In the article last weekend, I suggested some serious introspection and self-evaluation to determine how you were doing with your trading. To me that means going well beyond whether I am making a profit or loss. It means I need to understand how I behaved in a trade to determine what influence my action or inaction had on the ultimate outcome of the trade. Obviously, I can't control a market and I can't make a stock do what I want it to do, but I can act to do things like cut losses by placing stop loss orders or by buying protective puts and I can decide not to pull the plug when something is still going my way. Recognition of how I acted and reacted can profoundly affect my future trading as can failure to understand why I've acted in certain ways.

There are probably as many answers to the question "where would you like your trading to go" as there are people answering the question. Certainly everyone would like to see their trading be profitable and most, at least, would like their trading to be safe. But answers will begin to differ when we ask: how profitable? or how safe? Are we satisfied if we make 1% in a year or do we need to make 15% or 50% to be satisfied. What is safety in a trade, and what reward can we reasonably expect relative to the "safety" we want?

Recently, a coaching student wrote reminding that most people seek high rewards, safety, and liquidity. Unfortunately, though we may find two out of three in a trade, it would be exceedingly rare to find all three in one specific investment. From the outset it is important to recognize that almost all trades and all trading involves compromise of one sort or another. For example, often when looking for a large reward we may need to take on high risk. Conversely if we set up a trade that is relatively safe, we may find that we may need to limit the potential reward to achieve the safety.

As each of us decides where we want our trading to go, we must both understand and make compromises that can lead us to the results we seek. In next weekend's article, I'll discuss some of the things I believe are essential for a trader to do in order to achieve success. For now, however, the first step is to decide where you want your trading to go. Is it to be a gambling venture where you buy a stock that someone mentioned at a cocktail party with the hope it will go up or do you want it to be your full time occupation? Do you want your trading to provide a regular stream of income as I discuss in my new book "Smart Investors Money Machine," or is it sufficient to dabble occasionally with the hope of snatching a profit here and there?

All the choices are yours. I only suggest that you not be too cavalier in deciding your approach to your trading. Trading can offer very significant possibilities to enhance financial success and it can leave you broke. Either of these possibilities carry serious consequences deserving of careful consideration. Those who may be unlearned or unsophisticated in trading may believe that I have put too much emphasis on this self-analysis, but I am confident that self-knowledge is an absolute necessity for anyone who intends to achieve regular success in the markets. We are often our own worst enemies in entering and exiting our trades. If we start with a specific understanding of where we want our trading to go, I believe we have a good beginning. If we don't have that specific understanding, it might be good to go back to square one and make the effort to understand ourselves and what we are willing to do to become better traders.

Good Trading!
Bill Kraft

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The Option Trader service utilizes standard trading in Puts and Calls as well as strategies using Leaps, Straddles, Credit Spreads, Calendar Spreads, and Naked Puts. But no matter how sophisticated a strategy may be, we ALWAYS know our downside potential on every trade.

Here's a look at a trade Bill is currently working on:

RadioShack Corp. (RSH)
Movement in RSH enabled me to first buy some LEAPS calls then reduce my cost by selling other calls to create a spread that I ultimately closed during the week for a 20% return after commission in just over a month. The stock now has to contend with some overhead resistance if it is to continue trending higher.

Good Trading!
Bill Kraft