I’ve written about the importance of keeping a trading journal numerous times. (It fits “My Trader’s Journal” title don’t you think?) Another key reason to keep a trading journal is to keep your greed in check. This journal should not be limited to only the stocks and options you invest in, but should also include a system for a reality check for yourself.
Without taking the time to write down and monitor your holdings at any given time an investor can easily get away from the reality of how much can be made without “over-investing.” Individual investors need to beat the indexes to make it worth our time. That’s the underlying reason most of us manages our own accounts rather than sticking our cash in index funds. A problem we face is that after a good run, we can easily feel invincible and might even have a tendency to put more on the line than needed to beat the indexes. What many investors fall victim to is greed. I’m not talking about the desire for big returns. I’m talking about the total disregard for risk in the effort to reach those big returns. I’m all for making as much as possible, but have learned stop the tendency for greed to creep into my trades.
I limit what I’m allowed to keep on margin or in the case of writing puts, what I might have on margin if all my shorts are assigned. Without writing down your holdings and how the are adding up versus your account value a less cautious investor can let reality slip away in a bull market and can get pummeled in a correction. Along with all of the notes I keep here in my posts, I keep an Excel spreadsheet that adds my potential holdings based on the strikes for the options I’ve sold. That total is divided by my account value which gives me a ceiling I do not allow myself to cross.
As someone who invests through options, I can make 5% in a month or two and could stick my cash in a CD for the rest of the year and finish up the year with the long-term market average of just under 10%. That’s boring and would keep me from beating the indexes. What’s important to realize is the option of doing just that is there. That’s why I don’t rush into trades. Letting the right stocks come to you allows you to sit and wait for the right entry point. Knowing that you will have 2-5% gains in most months while realizing that if you over-extend yourself you could quickly have a 10+% loss in one month must stay at the front of an option investor’s mind. Keeping greed at bay can be the difference in almost beating the major indexes and having double their returns.
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