Date: 3/22/2021
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.
“How many trades should I have?”
I’ve heard a hundred times over my years as a trading coach. It’s a question equally relevant to beginner and advanced traders.
The answer is, “It depends.”
Alright, I agree that’s not much of an answer, so let’s look at two extremes.
Not actual clients, but close enough that they could be.
Carefree Carl loves to place trades. I mean, this guy will find a way to start some kind of position on anything he sees.
Doesn’t meet most of his entry criteria? To hell with it, let’s see what happens.
Carl’s the sort of guy who’ll immediately, and without looking at any kind of chart, place any trade I send out in my emails.
Trading overkill! His portfolio takes 15 minutes to scroll through!
On the other hand, there’s Nervous Ned. A guy so afraid of losing that he just can’t press the button and send the order.
He’ll analyze the trade, and if it doesn’t meet every entry criterion, he won’t even consider it.
Ned’s basically waiting for the voice of God himself to give him the ok!
Ned might place one trade a week, maybe less.
His account has so little activity that one wonders if he really wants to do this.
Like I said, extreme examples, but I’ve met both of these people so many times over the years I’ve lost count.
Since there isn’t a one-size-fits-all answer to trading volume, here are some guidelines!
First, you need enough trades to meet your profit goals for the week, month, or year.
I teach my clients to trade to an outcome.
How much do you want to make? If you track your performance, you’ll know how much money you need to use in the market to get what you want.
You aren’t going to consistently hit $1000.00 per week if you’re only willing to risk $10,000.
No one is that good.
Likewise, if you can easily make your 1K profit target using only 25K, why would you use more?
Careless Carl might exceed his goals but use far too much capital while Nervous Ned probably won’t come close to hitting his targets.
Second, follow your rules of allocation.
It’s simple math.
If you know that you’re going to trade with half your $100,000 account, you have 50K to work with. Then decide how much you’re willing to risk on any given trade.
Usually, this is 1-3%, with 5% being the max.
At 3% in each trade, you have $1500.00 in each for a total of 33 positions at any one time.
You might put a bit more into powerful set-ups or a little less on speculative ones, but it’s a ballpark figure.
My guess is that Careless Carl would have 50 or more and be heavily overallocated. On the other hand, Nervous Ned and his 2 positions wouldn’t come close to deploying the appropriate cash to hit his goals.
Finally, there’s the issue of management.
Proper trading means that you track every single position.
Know your entry and exit points, when to scale in and out, set your broker platform alerts, and be prepared to make adjustments when needed.
This means looking at the charts and technicals of EVERY trade EVERY day.
Sure there’s lots of tracking software available, but managing large portfolios is time-consuming work.
Ask yourself, “How much time can I devote to trading with my lifestyle?”
Most retail traders don’t make their living in the market. They have full-time jobs, family, and hobbies that keep them from staring at a monitor all day.
You can alleviate some of the headaches by focusing on longer-duration trades. Avoid day trading or dealing with weekly expirations.
But you MUST devote some time to pre-market planning and post-market analysis.
“There’s no such thing as trading on autopilot, especially with options!”
All the Careless Carls better have ample time to manage their massive trade volume. However, from my experience, those who trade this way usually don’t. Ironically it’s the Nervous Neds of the world that all the time but nothing to do with their tiny portfolios.
So everything is about BALANCE.
There are as many trading styles as there are personalities, and you need to find the one that fits.
You can only do this by practice.
GET TO IT!
Next time we’ll take a look at volatility and why it matters in your trading.
