OTMA and the Psychology of Trading


INTRODUCTION - Before you get into a position, you always need to have an idea of where you're going to get out if that position isn't going well. Now it's clear that if the market hits that level, it's time to head for the exit. But what's arguably far more important and massively overlooked, is that 'Out of The Money Area' (OTMA) between your point of entry and point of taking a loss. If you think about it, OTMA takes up all of the time a trade isn't going your way and has the ability to bring on intense stress and mental anguish. It sounds super obvious when you think about it and yet, I don't believe OTMA is an area (both literally and figuratively) that has been properly contemplated and explored. 

PROPOSITION - And so, my proposition with respect to OTMA is that once you decide on your stop-loss point, instead of sweating every OTMA move, try and retrain your mind to accept OTMA as nothing more than allocated space to allow your position to work towards your profit target. Remember, when you got into the position, you told yourself you would take a loss if the market got to a certain level, and hopefully, you chose that exit level for a reason. If this is true, it also means anything in the OTMA zone is NOT where you would take a loss and nothing more than allocated space to allow for your trade to play out. 

REFRAME AND RETRAIN - If you can do this, it should have a major impact on your trading in an amazingly positive way. There are two big changes that will happen if you're able to reframe your thinking towards OTMA. For one, if you can process this and recognize OTMA as nothing more than approved, allocated space to let your trade do its thing, you'll start to worry less about being in the red and will discover you're no longer obsessing over every tick along the way. You'll also find you're more confident with your trading decisions and more understanding of the fact that in many ways trading is no different than life itself. That is to say, many times in life moving in the right direction is also about time spent in the opposite direction along the way. There are no straight lines.   

AWARENESS - The other area of change will be in the trading itself. Once you adopt this healthier mentality (that doesn't involve a daily regimen of staring at your computer screen for hours on end), you'll find you're even more diligent about determining exactly what you think is the right level to define as a stop if a trade you love isn't working out. All of a sudden, you'll be more OTMA sensitive, which means you'll become more proficient at prescribing the appropriate OTMA dose to your trades. When this happens, you'll start feeling a lot better about your positions, as OTMA is more associated with a part of the process rather than a death row sentence. And yes....that will make a big difference.

OTMA is a part of the process, not a death row sentence. Via @joelkruger

MOMENTUM - Yes. Of course trades won't go your way and you'll take losses. That's not what this is about. This is simply about reflecting on what just might be a massive iceberg sized chunk of debilitating, negative energy time that consume your days. We all need to constantly put ourselves in a position where our days are filled with as much positive, constructive energy as possible. It's a funny thing. When we hear about momentum in life, we aren't accustomed to associating momentum with mental health. But when taking some time to reflect, it's really a tragedy that we don't value the power of momentum when it comes to mental health. The more time we spend filling our days with positive thoughts, the greater the chance these positive thoughts build into a wave of mental health momentum resulting in full body health, happiness and success. So here's to gaining a better understanding of OTMA and a better way to think about it all. 


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