The one thing that defines the successful trader from the unsuccessful is risk management We all would like to toss the dice and come up with double 6’s every time, but is that reality, NO. I had to learn from losing allot of money, here is why I am writing this topic, so I can help you avoid the same mistakes I made. First you have to know what you have to work with. In other words you have 10,000 to trade with.
The mistakes most traders make is taking on too much risk. You don’t want to put 50%of your 10,000$ on one trade! I hear that so many times I want to cringe! I have even heard someone say 90%!!!!!!!!
My percentage of most peoples’ risk profile should be only 5 – 8% of their account. In other words if you have a 10,000 you only want to put 500$ = 800$ at risk, some risky trades even less. If you don’t know use a calculator and use it.
Options give me the leverage of 100 times a stock so you can control 100 shares of a stock with an option. So think about that when putting on a trade. Also we will be discussing the deltas of the option. That is the movement of the option in relation to the stock price. A 50 delta on a stock means the option moves .50 for every 1.00 the stock price moves. Some of you go way to far out of the money on your options. I have a rule of .35 that’s usually my limit, now I have done less, but not usually.
As with other forms of risk, market risk may be measured in a number of ways. Traditionally, this is done using a Value at Risk methodology. Value at risk is well established as a risk management technique, but it contains a number of limiting assumptions that constrain its accuracy. The first assumption is that the composition of the portfolio measured remains unchanged over the single period of the model. For short time horizons, this limiting assumption is often regarded as acceptable. For longer time horizons, many of the transactions in the portfolio may mature during the modeling period. Intervening cash flow, embedded options, changes in floating rate interest rates, and so on are ignored in this single period modeling technique.
