New Traders Must Read This…

| April 16, 2010 | 0 Comments

It happened again.  And it pains me every time I see one of these…

I received an email from David H. who’s mad as hell.  You see, he “sunk his life savings into” a single option trade.  The trade didn’t work out as planned.  Now he’s wiped out.

Don’t let this happen to you.  I’ll tell you exactly how in a minute…

At this point, I think I’ve heard every excuse in the book.

“The markets are rigged.”

“Options are too risky.”

“Your strategy doesn’t work.”

Is that really true?  I know it isn’t.

Just look at my recent track record in Elite Option Trader.

Ten out of the last thirteen trades have hit my exit point.  It includes five trades that at least doubled, two trades that more than tripled, and three more up between 83% and 95%.

Subscribers trading my option recommendations at a 77% winning percentage are making a killing with those kinds of gains.

But if you don’t use proper money management, you’re not investing… you’re gambling.  That’s exactly the mistake David made.  And it’s easily prevented.

Say you’re heading to Las Vegas for a little R&R.  You’ve set aside $1,000 for gambling on your trip.

If you walk into the casino and plunk down the entire $1,000 on red… Well, there’s a good chance you’re going to be spending a lot of time sitting around waiting for your flight home.

You’d have a whole lot more fun by making a series of smaller bets over the entire length of your stay.  There’s still no guarantee you’ll win, after all, the odds are always stacked against you.  But at least you’ll have more fun.

Unlike gambling, when you’re trading stocks, ETFs, and options, you can put your money to work when the odds are in your favor.  But even when the odds are in your favor, trades don’t always work out.

That’s why money management is an essential part of any trading plan.

Money management hinges on one question… How much money do you put into each trade?

There are plenty of opinions on this subject.  And there’s really no right answer.  Everyone’s situation and risk tolerance are different.  But here are some general guidelines to get you started.

Many experts suggest putting no more than 5% to 20% of your capital into one strategy.  Your overall investment strategy should include long and short term holdings in stocks, options, ETFs, bonds, T-bills, currencies, commodities, precious metals, real estate, and cash.

Exactly how you divide up your capital is up to you.  But don’t put all your eggs in one basket.

Once you’ve decided how much money you’re going to allocate to any one strategy, the next step is figuring out how much money to put into each trade.  This is called position sizing.

Some investors use a fixed percentage of capital allocated to a particular strategy.  Again, this number will vary depending on your situation, the type of investment, and your holding period.

For example, say you’ve set aside $10,000 to invest in options and you’re going to put 5% into each trade.  To determine your position size, multiply $10,000 by 5% ($10,000 x .05) to get a position size of $500 for each trade.

The key is to put the same amount of money into each trade.  That way you’re not wiped out by a single trade.

Don’t end up like David… who made a beginner’s mistake.

The bottom line is, to become a successful investor, you need to use some sort of position sizing rule.  A set percentage isn’t the only way to determine your position size.  Next week I’ll explain a more advanced system.

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Category: Options Trading

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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