Aesop’s fable about the tortoise and the hare is as true for options trading as it is in science. That’s right – researchers have proven that over the long-run, the race will be won by the slower, steadier animal. Ergo, if you want to be successful trading options for income, be the tortoise when it comes to following new market trends.
What happens if you’re the hare
The business media have an insatiable desire to report on new market trends first, even if they’re not actually new … or an actual trend. Sure it makes them look good, but happens when you follow their lead?
In trading and investing, the rush to be first often results in false starts, traps and reversals. Recently most of the indices made a nice staircase run to/past all-time highs. The market doomsayers were out in force (and they still are), saying the markets have topped out and are doomed. As we know too well, the last top is the most important one. It’s nearly impossible to time a market top correctly unless you are a lucky guesser.
News flash: Guessing is not a recommended strategy for trading or investing – at least if you want to build your wealth. Trying to time turns and events often has dismal results. Economists feel the same way. That’s why economics is often called the dismal science.
The motivation to get new market trends right is very different from the motivation to be first. The overly confident predictor (the hare) wants to be the first to recognize a change. What they don’t tell you is that they are not confident the “trend” will continue. They jump in first, and often out first. Do they tell you when they’re jumping out? Of course not. Do they make money? Sometimes.
Be the tortoise when following new market trends
Meanwhile, the one who waits to be right (the tortoise) looks for confirmation before jumping on new market trends. The tortoise’s patience pays off. When they get on board a new trend, their confidence level is high that the trend will continue.
Last week, the markets were down sharply towards the end of the week. On Friday, we saw confirmation of a short-term downtrend. If you got in too early you probably had to live with a bit of pain before the move down. If you waited, you could get on board with more confidence that your trade will work out. (And if you were smart, you added some index puts as protection.)
This downtrend may continue for a bit longer. The trend will change again, and probably very quickly. My advice is to be the tortoise and not the hare. Wait for the move to happen, confirm the new trend and then make YOUR move.