control any of these factors. So once you understand it, you're able to then to confidently move forward, accepting what you can control.
I always relate this to driving. I think driving is a great analogy of control. I can tell you this, as I talk about this right now, I've had very close friends of mine that have been killed in car accidents with drunk drivers.
I am sympathetic to this concept that I'm not using this concept to exploit anything. I'm just trying to use it as a means to learn what we're talking about here, especially with the black swan events.
When you get into your car, there's only a certain amount of things that you can control. If you think about it, you can put your seatbelt on, so you can buckle up. You can make sure that your windows are clear.
That you've got enough gas. That you're paying attention, that you're not texting or calling on the phone. That your music's not too loud. You can drive in between the lines, so you're not driving on the other side of the road.
These are all things that you can control driving your vehicle down the road, trying to get you from point A to point B. And, you can drive the speed limit. You don't drive over the speed limit. You don't swerve. You don't tailgate. You do all these things that you can control.
But let me ask you this: Tell me, in honest terms, who can control the drunk driver? And again, I'm sympathetic to this. I've had friends that were killed in drunk driving accidents. It's horrible.
But you cannot control, every time that you get inside of your car, you get inside, you do everything right. You do everything perfect. You can't control the person who was an idiot, and dumb enough to get behind the wheel intoxicated, that's going down the road beyond the speed limit and hits you head-on at 90 miles an hour.
Unfortunately, you can't control that. There's only so many things you can control. Again, I relate this to black swan events. Because of the drunk driver, in this scenario, is the black swan event.
The only thing you can control is making sure that you're as safe as possible, but you don't know that it's coming. Again, it's not that you shouldn't trade or you shouldn't invest. It's that you should just recognize that this is the reality of the market.
Once you realize that, then your confidence goes up. Because now you know: Okay, look. I can't control this stuff, but I can control some of the things we're going to talk about here.
Here's what I say, and we'll be talking about each one of these points in a lot of detail as we get further through track two here at Option Alpha. You need to focus on what you can control.
What you can control, as an investor, is your position size. You can choose to invest all of your money at one time in one trade. Or, if you're smarter, you can choose to invest a little bit of money at one time in every trade.
So that if that trade goes really bad, if you get hit by a drunk driver, if that trade becomes the black swan event that you didn't know was coming, it doesn't blow up your account and you don't lose all of your money. But again, that's something you can control.
I guarantee, and I have people that do this all the time ... So, we'll have people, even in our pro and elite memberships that will email me and say, "Kirk, I lost, like, 20% on this trade." And I say, "How did you lose 20% on that trade?" And they say, "Well, I had too big of a position size."
And I tell them, I don't feel sorry for them that they lost that because they controlled their destiny. We tell people not to do that, and then they go and do something different. I don't feel sorry for that person, that they lost all that money because they controlled it.
They were the ones who put themselves in the position to make a stupid decision. Again, this is probably hard advice but, maybe nobody has told you this before, and I think I'm the person to do it because I'm confident in what we talk about here and what we teach people.
Number two is you can control strategy selection. Again, we'll talk about this more in track two. If you already been through track one, you know we talk about it there. You can control what strategies you choose, and how you set up strategies.
That's a big part of being successful trading is trading the right side of volatility. Number three, you control what target of probability you focus on. As a stock trader, you naturally target a 50/50 probability.
There's no debating this. If you are trading stocks, trying to day trade, trying to "pick stocks," you've got a 50/50 chance of winning. That's just how the numbers work out. You can assume everything else that you want to about the market, and assume you can predict something with some awesome indicator and technical whatever, but it's not.
You're a 50/50 trader trying to trade stocks. With options, you can target whatever probability you want to success. That means that you can go out and focus on trades that have a 90% chance of success, or a 70%, or an 80%. And that's the beauty of options is that we have the ability to make higher probability trades.
