Risk management, my favorite!
As a long time trader and investor, I have encountered numerous strategies over the years. If I had to guess, there probably are at least 10 new ‘gurus’ created on the internet everyday. These ‘gurus’ want to sell you “stuff” and tell you that there way is the best way to live the millionaire lifestyle. Their strategies can be an over-complication of simple concepts, or as convoluted and advanced as the meaning of life. What they will never say, is that they are largely penny stock pumpers and front runners. Pretty unethical in my opinion. But, newbie traders and experienced alike are looking for that quick buck. Who isn’t? And so, these gurus and their strategies propagate throughout the finance world. Few people, besides the successful traders truly understand what it means to eat what you catch. Having gone through all of the marketing and education overload when I first started out, I have learned some pretty important things, cons and frauds. I want to share one of those with you today. You may have heard about this before, but I want to share it again as it is the single most important factor in my own trading that has helped me turn the corner from the path to destruction and daily losses, and now helps keep me balanced and focused on trading the RIGHT way. Risk Management. The single most important concept a new trader needs to learn, love and live by. Just like the weather, the stock market can cast shadows and nasty storms onto our accounts, confidence and strategies. It is risk management that allows us to weather those storms and stay in the game long enough for the sunshine to return.
There are as many risk management strategies as there are gurus out there. I am going to share one of my favorites and tell you how I use it to manage my risk in trades and why. So, everyone in the trading world knows what options are. Most don’t truly understand them or how they work, but they do know that they provide leverage and can be used in both conservative and speculative trading strategies. I use them for hedging, speculating and during earnings season. I began trading using options, even before stocks. It was a backward and unnecessarily challenging approach, but I muddled my way through the learning curve. Basically, the purpose of using options in most trades is to capitalize on the leverage they provide while minimizing exposure or risk. When purchasing an options contract, your losses are limited to the premium price you paid at purchase. Recently, I alerted a couple of trades on GILD (Gilead Sciences), a fairly volatile, $100 stock. In recent weeks, the biotech sector suffered a huge hit and GILD did not escape unscathed. One day GILD closed around $108 and the next day it opened up at $96. Had I been trading this particular stock for a swing to the long side at that particular time, based on it’s price and my risk tolerances, I would ordinarily own between 500 and 1000 shares depending on my objectives and conviction in the trade. That gap down with the rest of the sector would have been quite a devastating loss to wake up to. I will let you do the math.