Three Easy Steps To
Trade Options For Explosive Gains...
The Dynamic Wealth Report
November 13, 2009
by Corey Williams, Editor
As the editor of Elite Option Trader, my email is filled
daily with questions about stock options. I’ll often answer subscriber
questions in my weekly update.
The question that comes up most often is - how do you know when to take
a profit?
The easy answer is… Sell at the top.
Just kidding! The reality is selling every trade at the absolute top is
impossible.
Knowing when to take a profit is really part of a bigger question. What’s my trading plan?
That’s right, you need to have a plan. Unfortunately, some people refuse to
develop one. Inevitably they face a small loss that grows into a big
loss. They’re left wondering why they aren’t more successful. Often
they’ll blame their failures on others. Then they give up their dreams
of making money in the markets.
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I don’t want you to be one of ‘them’. So let me say it again… In order
to trade any investment, you need to have a plan. Before you invest a
single penny of your hard earned money, you need to understand these five
things -
- What to buy
- When to buy
- What price to pay
- How much to buy
- When to sell
Here are my three easy steps to developing a successful trading plan.
The first step to developing a trading plan is choosing your trading
method. This is where you’ll determine what to buy, when, and at what
price. (Unfortunately, many investors never make it past this step.)
There’s a seemingly endless number of ways to do this. You can use
technical or fundamental analysis or a combination of the two. And the
number of different indicators, tools, and other number crunching
methods seems to grow every day. It can be a bit overwhelming…
especially if you’re just starting out.
It’s important to develop a system that returns more winners than
losers. You may choose to go it alone or you can let someone else do the
heavy lifting for you. This is the part of the plan we handle for all
the subscribers to our investment products.
Once you have a method for choosing your investments, the next step is
money management.
Determining how much money you’ll risk on each trade will vary from one
trader to the next. Everybody’s capital situation and risk tolerance is
different. I suggest keeping the amount of capital at risk on a
single trade to around 1% to 3% of your available capital (some suggest more,
some less).
When it comes to the volatile world of options, the key is to prevent one
or two unsuccessful trades from destroying your capital. It’s much
easier to recover from a loss of 10% or 20% than 50%. And you’ll never
recover if you’re cleaned out betting the farm on one trade.
Remember, you should be comfortable losing the entire amount. Never
invest in options with borrowed money or money you can’t afford to lose.
The next piece of good money management is developing a sell discipline.
It’s called a discipline for a reason… You must adhere to your plan to
take profits and cut losses systematically. There shouldn’t be any
thinking, hoping, or deciding when the bullets are flying. Once you hit
your predetermined point to exit a position, you’re out (win or lose).
Now there’s no rule that says we all need the same exit strategy to be
successful. Your individual situation, preferences, and risk tolerances
will determine the right one for you. When it comes to exit strategies, I
like to use a baseball analogy.
Some options traders are singles hitters and others are homerun hitters.
Singles hitters get a lot hits and don’t strike out often. This type of
trader will take lots of smaller gains and losses quickly. They won’t
have as many big winners but they won’t see many options expire
worthless either.
Homerun hitters on the other hand like to swing for the fences. As a
result, they’ll strike out more often. This type of trader will endure
some options expiring worthless but their 100%, 200%, and even 1,000%
homeruns will more than offset the losses.
After you’ve decided on a money management system, the last piece of the
puzzle is controlling your emotions.
Fear and greed are the two emotions that ebb and flow through investors. And if you’re not careful, they can derail even the best plan. You can
avoid falling victim to these emotions by being honest with yourself
when you set your sell discipline. By choosing a strategy you’re
comfortable with, you’re more likely to stick to the plan and be
successful with it.
So there you have it… In order to successfully trade options, you need a
trading plan. Be honest with yourself and stick to the plan. Identify
your trading strategy, implement a strict money management plan, and
remember to control your emotions. You’ll be a better (and richer)
trader for the effort.
• Toll Brothers (TOL) was upgraded by Wells Fargo
this week. They now have an outperform rating on the stock. The company
pre-announced positive Q4 revenue and earnings and increased their
guidance for 2010.
• Priceline.com (PCLN) was downgraded to neutral by
Credit Suisse. The discount travel site has seen its stock soar 167%
this year as leisure travelers search for bargains.
• MKM Partners started coverage on Palm (PALM) this
week with a neutral rating. The smartphone maker is battling for market
share in an increasingly crowded field.
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