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.
Brandon is one of my newest clients.
A bright, eager 30-something who has saved enough money and decided to try his hand in the market.
Bravo to him for deciding to get some actual coaching, rather than just throw his money away like so many others who hop on to the newest free broker platform.
On our most recent call, he said:
“Chris, I really like MSFT. Solid company, and the indicators are looking bullish. I just bought a Jan 21st 315 call option, and it’s going to pay off.”
Looking at the charts, I think he might be right.
Now, this isn’t a trade I’m recommending to anyone. It’s Brandon’s money, and if he’s willing to risk the $2360.00 on the call, that’s his decision.
And he already bought the option, so there isn’t much I can do about it.
I immediately asked Brandon, “What’s your profit target on this trade?”
“I mean, how long are you going to hold it, and when will do you plan to get out?”
When I heard nothing but crickets on the line, I knew we had some work to do.
Ok. I confess.
I don’t have a student named Brandon. Still, I’ve honestly lost track of just how many times I’ve had a near-identical conversation with one of my coaching clients.
You have to know when you’re going to take your money off the table before you get into the trade.
It’s called setting profit targets.
You just need a reasonable expectation of what you expect the underlying stock to do.
If not, you’ll be trading purely on emotion. Then, the twin gangsters FEAR and GREED will shake you down and leave you penniless.
There are many ways to plan your trade exits.
One of the simplest is to take profits when the option hits a particular percentage gain, such as 20-40%.
Or, if you’re a bit more sophisticated with your technical analysis, you could use one of the following profit-taking methods:
– The stock price hits a critical Fibonacci extension level
– The stock price extends far enough above it’s mean to breach the 2nd or 3rd Keltner channels
– The trend breaks down, and your indicators signal a likely reversal
I use (and teach) all of these methods and more to my subscribers. And I emphasize one crucial fact, many paths can lead to consistent profits.
You simply have to experiment and find that’s most successful for you.
Everything comes back to having a plan that you execute without hesitation. Train your logical mind to overpower your lizard brain.
If you don’t, then you’ll lose out on thousands of dollars of potential profits.
FEAR will scream at you, “Take the money now before it goes away.”
You’ll jump out of beautiful trends, making a fraction of what you should have had you planned your targets correctly. You must be amply rewarded for the risks you take.
Similarly, GREED can keep you in trades too long.
You hear it whispering, “Just hang in there, and we can get another 5% out of this.”
You’ll watch your potential profits disappear just because you wanted to make a few more bucks…A sad situation that happens every day to retail traders around the world.
So know when you’re going to cash in BEFORE you place your order.
Keep you your plan.
Tell those thieving voices in your head to take a hike, and I promise your trading account with thank you.
P.S. Build your stock watchlist, find out the inside scoop on the market, and turn your portfolio into a wealth-building machine by signing up for Rogue Investing Daily. Click the link here to find out more.