Don’t Get Wiped Out

 

Date: 9/22/2022
Author: Chris Hood

 

 


Every single day some retail trader blows up his account.

I know because I see it in chat rooms and get desperate emails from options novices.

Oh…and I’ve done it myself.

If you don’t know what this means, blowing up your account is losing every cent of your trading money. The loss can be even greater if you’re operating on margin.

So what causes traders to lose everything.

Is it because of their win rates? Entry and exit points? Or is it the tickers they play?

Nope.

None of these will necessarily wipe out your account.

Obviously, if you lose more than you win, it will chip away at your capital. This is normal for novices as they build skill with options.

It took me years to become consistently profitable in the market.

So what is the number one mistake that will leave you penniless?

Position sizing.



Making money requires risk.

Each time you place a trade, you take on risk. The amount depends on the trade type and how much capital you allocate to the position.

The risk is defined as your potential loss on the position.

Some trades are so risky that I advise my subscribers to steer clear of them.

For example, selling naked puts.

Selling a naked put on SPY with a max profit of $690.00 that could lead to a $32,3210.00 loss doesn’t sound appealing.

I got hammered by one of those early in my career for 20K, and I didn’t enjoy it.

Before you place any trade, knowing the maximum amount of money you could lose is critical.

This is the max risk for that position, and a sound allocation plan is to keep your risk to 1-3% of your total account value.

Let’s assume you have a 50K trading account.

You decide to keep 25% as cash and trade with the remainder.

That means $12,500.00 stays safe on the sidelines, and you have $37,500.00 to use for your positions.

Now let’s apply the 1-3% rule.

Your total NLV (net liquidating value) is $50,000, so each trade should risk no more than $500.00 – $1500.00.

If you had three positions at $500.00 and lost 100% of each, you’d still have plenty of capital to work with.

But chasing dreams of getting rich quick, many ignore this entirely.

I’ve even seen some people with a $50,000.00 account risk 90% or more on a single trade.

Their focus is on the potential gains rather than the potential risk. As a result, they either win big or lose nearly everything.

A couple of early wins that double your account can become addictive.

You’ll likely be overcome with a feeling of invincibility, mistaking your luck for skill. But sooner or later the market will take it all back.

What an emotional rollercoaster ride.

The key here is to shift your mindset from potential gains to potential losses.

Are there times when I break the 1-3% rule?

Sure, if I’m incredibly confident in a setup, I might push this up to 5%…but not often. I’m likelier to size down to 0.5% when the market gets dicey.

So there’s room to customize.

You have to decide how much risk you want to take on.

Just be smart about it, so you don’t get wiped out.

 

Cheers,
Chris Hood

 

[Special Announcement]

We’re in the final stages of launching our live trading room.

Due to the logistics, I can only accept a few people. When the call goes out, you need to let us know right away that you’re in.

I’m looking to change some lives and hope you’re along for the ride.

 


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