Professional keys to maintaining profitability

Hint: It’s in your approach and follow through [image] Professional traders and beginners alike all plan to make money each week. A key difference is in their approach and follow through to position sizing. Professionals incorporate one of two main approaches. Having knowledge of — and using — both adds a very important element of diversification to your trading. The first one is based on predetermined success. For example, if all the parameters are in place for a high conviction trade, a professional trader might allocate 100% of predetermined dollars to that trade. If the predetermined amount is $1000, the trader will allocate all of that amount to the trade. If a few of the checkmarks are missing, implying that a trade has a lower percentage chance of winning compared to one that has all the check marks, a professional will allocate say 80% of the predetermined dollars to that trade. Capital will be preserved by allocating only $800 to this trade. It is still a solid trade, but the professional trader sees it as having more risk. This common trading style incorporates a variety of caveats. It is also very common during times of broad market uncertainty and volatility when more risk is the unexpected caveat. If you hear a professional trader say, “I’m reducing my exposure,” that’s the thinking process imposed by the broad market. The other approach is to consistently apply the same dollar amount over and over to the same strategy. For example, say you are trading a new system you’ve developed that has been back tested with proven results. There is no reason to apply different percentages to trades week after week, because the system has been proven for all market conditions. The only exception is if current market conditions are extremely abnormal, like consistent limit down days or market closure due to an extreme event like war. Other than those rare examples, this is a steady approach and mimics routine. It’s the turtle versus the hare approach meaning that it’s the consistent plotting that creates success and wealth. With either strategy, here’s how the account grows: Say you have a $10,000 account you are trading and putting at risk in a certain option trading strategy. Since options are leveraged, you decide (and I agree) it’s wise to apply only $1000 to each trade idea to get started (10%). (As time goes by and you develop experience and success with the strategy, you may decide to increase the size which implies that your account is growing from say $10,000-$15,000.) The trade is completed, and profits or losses are allocated to the account size systematically. You go up to bat a second time and apply the same $1000 to the trade idea regardless of what happened with the last trade. For example, say that your account after the first trade is now at $9500. You will still apply $1000 to the next trade. After the second trade your account size is now $10,200, and you systematically apply $1000 to the third trade. Making the decision to increase trading size is based on proven results. After many times at bat, say your account has now grown to $15,000, and you have measured success and experience. You wisely choose to increase your trading position size to $1500 (10%), and begin applying the same process. Continue this process at each mile mark. Expect ups and downs at each new trading level. That’s the psychology of trading. When greed rears its ugly head, do this: It probably won’t happen to you, but it has definitely happened to me! For example, say the account doubles from $10,000 to $20,000, and everyone feels pretty puffed up. The decision is made to start applying $5000 to each trade idea. All of a sudden a 90% loss is experienced, and the account size is now $15,500. The common, but not recommended, thought process goes like this, “Well hey that was just a bad trade. I’ll get that back, and I’ll put $5000 in again. I hope things go better.” Then all of sudden the second trade also loses 90%, and the account is back down to $11,000. Ouch! If that ever happens to you, do this: - Take note of the lesson and review it often. Then, - Get back up. That’s the most important step. Because… Successful trading is a process… not a destination. To Your Success! Celeste Lindman Ask The Pros RISK DISCLAIMER There is a very high degree of risk involved in trading. Ask The Pros and all individuals affiliated with this site assume no responsibility for your trading results. The indicators, strategies, columns, and all other features are for educational purposes only and should not be construed as advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. 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