Number four is you can control order pricing. Now, this is a big one for me. Again, we go through this further down in track one. You can control order pricing. Meaning, you can determine if you are getting a fair price for a trade or not.
Not a lot of people talk about fair pricing in the options world, but it's insanely important that you should be getting a fair price based on the risk in the trade. And I relate this a lot to either, going to buy a piece of real estate or going to buy a new car.
If you're going to buy a new car, and the new car you're going to buy, you know is worth $20,000 because you've looked it up on Kelly Blue Book and all these different things, and the dealer says, "Hey, my car that's on our lot. Well, you have to pay $30,000."
You have the choice to say, "I'll pay the $30,000" and overpay, or I'll look someplace else and pay $20,000, or I won't buy the car today from you. That is your choice. That is something you can control.
So when people always tell me, "Oh, I made a bad decision. I got into an investment. I overpaid." Well, that's your choice. That was a choice that you made based on the information you had at the time. I think overpricing is a huge, huge component of being successful.
Number five is your emotions. This is a big one that a lot of people talk about. It comes down to recognizing that you are either fearful, greedy, or whatever the case is, and being able to control those emotions and move forward with consistency and persistence.
I believe that the two biggest hurdles to people being successful in this business are the ability to be consistent and persistent. I'll relate it back to working out, like being healthy.
We know what we have to do to be healthy. You have to go to the gym. You have to eat right. You have to avoid sweets and sugars. That's not anything new to anybody. The hard part about being healthy is going to the gym.
Being consistent about going every day or every couple days. Being consistent with not eating sweets and not eating too many fatty foods and too much food with sugar. Being persistent in doing that over a long period.
You can't be healthy for five days and assume it's going to carry on for the next two years. You have to be persistent for a long time. The same ideas apply in the options market and the investing market. If you want to be successful, you have to be doing all the things we talk about here.
The right position size, the right strategy, targeting the right probability. And you've got to do it consistently over time. You have to recognize that sometimes your emotions are going to try to pull you out of that consistency pattern.
Just like sometimes you're not gonna want to go to the gym. And sometimes you're gonna want to splurge and eat some ice cream or eat some cookies. And that's okay; you just have to recognize when those happen and pull yourself back in. You have to control your emotions.
For me, just to kind of dovetail off this for a second. For me, the ability to control my emotions is easy because I understand the math behind everything we do. Again, we talk about math here a lot at Option Alpha.
I understand the math behind the market. I understand clearly, where my probability of success is. Where my edge is as a trader. And so, when I have a bad trade or a trade that goes against me, people always ask, "How do you keep so calm?" The reason I keep so calm, even if I have a bad trade go against me, is because I know that those are going to happen.
That I'm going to have them. I also realize that the more and more and more I trade, at the same probability of success level, the more I target that edge and implied volatility, the closer I'm going to get to reaching my goals. It's just a matter of time.
Again, for me, it comes down to ... Emotions, for me, is controlled by my understanding of the math. Again, here at Option Alpha, we're going to give you all the training tools and education you'll need to be successful, hands-down. It's all free.
You first have to recognize what you control and what you don't. I believe that this should be the building block for everything that we're going to talk about here in track two because without understanding and accepting what you control and what you don't, I don't think that you can be successful in this business.
I don't. That's a hard truth, and I'm sorry if I'm the one that has to explain that to you and has to push that on you. Maybe you've never heard that before. Maybe no one has ever loved you enough to tell you the truth.
That is the reality, is there are things in the market that we don't control that we try to control all the time. Once we just move past those, we become more confident, and we have more courage to stay and stick with the system through the next couple years, couple months, whatever you want to do so that you find success.
Again, thank you so much for checking out this video. If you've got any comments or feedback, or any stories you want to share or revelations that you had from watching this video, please let me know.
Add them in the comments section right below. If you loved this video and thought it would be helpful for other people out there, please, please share it online. It's one of the ways that we help spread the word here at Option Alpha. Until next time, happy trading.