On Discretionary Trading (Part 3)

A recent option trading Meetup frustrated me immensely because of discretionary trading and the Lemming Effect.

I wrote about this group previously and described the source of my frustration named DY. According to another member, DY “loves to hear himself talk.” He says “I have nobody else to talk options with.” He doesn’t talk options with us either—he lectures. The last Meetup featured a financial adviser presenting on covered call investing. DY eventually took over the show by telling us that he:

• was approached by a publisher to write a book on options
• trades options on NFLX simply because he has already made so much money on it
• does 15-20 trades per week

DY then started talking about his short-term weekly trades. The organizer fell prey to the Lemming Effect and redirected her attention. Over the next 10 minutes, she asked DY a series of questions about his trading strategy and how he does it.

I think most discretionary traders are profitable for a variable amount of time [until they aren’t] and they usually represent as if they “get it.” Outsiders perceive them as experts and try to learn the discretionary trading approach. In most cases, I believe the strategy will eventually fail and leave the lemmings locked out on the cold doorstep.

I can either work to emulate another trading approach or I can work to learn about trading system development and develop my own system. If I do the latter then I can at least see what’s coming, have context for what to expect, and make tweaks when needed. If I copy someone else then I have no context and maybe only their claims about historical performance. When it stops working I am lost since my “teacher” may be gone or have moved onto something else entirely.

Regardless of how any individual trades and what validation steps have [not] gone into developing that approach, I believe people should first learn about option theory and fundamentals. After that, people should understand the philosophy and steps behind trading system development. This involves education about critical thinking and statistical analysis.