Advanced Options Training: Risky Business Class 3: Trade Management

Class 3: - Trade Management

Review
“Always bear in mind that your own resolution to succeed is more important that any
other.” -- Abraham Lincoln

4 Musts of Trading
• A Identify the Edge (your strategy)
• Assess the Risk to Reward (R to R)
• Consistent Trade Management
• Monitor your stream of thoughts

PAGE 1
Advanced Options Training: Risky Business Class 3: Trade Management

5 Steps to Trading R’s

• Step 1: Determine your R for each

trade to be used consistently over
a period of one month or 20
trades, whichever comes first
• Step 2: Determine your entry price
and then stop price based on the
chart. For example, buy XYZ at 30
and stop will be 29.50
• Step 3: Calculate how many shares
or contracts to purchase by taking
your R unit and dividing it by your
stop
• Step 4: Identify target based on the chart and calculate R’s
• Step 5: If R to R is at least 3 to 1 then enter trade when it triggers
Risk Unit (R)
• A trader’s R should be no more than 2% of their cash account value:
➡ With a $2,500 account you would be trading a $50 R
➡ With a $10,000 account you would be trading a $200 R
• Therefore, no more than 2% of your account should ever be at risk on a
trade
• Assuming a $2,500 account, you now know your R value is $50
Trading R’s
• To determine how many shares (or contracts) to buy, divide R by the size of
your stop.
➡ $50R ÷ $0.25 Stop = 200 Shares
➡ $50R ÷ $2.00 Stop = 25 Shares
➡ $100R ÷ $0.25 Stop = 400 Shares
➡ $100R ÷ $2.00 Stop = 50 Shares

PAGE 2
Advanced Options Training: Risky Business Class 3: Trade Management

How to Calculate R for Options

• As option traders we are expecting the underlying security to move and
improve the value of our options.
• The primary Greek to determine this type of price movement is Delta.
• Remember, a Delta of .50 means your option will move $0.50 for every $1 of
stock movement.

Mastering Trade Management

“ “What good is there in being ‘right’ if you don’t get paid for it? Make it count by losing
small and winning big. I am in the stock market to make money, not to be a hero
(bucking trends/picking bottoms/trying to convince myself I am smarter than everybody
else. No one can ever beat the market so I won’t waste my time trying.”
-- Sami Abusaad
Trade Management
• Many effective ways to manage a trade
• Trading is unique and personal
• No two traders are the same
• Pick one that best fits your style

PAGE 3
Advanced Options Training: Risky Business Class 3: Trade Management

Trade Management (Continued…)

• Journal every trade you take
• After 10-20 trades it is time to analyze
• Make any necessary adjustments
• Repeat the same process again and again

All or Nothing (AON)

• Powerful, simple and effective plan for new traders or traders that lack
discipline
• Ideal for a trader that wants to enter a trade and forget about it
• Ideal to use in any time frame

AON Action Plan

• Identify the trade (Entry/Stop/Target)
• Enter when Entry Price Triggers
• Set stop market order at stop
• Set Limit at your Target (>=3 R)
• Do Nothing until either target is reached or you are stopped out
• Exception is if a day trade, then if neither is reached by 3:30 exit trade

Benefits of AON
• Over 20 trade sample AON will outperform any inconsistent plan based on
emotions or dollar counting or randomness(you)
• Simple and effective
• Removes almost all emotion
• Provides freedom away from computer

PAGE 4
Advanced Options Training: Risky Business Class 3: Trade Management

AON Challenges
Majority of traders who try AON quit before the 10-20 trade sample… Why??
• They create disempowering What If scenarios
• What if trade gets to 1.5R then reverses and fully stops me out
• What if Trade goes further in intended direction after it reaches AON Target
• AON is too boring and not any Fun

The Reality Corner

If you cannot commit to following something as simple and effective as All or
Nothing (AON), then do you truly believe you can follow some other plan or
master some random emotional based plan?

PAGE 5
Advanced Options Training: Risky Business Class 3: Trade Management

Twice the Stop & 1/2 the Position

• Simple, Powerful, and Effective way to manage a trade
• Ideal for a trader who struggles to honoring stops or likes to give them room
• Ideal for a trader who is correct with analysis but often finds entry is not
timed properly or stop is too tight
• Great way for a trader to stay in a high quality trade

Twice the Stop & 1/2 the Position Action Plan

• Identify Entry/Stop/Target
• Calculate technical stop in cents or dollars and then double it or go one
higher/lower pivot (stop on chart 50 cents - now make stop 1 dollar)
• Identify number of shares based on the double stop
• Enter Trade when entry triggers and either reaches target or stops

