3 Simple Ways to Boost Your Trading Profits Today
Dear Investor -
Congratulations! You’ve just made a very smart decision by reading this and one that will help you take control of your portfolio and begin making impressive gains.
As an active trader we are amazed that more people don’t trade options. Options not only allow you to lower your risk but also allow you the opportunity to mimic a stock portfolio - with a lot less money! Now, who wouldn’t want to make bigger profits AND risk less of their money?
Learning how to trade options was definitely a turning point for our wealth building. We take pride in outperforming the Wall Street pros every year and have learned not to get caught up in trading ranges or pending breakouts or breakdowns until they happen. In part, we attribute our success as an options traders to a few simple steps that we are going to share with you today. So, no matter where you are in your trading career, adhering to these three key guidelines will help you collect more profits and increase your wealth.
Step #1 — It Takes Money to Make Money
The most important thing you will need is money. The best trading idea in the world is worthless unless you can execute on it. “How much do I need to start trading options?” is probably what we get asked most often and, while there’s no one-size-fits-all answer, we will give you our general guidelines.
A lot of people want to trade options with only a $100 – $1,000. You can start with this amount, but one or two bad trades are going to wipe you out – and, trust us, there will be trades that don't work out. Our philosophy is to build a solid foundation of wealth and then use some of that for your “riskier” investments. We suggest having at least $2,000-$5,000 to start your option trading account, which should be separate from your longer-term investing account. Also, we hope this goes without saying, but we will say it anyway: Don’t use money that you need to pay for crucial expenses like food and housing. If you start an options account with that $2,000 to $5,000 in place, you can easily double or triple that amount with the right trades.
So, the next logical question is: How much should I put toward each trade? Let’s start with the maximum: For our options trading account, we do not risk more than $5,000 in any one position but more conservative traders might do $1,000-$2,000 per trade. You can even trade options for less than $100-$500 per position.
If you’re starting with a smaller pot, it’s better to think in percentages. Do not risk more than 5% of your trading account on any single trade and, as you’re getting started, consider not risking anything. Paper trading or practice trading can be helpful to gain confidence and avoid costly mistakes. Practice on paper or a simulated portfolio first if you have never traded options.
Once you see how options work, you’ll understand why they are the most powerful tool ever created. There are numerous website offers a free simulator, as do most options-related brokers.
Step #2 — It’s Good to Aim High
Like any journey, it’s important to understand where you’re going before you set out. We never make a trade without knowing what we expect from a stock and the corresponding option we choose to trade around it.
A lot of people buy a stock or make a trade based on a company or a product they know and like. If that’s worked for you in the past, then luck was on your side, but using it as your sole strategy can be dangerous. If you only trade stocks you “like,” then you’re missing out on half of the opportunities in the market.
Conversely, if you decide to take a bearish stance on a stock simply because you don’t like its products or practices, you may be setting yourself up for trouble. This is why we let my fundamental and technical analysis set the roadmap for me.
Our expectation for every option trade is to make a return of at least 100%. And we often achieve that, but, just as often, we will take lower profits if the charts are telling us that the stock or the underlying market are about to change direction.
If your exit target is reached, you can sell half of the position and take all of the risk out of the trade because you will have earned your original investment back. Sometimes an option zooms past our 100% target and we ride it for even further gains. Once this happens, it is easy to set a stop to take you out of the position, and it also gives you more room to play the volatility.
Another word of advice: Most traders get greedy and wait too long to take gains. This folly can turn profits into losses, and that’s why we always stick to the game plan. While there may be a little more juice in the melon to enjoy, exit when the parameters of the trade have been met.
Whether you take profits just in the nick of time or you happen to take them too soon, never look back! What’s done is done.
Step #3 — Know When to Say Goodbye
Exiting a trade with a win is the goal, and we hit that goal most of the time. But losses happen, and any trader who tells you otherwise isn’t being honest.
We try to limit losses to 50% on options over $2 and you should too. However, we do not carry stops on cheaper options (those under $1) because you can often get “whipsawed” out of trades due to market volatility. This is why chart work is crucial and why we do the homework to decide if a position should remain open or we should cut our losses.
What we tell NextOptions traders is that all exit targets and stop targets are just that: targets. As a general rule, you should not have any “hard stops” entered with your broker because the market makers can often see your orders. They will try to purposely drag down the price of the option to “knock” you out of the trade, and will then turn right back around and buy your contracts on the cheap to hold for the profit target that you were shooting for when you first got into the trade.
Oftentimes, we will use a stop limit in order to protect the profits we’ve already accumulated. If your position is up 125%, you want to protect that return by having a stop in place. Traders can get greedy if they see a return of 200%, and they will often give back a major portion of their gains by not having a stop in place.
Again, it all comes down to knowing what you expect from the trade on the upside, but being prepared to exit early with profits — or a loss — if the charts tell you do.
While simple, these three steps can provide you with a foundation to help you gain control of your own trading strategy. We recommend you implement these steps immediately and not only will you become a stronger trader but a much more profitable one.