Happy Wednesday, traders…
Ben here.
If you’ve ever made a profitable trade only to give all of your gains back on the next one, you’re not alone…
Taking two steps forward and one step back is a common problem for aspiring traders.
You often lose the most after you’ve just had a big win as overconfidence and euphoria invade the logical part of your brain.
(Remember the Holy Trinity of Trading Psychology…)
But trading isn’t just about making money — it’s about keeping the money you make.
If you don’t take the necessary steps to protect your profits, it doesn’t matter how amazing your preceding trades were … you’ll eventually lose it all.
CAUTION: This is especially true in the current market, where volatility is surging (and more downside risk is apparent).
In other words, it’s all about risk management right now…
The Secret to Proper Risk Management
The first step to proper risk management is forming a solid game plan.
Before buying any options contracts, you need to determine:
- How much money you are comfortable losing in a worst-case scenario…
- How much money you expect to make in a best-case scenario…
- Where to set your stop loss (risk level)…
- Your expected price target (for the underlying stock and the contracts)…
If you’re thinking about buying puts, consider whether there’s a major support level near the current share price. If there is, you may wanna wait to see the stock lose that level before buying puts.
The inverse is true if you’re buying calls. Check to see if there’s a level of strong overhead resistance to worry about. If so, consider waiting for the chart to crack that level before buying calls.
Watch the price of contracts throughout the day, noting their high and low points.
This will give you an accurate gauge of the range the premiums are trading within.
That way, you don’t have to guess what a good fill is … you’ll know you’re buying near the low of the day.
Then, how you exit trades is arguably even more important than how you enter them…
After all, exits are where you make (or break) the bank.
Always have a price target where you plan to exit. I like to have a target for the share price as well as for the options premium.
For example, I’ll send out an alert saying “I’m aiming for Stock XYZ to hit $95, my first target for the contracts is $1.20.”
If you’re worried about your timing, or being able to pay attention to the market for the entire trading day, don’t hesitate to set a limit sell order. You can even do this as soon as you put the trade on.
That way, you can guarantee your contracts get sold if you hit your price target.
On the other side of the coin, it’s good practice to set trailing stop losses near your risk level.
This ensures your contracts will be automatically sold if the underlying stock breaks your downside risk level.
The Biggest Risk-Management Mistake You Can Make
Quite literally, the costliest mistake you can make when it comes to risk tolerance is risking more than you’re willing to lose.
If you plan on persevering through tough markets, you MUST avoid oversizing your positions.
This may sound obvious, but I see so many traders oversize their positions in a moment of exuberance, which often leads to disaster…
BOTTOM LINE: Every trader has to figure out how to strike a delicate balance between risk and reward.
But if you go over your boundaries and break your rules, it can ruin you.
This is why I advocate for hitting singles, especially when you’re first starting.
String a bunch of small wins together. It’ll help build your confidence while simultaneously fine-tuning your trading strategy.
And the best part is by sizing small, you’ll never lose more than you’re willing to.
How Emotions Can Affect Risk Management
While all of the technical considerations I just outlined above will help…
At the end of the day, risk management is a personal journey. It’s about your emotions.
I can’t tell you how much money you’re comfortable losing or how much you should strive towards making.
These answers come down to personal money management, your personality, your account size, and more…
For example, a middle-aged parent will often (and should) have a lower risk tolerance than a 25-year-old Reddit trader.
That said, there are four hard-and-fast risk management rules that everyone can take to heart:
- Be greedy when others are fearful, and be fearful when others are greedy.
- Don’t let the emotional half of your brain dominate the logical half.
- If you find yourself green on a trade, and you’re telling yourself “Let’s hold for just a little more, just a little more” — it’s time to get your emotions in check.
- Take your profits while you still have them. As the Steve Miller Band said, “Take the money and run.”
And speaking of taking some money out of the market, let’s look at:
💰The Biggest Smart-Money Bets of the Day💰
- SBUX 05/17/2024 $90 calls
- SNAP 05/17/2024 $12 calls
- AIG 05/17/2024 $77.50 calls
Happy trading,
Ben Sturgill
P.S. We talk about risk management all the time during our SPYDER WEBINARS…
This SATURDAY, April 20 at 3 p.m. EST — my colleague Danny Phee is hosting an urgent LIVE WEBINAR where he’ll reveal the most promising ‘smart money’ trades we’re seeing this week.
What are you waiting for? CLICK HERE NOW TO RESERVE YOUR SEAT.
