The document discusses the importance of risk management in trading. It states that precise risk management is difficult to achieve in stock markets due to gaps, but is easier in forex markets where there are no gaps. It defines accurate risk management as limiting losses to 1% of total capital per position. The options market allows traders to determine maximum risk levels through strategies like long calls, long puts, bull call spreads, and bear call spreads. It emphasizes that determining and adhering to position risk levels is one of the most important aspects of successful trading.

1. The key to successful trading is risk management
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Options Trading

2. The key to successful
trading is risk management
We discussed in the previous article that the risk graph of the stock
market involves unlimited risk. That means despite using super good
stop levels, there might be days when the market skips your limit order.
Or, your market order could be executed at a price you did not expect.
Consequently, a precise risk management cannot be achieved. Those
who trade on the Forex market may groan now because this is not
strictly true for them. Yes, the Forex market is not characterized by a
gap up, gap down, therefore the STOP level can be more easily
planned, as it is usually executed where we planned it.
One of the big advantages of the Forex market is the more balanced
price movement. There is no gap, or it occurs in very extreme and rare
cases.
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3. But what do we call accurate,
pre-defined risk management?
But what do we call accurate, pre-defined risk management?
We call it this:
If you determine in advance that the maximum loss of a position
cannot exceed 1% of your total invested capital.
This is a healthy level of risk. It is sufficiently conservative, but it
contains sufficient potential for growth. There's no mystery in
this.
It is not that hard to determine this, but it can be hard to
comply with it.
Think about it, when do people lose their money?
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4. When do people lose their
money?
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Not when they follow the pre-defined, correctly specified
rules.
They lose everything when they are driven by two basic
emotions: fear and greed that emerge during trading.
This is the most difficult to work off. I did not
incidentally start my Trading Psychology Blog column
with the article which shows that 90% of successful trading
is psychology and only 10% of it is technique.
If you have been trading the markets for a couple of
years, you can understand and feel the truth of this
statement.

5. Risk management
Risk management protects you from making wrong,
emotional decisions.
If you can maintain this one, you have bigger chance for a
successful career on the stock market than 99% of the novice
traders.
It is not too difficult - you can invest max. 1% of your total capital
in one position. To give an example, if you have $100,000 with
which you trade, you should risk up to $1,000 on one position.
There are two ways to do this.
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6. Here is an example
Here is an example of the first method:
You open a position on the Forex market and invest the total $100,000,
but you enter the stop level to close your position at $99,000. This is a
simplified example, of course.
As I mentioned, in case of Forex, the STOP is usually executed at a
guaranteed level. If you want to play the same thing on the stock
market, the paper in your 100.000 stock position may suddenly open
with a gap down, and your market stop order is executed at a price of
90,000.That is, you lost 10% of your total capital at once. I would not
call this Risk Management.
The other method is provided by the options market.
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7. What are the differences between the
regular and the options market?
The answer is very simple.
In the options market, you can determine the level of your maximum loss with
the help of various strategies. Examples include but are not limited to the following:
Long Call: you can lose the amount you paid for the Call
Long Put: here you can lose the amount you paid for the Put
Bull Call Spread: you can lose the amount you paid for the spread
Bear Call Spread: The maximum loss is the amount of the margin requirement
arising from the credit spread.
You can find the detailed description of the strategies in the Options Strategies section.
Here I would not detail all of them. What I would like to emphasize again is the risk that
can be accurately determined in advance!
In closing, here are the risk graphs of 1-2 options strategies with limited risk.
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8. Long Call Risk Graph
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9. Bull Call Spread Risk Graph
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10. Long Put Risk Graph
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11. Do not forget!
Do not forget - if you have not done already - determine the level of
risk your account can tolerate and risk only this amount on one
position! This is one of the most important directives that exists in the
trading world!
Lessons learned:
-> Invest a predetermined % of your capital in a position.
-> The options market allows a planned, pre-defined
determination of the risk level.
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12. Feel free to ask me!
Email: gery@optionsrules.com
My webpage: http://www.optionsrules.com/
You can find me:
Facebook: https://www.facebook.com/OptionsRules1
YouTube: https://www.youtube.com/user/optionsrules
Twitter: https://twitter.com/optionsrules
LinkedIn: http://hu.linkedin.com/pub/gery-nagy/6a/513/261
Skype: opcioguru
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