*(This is not financial advise)

Establishing Rules To Guide Options Trading

Setting clear rules will keep trading on track to realize success. A couple rules to consider are as follows.

  • Allocate Trading lot sizes: Determine the percentage of your trading capital to allocate per trade. An optimal lot size is 10% of trading capital as the benchmark of the Compound 20 Trading Challenge so as to manage risk. Alternately when trading on smaller account values, identify a dollar amount for a lot size that gives optimal return in a timely manner based on risk tolerance.
  • Taking Profits/Closing Positions: This involves establishing clear rules for closing trade positions to lock in profits made and to ensure a positive trajectory for the Compound 20 trading journey.
  • Do not guess the direction of the market, instead wait for indications and setups that show winning a trade is most probable.
  • Before you place a trade, ensure that no rules are broken

Risk Management

  • Respect your money
  • Set a stop loss order as soon as you open a trade. Set a positive stop loss order as soon as you are in profit.
  • Use a stop loss when scalping in the opposite direction of a clear trend.
  • Use a hard stop loss of 15% on all trades.
  • Use a soft stop loss of 12.5% on all trades. With this stop loss, if a position falls below 12.5% then goes positive again, only to fall below 12.5 % again, close this position.

When to stop Trading

  • When you reach your daily goal.
  • When you exceed a max loss tolerance for the day.
  • After you have made your daily goal but subsequent trades cause a loss of half of your daily goal.

Other rules

  • Take profits when scalping in the opposite direction of a clear trend.
  • Set a minimum initial capital to start trading with.
  • Do not dollar cost average(DCA) more than a total of two positions against a trend so as not to be cut by trying a catch a falling knife.
  • Not because the market opens up high does not mean it is going up.
  • Do not chase a trend especially after the move has happened.
  • Do not be quick to make trade, take time to watch the direction of the market and look for setups.
  • Do not trade everyday, look for market setups that puts risk reward in your favor.
  • Develop a broader outlook to improve swing trades.
  • Some days it is OK to make no trade.