New Traders Must Read This...
The Dynamic Wealth Report
April 16, 2010
by Corey Williams, Editor
It happened again. And it pains me every time I see one of
these…
I received an email from David H. who’s mad as hell. You see, he “sunk his
life savings into” a single option trade. The trade didn’t work out as
planned. Now he’s wiped out.
Don’t let this happen to you. I’ll tell you exactly how in a minute…
At this point, I think I’ve heard every excuse in the book.
“The markets are rigged.”
“Options are too risky.”
“Your strategy doesn’t work.”
Is that really true? I know it isn’t.
Just look at my recent track record in Elite Option Trader.
Ten out of the last thirteen trades have hit my exit point. It includes
five trades that at least doubled, two trades that more than tripled,
and three more up between 83% and 95%.
Subscribers trading my option recommendations at a 77% winning
percentage are making a killing with those kinds of gains.
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But if you don’t use proper money management, you’re not investing…
you’re gambling. That’s exactly the mistake David made. And it’s easily
prevented.
Say you’re heading to Las Vegas for a little R&R. You’ve set aside
$1,000 for gambling on your trip.
If you walk into the casino and plunk down the entire $1,000 on red…
Well, there’s a good chance you’re going to be spending a lot of time
sitting around waiting for your flight home.
You’d have a whole lot more fun by making a series of smaller bets over
the entire length of your stay. There’s still no guarantee you’ll win,
after all, the odds are always stacked against you. But at least you’ll
have more fun.
Unlike gambling, when you’re trading stocks, ETFs, and options, you can
put your money to work when the odds are in your favor. But even when
the odds are in your favor, trades don’t always work out.
That’s why money management is an essential part of any trading plan.
Money management hinges on one question… How much money do you put into
each trade?
There are plenty of opinions on this subject. And there’s really no
right answer. Everyone’s situation and risk tolerance are different. But
here are some general guidelines to get you started.
Many experts suggest putting no more than 5% to 20% of your capital into
one strategy. Your overall investment strategy should include long and
short term holdings in stocks, options, ETFs, bonds, T-bills,
currencies, commodities, precious metals, real estate, and cash.
Exactly how you divide up your capital is up to you. But don’t put all
your eggs in one basket.
Once you’ve decided how much money you’re going to allocate to any one
strategy, the next step is figuring out how much money to put into each
trade. This is called position sizing.
Some investors use a fixed percentage of capital allocated to a
particular strategy. Again, this number will vary depending on your
situation, the type of investment, and your holding period.
For example, say you’ve set aside $10,000 to invest in options and
you’re going to put 5% into each trade. To determine your position size,
multiply $10,000 by 5% ($10,000 x .05) to get a position size of $500
for each trade.
The key is to put the same amount of money into each trade. That way
you’re not wiped out by a single trade.
Don’t end up like David… who made a beginner's mistake.
The bottom line is, to become a successful investor, you need to use some
sort of position sizing rule. A set percentage isn’t the only way to
determine your position size. Next week I’ll explain a more advanced
system.
• GameStop (GME) was upgraded by BB&T Capital Markets
this week. They now have a buy rating on the stock. Video game sales
spiked 6% in March after two months of declines.
• NVIDIA (NVDA) was downgraded to hold by Needham. The
analyst thinks product delays could hurt profitability.
• FBR Capital started coverage on Mastercard (MA) this
week with an outperform rating. The analyst thinks the company will
continue to benefit from a shift toward electronic payments.
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