Q: I am not sure where I originally learned of Dr. Tharp, but I recently listened to an interview by Robert Kiyosaki of Dr. Tharp back in 1998. I consequently have bought two books by Dr. Tharp. One problem that I currently am having is applying the position sizing rules to options. Since the option price can change with respect to underlying equity price by a given gain factor (or leverage), it would almost seem like getting stopped out for every trade is almost inevitable. I have only been trading for one year coming up next week. I also have downloaded the position sizing game, and am practicing with that.
A: As for stops, it’s the same for options as for other instruments—there are advantages and disadvantages to keeping stops very tight and getting stopped out frequently. Likewise, there are advantages and disadvantages to making the stops very wide and getting stopped out less frequently. Elements to consider when choosing between the two include your personal psychology, the trading system, market conditions, the type of instrument, and probably a few others.
Good luck and have fun with the position sizing game. You don’t get to practice setting stops in that game—that’s done for you. There, you simply are trying to come up with position sizing strategies that get you to the next level.
