Author: Chris Hood
Be sure to check out new episodes of my video podcast each week, where my ace pupil Brian Jones and I talk the ins and outs of options trading- and give you insights and strategy that you can immediately put to work for you in the markets.
Why do you want to trade?
A simple question, but one I ask each new client.
You want to make money?
Fair enough, but how much money exactly?
This is where most run out of good answers. Either they want to get rich overnight, or else simply have no idea.
If you’re new at trading, you’ll likely fall into one of these two groups.
Let’s address each in turn so that you can disabuse yourself of any unrealistic expectations and get down to the nuts and bolts of building your trading plan.
“I have 10K in my account, and I want to turn that into 100K by the end of the year!”
As wonderful as this would be, I hate to be the one to tell you it isn’t going to happen.
Is it even possible?
Of course it is. You could put 100% of your capital into speculative directional bets like long calls or puts and have the stock skyrocket in price or sink like a stone.
But here’s what would have to happen.
You’d need to consistently throw large percentages of your capital into positions. Your entries would need to be perfectly timed and your exits exact.
Every single time.
Just one loss on an overloaded low probability trade, and you’d be right back to square one.
That’s assuming you don’t completely blow up your account.
You must understand the relationship between risk and reward. They’re inversely related – the less risk, the less reward, and vice versa.
Temper your expectations and control your risk.
All it takes is a subtle shift in your mindset. Assume that every trade will lose when you place it, and you’ll tend to size your positions appropriately for your account.
“I want to make money but have no idea how much.”
If you find yourself in this camp, you’re much better off than the ‘get rich quick’ contingent.
Are you trading for some extra spending money?
Want to grow your retirement portfolio?
Are you looking to use trading to match your income so you can quit your job?
Identify the goal, then determine how much you need to make per week to achieve it.
Let’s say it’s $1500.00 per week.
As long as your expectations are realistic for your available capital, you’ve got the beginnings of a trading plan.
I’m a firm believer that you always need to trade for an OUTCOME. Set a profit goal, then determine how you’re going to meet it.
This isn’t possible if you have no idea your win rates and profit/loss ratios for different trade types.
Collecting this data is one of the key reasons I advocate paper trading.
You get to collect some historical performance data without risking actual money.
If you know your win rates, average profits, and average losses, you’ll learn how many of each trade you’ll need and how much to allocate to each to hit your goals.
It just comes down to a bit of math.
Everyone is eager to start making money. Perfectly understandable.
However, your goal must be realistic, well-defined, and backed up by a written trading plan.
Trade too aggressively or wholly blind, and you’ll end up running in place at best and potentially walking off a cliff.
Trade small, trade smart, and build consistency in your goals.
There is no other way.