Trading guidelines and FAQ

What type of style do I trade?

Consistency always wins! Trade small and avoid losses as much as possible and let compounding do the heavy lifting, most of you probably already know this but it is always good to remember this:

As you can see in absolute terms both give you the same FV but look at the difference between consistent and aggressive trading when compounded.

Therefore; if you like the rush of trading and you consider yourself an aggressive trader make a habit of taking Profit out of your account and putting it somewhere safely ( you will be much better off in the long run) but it is clear that the greatest profit potential comes from achieving consistency.

By the way, you can still have big winners; it just means that you need to size them accordingly to avoid big losses.

How should I manage my risk?

Any given trade should have a max loss of no more than 5% of capital, ideally around 3%. Hence, you should only trade whatever trades I provide that your account size allows or enter the stock version (if it is an options alert) of the trade when the SL parameters allow you to.

Obviously, take into account market correlation so start reducing size as you get into correlated positions. ie don’t have AMZN, GOOGL, and APPL positions at the same time and use 5% in each case.

Assigning a Stop Loss (SL)

Options

A good rule of thumb on SL when trading options is:

2 weeks or less to exp ITM SL 50 %
2 weeks or less to exp OTM = lottos no SL
Short term trades: up to 2 months SL 30% - 40%
Long term SL 20% - 30%

So ALWAYS size your positions relative to the size of your account ( ie if you have a 1 k account a lotto should not be more than $50 and ideally around $30).

It will depend a lot on the name in regards to SL but I would advice it should be no more than 30% and adjust size accordingly.

SIZING positions

A good rule of thumb is as I mentioned 3% - 5% of capital per trade ( can't stress this enough) so:

4% x Capital = SL x Position

or put it simply you need to size your position so that :

Position = Capital x 4% / Stop loss

So for example if you have a $1k account the math you should do is $ 1000 x 0.04 / 0.3 ( if it is a 30% SL trade) that should give you the notional amount of the position in dollars or in this case ( $133.33) which then you would need to divide by the price to get the amount of shares or in the case of options it would be divided by the ( px x 100) as each 1 option contract represents 100 shares.

*If you need help with this I can give you a demo spreadsheet with all the formulas done so you dont need to think about it. Though I promise it will soon become second nature.

What do I do if I dont have enough money in my account to enter a position safely?

Ifyour account size is not big enough to enter a position you either DO NOT trade it or you do the equivalent with shares

What should I do if I cannot look at my account regularly?

Only on very few names you can use an actual SL as in most cases volatility will take you out!

Therefore, IF you cannot be looking at your screen regularly during the trading sessions, three things you can do are:

Buy shares = always easier to put a SL and target on them and check your positions whenever you have the time.
Buy time and ITM; choose longer expirations and always ITM to avoid big swings in your PnL and hence keep your risk in check.
Deep ITM, when delta approaches 1 you effectively have a leverage position that trades like a stock.

You can clearly see in the example that as Delta approaches 1 if you add the mid-price plus the strike price = the spot ( ie 2000 strike + value of the option /1372.65 is very close to the spot price of 3372.43) meaning your cost is only the intrinsic value of the option and therefore a lot easier to manage.

Obviously, I could get into more complex option strategies to manage your Greeks but there are entire books written about it so I will keep things simple.

Taking profits

I will alert you when I am taking profits and for simplicity sake I will not really use any runners in the performance review but as a general rule and if your account allows it, when a stock is running and once it reaches the targets set, you should close 2/3 of the position and leave a 1/3 to run but raise the stop loss on that remaining 1/3 to break even (BE) at least.

Once your account has grown to a decent size, consider taking some of the profits and using a different account for LT more secure investments which if you use my GOLD service we can help you build, or if you don't you can still use my LT portfolio as a guideline.

Dealing with Losses

Last but not least, what to do if we are on a losing streak? well referring back to my HF experience the way I deal with it and so do a lot of the HFs and money managers is the following. You start reducing the trade size by half after your account is down 5% and half again when you are down 10%. The idea is to defend your capital and avoid crippling losses, remember is a marathon, not a sprint, and rich quick schemes same as casino runs are not profitable in the long run.