Twice the Stop & 1/2 the Position Challenges

• While Risk (R) Unit remains the same, potential reward will be reduced
because original target remains the same
• Overcome this by trading with 2 targets and/or only taking trades with a 4R
target potential on chart
• Often after a sample of trades the trader can go to AON plan

PAGE 6
Advanced Options Training: Risky Business Class 3: Trade Management

Candle by Candle Management

• Simple and Easy to Follow plan
• Allows trader to stay involved in trade but also in a rigid system
• Best used for a scalp or micro strategy Day Trader
• Valuable in trail stop method (discussed later)

Candle by Candle Management Action Plan

• Identify Entry/Stop/Target
• Enter when triggered
• Stop is 2-5 cents under previous candle in same time frame
• Exit at target or stop out

Candle by Candle Management Challenges

• This Management Systems requires you to manually raise your stop upon
each candle close (time consuming if day trader)
• Often limits a trader to achieve original target as a pullback may trail stop
you out of position
• In most cases it is not a true technical stop

PAGE 7
Advanced Options Training: Risky Business Class 3: Trade Management

The Time Stop Plan

• Designed to make sure you lose as little as possible on certain trades
• Generally produces a smaller loss than your predetermined R
• Helps reduce the total number of Full R loss trades
• Ideal for the impatient or instant gratification trader
• After 3 closed candles in time frame of entry, you exit the trade if it has not
moved in intended direction
• Typically after 3 candles if trade has not moved in intended direction then
either entry was too soon or other traders/investors do not agree with you.
If former then you can always re enter on next set up, if latter then you cut
your loss to less than 1R

PAGE 8
Advanced Options Training: Risky Business Class 3: Trade Management

My Trade Management Plan

(Objectives)
• Batting Average/Winning Trade
Percentage >=50%
• Average Winner/Loser >=2.5
• Risk to Reward Ratio R to R >=1:3
• Maximum Number of Trades/Day <=4
• Risk Management - 1R/Trade - 3R’s/Day - 8R’s/Week - 15R’s/Month

Trading is Personal and Unique

• What are your Objectives?
• Progression Plan
• Just Be Consistent
• Find what best suits you

My Trade Management
• After Entry I immediately enter my stop in system to limit my loss
• Do nothing until I get to 2R target or stop out
• At 2R profit I exit half position to lock in profit
• I Keep my back half position at original stop until a 5 minute pivot forms (60
min pivot for swings) or 2nd target reaches next target
• Then trail under 5 min pivots (60 min on Swing Trades)

PAGE 9
Advanced Options Training: Risky Business Class 3: Trade Management

Upon Reaching Target

• To ensure my winning trades pay me the most possible in R’s, I use a candle
by candle trail on the next time frame lower from entry time frame (if
entered on 15min chart then drop to 5, if entered on 60 min then drop
to 15min)
• Candle by Candle means I will trail 2 cents under low of previous
candle’s close

Setting Targets
• Must represent at least a 1:3 Risk to Reward Ratio
• Targets should always be found on same time frame as strategy, even if
entered off a smaller time frame
• If stock is a market related stock ie AAPL YHOO etc then target is either
your target based on strategy or target for the market (Q’s), whichever
comes first.

PAGE 10
Advanced Options Training: Risky Business Class 3: Trade Management

Targets
• Once you are in a profitable trade, if you are to attain a larger R gain, you
have to let the stock correct at times.
• There is no way to know the extent of the correction to come.
• This means it is possible you will give back some gains in an attempt to
achieve a larger one.
• There is no way around this fact - treat all your trades the same

The Bigger Target

Remember you must Reverse your natural impulses: Instead of hoping you must
fear. Instead of fearing you must hope. You must fear that your loss may develop
into a much bigger loss, and hope that your profit may become a big profit.

Factors that Affect Targets

• Quality of trend and price location relative to moving averages
• Proximity to Demand and Supply areas
• Market Environment
• Relative Strength/Relative Weakness to market
• Whether trade is in direction of the 60 min trend or counter-trend

PAGE 11
Advanced Options Training: Risky Business Class 3: Trade Management

Record keeping is the link between the trades you took and the lessons you
can learn from those trades. Record keeping is a must for a trader for life.

Record Keeping PLan

• Screenshot or print out chart of trade
• On chart write what strategy it was in trading plan
• Mark what was your Entry/Stop/Target(s)
• Mark where you actually stopped or trailed or sold for profit
• If deviated from trade management plan, make note if trade actually reached
the predetermined target
• Write down why you deviated (the emotions/self talk etc)

Homework
• Review past trades to identify which plan most looks like your plan
• Come to class with 1 or 2 examples of trades you are considering that we
can look at on Thursday

PAGE 12