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Why Options Trading Is the MO of the Black Swan Trader

I have loved options trading from the very first time I tried it. While I didn’t exactly know why I liked it so much, I knew there was something particularly special about it but I couldn’t quite put my finger on it. That changed last week when I read a book called The Black Swan by Nassim Taleb.

Exposure to Serendipity – a Television Interview that Became a Black Swan for Me

I had never heard of Nassim prior to this past month when he appeared on television and gave a short interview about the Greek debt crisis and how it related to his description of Black Swan phenomena. I did not catch all of the interview, but I did catch one extremely important comment by him – a comment that resolutely cemented in my mind the investment strategy I had been tinkering with lately. What he said that there was unknown uncertainty in the world, and in particular the stock market – and while that may not seem like the boldest statement ever made what he next said forever changed the way I think about investing. What he said next was that what made those unknowns particularly important was that the returns (positive or negative) on those unknowns were large enough to impact the overall performance of an asset portfolio. In other words, sudden events can produce such large (usually unfavorable) swings in the market that single market or asset events can obliterate decades of returns in a matter of hours. I am sure that if he ever has the mis-fortune of reading this post that he will be horrified that I have referred to watching the television (and in particular a financial news channel) a “black swan” event.

For those of you not familiar with modern portfolio theory, this is equivalent to standing the classic investment portfolio theory (and all of its academics) on its collective ignorant head.

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An Options Trading Strategy Suddenly Makes Sense

As I had mentioned before, I had been tinkering with my own investment strategy, attempting to maximize my exposure to positive returns using the minimal amount of capital, all the while keeping the remaining cash in highly liquid/low risk assets. Oddly enough my options trading strategy was working quite well before I read the Black Swan… and now I have some appreciation for why.

If you have read The Black Swan already and haven’t given options trading a try, I highly recommend learning more about it. If capital is a problem, then perhaps binary options are for you.

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1 Comment updated August 8, 2011

Learning to Trade Foreign Currency Made All The Difference

When I was learning to trade foreign currency I was being trained not just to understand the movements of the currencies back and forth between countries but also learning about the human condition and psyche. I have long enjoyed the benefits of a superior financial education than most of the people around me, and having this knowledge has always allowed me to have a deeper understanding of how individual human decision making impacts economics and global finance.

Forex Trading Plays on Inequities in the Market
It wasn’t until I learned to trade foreign currency that I began to understand how people with real money take advantage of the basic needs and desires of individuals and use forex trading to take advantage of the opportunities in the market. It used to take large amounts of capital and small teams of traders to take advantage of the movement of money around the world but now many automated trading programs have sprung up allowing individuals with smaller amounts of capital to play and succeed in the market where only the big fish once played.

Now I Trade Forex Too
Now instead of watching all the highly capitalized players in the market play – I get to play and make my money too. With the cool robot programs I use (linked to my broker), I don’t have the stress of constantly monitoring results either.

Is The Stress of a Margin Account Too Much For You?
Many people who try to learn to trade foreign currency end up quitting before they ever make their first trade. The number one reason for this (other than pure lack of capital reasons) is the stress and high risk of using a margin account. While the leverage of a forex margin account is awesome (try upwards of 100:1 leverage), the downside is that losses can mount quickly and in many cases are not limited to the amount of initial investment. Fortunately one alternative to direct forex trading is the advent of binary options. Binary options offer exposure to the high returns of forex trading without the unlimited downside. A binary options trade offers the high yield but losses are limited to the amount of the investment – an important protection for traders afraid of the exposure to margin calls. Better still trades typically are commission and spread free, greatly reducing the amount of capital required to effectively trade. In many cases as little as $100 is required to open an account and place a trade. Try that with a forex trading account, no?

Anyway, I hope you’ve learned a little about how to trade foreign currency and are committing yourself to learn more or to give other forms of investing a try. The fastest way to make money is trading online. Other people are doing it, no reason you can’t.

More on Foreign Currency Trading:
Learn to Trade Foreign Currency – Examples of Forex Trading Opportunities to Exploit
Learn to Trade Options – The Basic Put and Call Options Explained
Learn to Trade Binary Options – The Fastest Way to Make Big Money in the Market

Prior Post: Forex Trading Systems That Work 24/7 Good Times and Bad Times

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1 Comment updated July 26, 2013