Options Traders With Short Term Memory Loss Are Ultimately More Profitable

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Learn from the past is what we are taught in school. And as a big history buff I love to read up on how historical events can sometimes repeat themselves. Not exactly of course, but rather in the same context.

History fascinates me, but my finance degree helps pay the bills (nothing personal here history majors! Feel free to beat me up in the comments section on this jab).

As an options trader though I feel you have to have a short-term memory loss at times. This isn't to say that we should forget and repeat the same mistakes over and over, but rather that we should look at each new trade independently of the last.

Each Trade In A Completely New Animal

Whatever happened on that last trade is over and done with - in the past! You could dwell on it for the next two months or move on to the next trade. For better or worse it's over, and you cannot change what happened.

The market is now a completely different animal than it was even 10 minutes ago. Your outlook could have changed since you made your last trade. Your capital available could be lower/higher. Volatility could have increased changing which option strategies you might select.

There are 1,000 things that could have changed to make this new trading environment different that the last one you traded in. And if you want to be a successful options trader you have to wipe the table clean and reanalyze everything from scratch.

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3 Common Traps You Might Fall Into

Short term memory loss is a great asset as an options trader. It helps you forget about what has already happened (for better or worse) and quickly move onto the next trade full steam ahead. And maybe you don't know if you should develop it or not, so I put together this quick list of 3 common traps you might fall into with short-term memory loss:

1) Riding The "Greed" Cycle - You made an awesome trade and banked more money than you know what to do with! Investment banks should be calling right now to hire you. But this classic scenario can leave you extremely open to the "invincible" feeling that quickly leads to losing trades. Don't think because you made one awesome trade that you could repeat it consistently.

2) Dwelling On Losers - On the flip side you made a horrible trade. We all have. That's not an excuse to not make the next trade. Again, the market could be different now and your strategy might just work. Time to get back to the drawing board and analyze the technicals. Get back in the saddle!

3) Using The Same Technicals - Not one single technical or sentiment indicator is right 100% of the time. So why do you use the same two indicators on every trade? You need to realize that just because you got some "golden" signals on this trades didn't mean they will work the same one on the next one. Forget about them and start all again. Look for patterns in the technical that are broad-based and across multiple markets.

Do You Have ST Memory Loss?

I hope you don't have this, or you would have already forgotten the first paragraph!

We all have skeleton's in our closet when it comes to investments/trading. Lord knows I've had my fair share of bad months, but I tried to forget quickly about them and move on.

Do you think you do a GOOD or BAD job forgetting about past trades and moving on? Is there anything you know you could do differently? Add your comments below and share!

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and two daughters.