Some of the most frequently made mistakes in trading are done at order entry. The one we will discuss here is the one that violates our mantra of “Trade Small Trade Often.” It’s tempting but you really need to avoid accepting too much risk if you want to be as successful as possible. A trader with a tastybite-sized account especially needs to be careful. So how can we eliminate taking too much risk?”
To avoid this problem, you have to first know the warning signs. The easiest sign to recognize is when you allocate too much capital to a single opening trade, even if the underlying and the options may be incredibly liquid. The Market Measures from September 10, 2015, "Position Sizing | Defined Risk" taught tastylivers to stay small because of the chance of consecutive losses. Staying small will lead to more consistent returns, increase your number of occurrences and give you the chance to roll and manage your trade if it starts off as a loser.
Something more difficult to realize is when you are concentrating too many positions in just one expiration cycle. This places you at risk of binary events such as earnings or elections (remember Brexit?) and short term large moves (think late August of 2015). Given a choice between a 30 DTE and a 60 DTE you should make sure to distribute trades among the two cycles equally. Another common mistake is being concentrated in similar correlated underlyings. The stock index ETFs are (mostly) highly correlated. Trading in SPY, QQQ, DIA and IWM isn’t really diversifying and your account can end up highly correlated to one market. By adding uncorrelated ETFs like GLD, TLT, XME or XLU proper diversification can be reached.
Tom noted, “To this day, this is the biggest issue we face at tastylive and the biggest issue among retail investors everywhere. We all trade too big and we all take too much risk. What starts out as a little risk turns into a lot of risk because you cannot manage or control risk despite what people think.” Knowing the Probability Of Profit (POP) won’t be much help if you trade too large and take on too much risk. As Tom put it, “Stay small, trade often, and use the most liquid underlyings. Stay aggressive and create as many occurrences as possible. Then you can create predictable outcomes and be far more successful than if you don't do those things.”
For more information on Trade Sizing see:
The Skinny On Options Data Science from May 19, 2016: "Simulating Appropriate Account Size"
Market Measures from August 24, 2016: "Profit From Activity"
Market Measures from September 2, 2016: "Mechanical Sizing"
Watch this segment of tastyBITES with Tom Sosnoff and Tony Battista for the important takeaways and a full understanding of why "Bigger Isn't Better" and learn the important steps to avoid taking too much risk.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.