How to Learn from Trading Mistakes & Transition into New Habits

Nobody's trading or investing journey is a straight road or easy path. We never just magically trip into a perfect system or investing philosophy without a couple bumps along the way. Today's podcast focuses heavily on overcoming the stigma attached to being "wrong" and having the humility and grace to learn from trading mistakes and transition into new habits. Also, I want to describe two major mistakes that I've made over the last couple of years that have changed the way I look at positions and my portfolio. Both of these have been discussed before in various formats but never in one place under this topic. I hope that sharing my story helps give you the courage to make changes or adjustments to your own options strategy for the better.

Introduction:

• How do you feel when you are told or find out that you are wrong?
• Usually, people start to immediately break down inside and become subjective to themselves. 
• The idea here is that since we don't ever want to be wrong, we end up trying to become perfect “A” students.
• Society, in general, teaches us not to make mistakes and shames us for being wrong.
• There is no reward for trying something and failing and learning from that mistake.
• Often we blame others in an effort to prove that we were right.
• The reality is, we have to learn from our mistakes.
• We have to recognize and embrace the fact that we are not perfect to get on the right path.

Stages of Assumptions:

1. Assume ignorance - When someone disagrees with us, we assume that they don't have access to the same information.

2. Assume idiocy - Think that those who disagree are too moronic to correctly put the pieces of the puzzle together.

3. Assume deliberate distortion of the truth - Believe that the other person knows the truth but that they are deliberately distorting it for their own purposes.

Although we all have the same set of information, we look at the information from different perspectives. This is what leads to people making trading mistakes. There are a lot of different paths to go down that can lead to the same destination. The key is using the right trading framework.

Mistake 1: Trading only when IV is high

• When I first started trading, I knew how important IV was.
• I only traded during high IV situations, which was a big mistake. 
• I took 3-5 months off, not trading when IV was low.
• Then, when IV was high, I would trade all the trades I could find.
• This created a feast and famine situation.

• The key is, in fact, you should generally trade all the time even during low IV.
• Scale down your position size, but still, stay active. 

Mistake 2: Not holding trades long enough for profits

• The Profit Matrix Research shows a correlation between holding trades further than profit targets and the overall returns that you see on an account after 5 or 10 years. 
• Holding a trade a little bit longer pays off big in the end. 
• This will create the highest possible CAGR scenario. 

It is okay to recognize that you did something different before and that you need to change it and do it better next time. You have to be willing to have been wrong and make changes to take advantage of potential strategic opportunities in the future.