Learn To Trade Options

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Video 1 From The Trading Pro System

Many online options traders take losses when they first start out because they have used a flawed strategy in the amount of money they invest in each trade.

It’ss important to know how much to invest in options before starting to trade them. Many traders take big losses when they start to trade options simply because they use a money management strategy that results in their incurring higher risks than are needed with the unfortunate result of losing their investing budget too quickly, resulting in quick losses.

No matter what technical analysis you might use or what trading system options traders need to establish a trading strategy. This puts constraints on how much money one should invest in each trade, or re-invest once a trade has been completed. Here are three strategies we have usedsuccessfully for doing this.

1. Invest a Fixed Percentage of Your Total Portfolio Value

One of the most common trading strategies is to to limit the amount of your trade to a defined percentage of your total porfolio’s value. For example, when a trader invests only 20% of his  portfolio in each trade, and assuming a $20,000 portfolio value, he or she would set a limit of $4000 in the first trade. If the trade results in a 50% profit, the portfolio then would grow to $26,000 and in the next trade $5,200 (20% of $26,000) will be invested.This strategy is considered conservative and is most common among professionsal options traders.

2. Invest a Fixed Amount

Another strategy is to set  a fixed amount per trade. Similar to the first example a trader would initially allocate $4,000 in each trade. Even after the portfolio grows to $26,000 only $4,000 would be invested in the second trade. This trading strategy is less profitable than the first investment strategy discussed above, but it a  trader can keep his losses under control better. Sometimes this trading strategy can be used in combination with strategy #1 by options traders. For instance, in order to increase profits, some traders may prefer to use strategy #1 after each winning trade, and in order to recover faster from a lost trade the #2 strategy might be used after each lost trade until the portfolio is restored.

3. Reinvest Both the Principal and The Net Profits

The last trading strategy involves the reinvestment of both the principal and the profits after each trade. If a trader invests $4,000 on a first trade and then takes a 50% profit, then $6,000 would be invested in the second trade (the principal of $4,000 plus the $2,000 profit). By using this strategy, a trader would benefit from compounding and many investment institutions use this strategy, however, trading options this way is aggressive and more risky and could result in wiping out an entire portfolio quickly. None of the professional options traders use this strategy in options trading.

(Hint: Follow the Professionals)

Conclusion

Options trading can be a risky type of trading and using the strategy #3 could should be discouraged. In the end, you’d lose everyrhing. On the other hand the options trading strategies #1 and #2 are used most of the time. Strategy #1 is used in auto trading by many online brokers and very often this is the only choice a trader has in the options auto trading account.

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