Every now and then I find traders will go out on the risk curve and take a speculative trade.
That’s a good thing — because as they say in baseball, ‘you cannot steal second base with your foot on first.’ However, there are limits, and often I find these traders stretch too far and they soon find themselves wounded – sometimes a devastating blow that is nearly impossible to overcome. How can you avoid such a calamity?
We must always consider good risk management techniques when trading or investing. The disciplined player can have control over their account and will withstand tough results or outcomes. The name of the game is survival, live to fight another day – as the future is the unknown and if prepared we always have a chance.
So, What Can We Do?
Position sizing is the first and most important rule of risk management. Know how much you can afford to lose and do not risk more than that amount. Always consider the payoff of a trade and if you are aligned with the risks. Taking an option trade that has a low probability of success but a high payoff rate if it wins should not be your heaviest bets. I have seen more disasters from traders using this strategy of ‘lottery ticket wins’ than I would like to share, but suffice to say those who sip from the ultra risk bucket will find their accounts dry up quickly.
I will suggest to an options trader no more than 2% of your account for a trade. This allows room to absorb a total loss without devastating the account, and offers a chance to use the magic leverage of options to scale very nice returns. But this takes discipline, patience and acceptance of the outcome. Can you do it? If so, you give yourself a chance to stay in the game.
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Learn more about Lang’s option service: Explosive Options here.
