Know when to take Profits
When you start with trading, you often will hear a number of pearls of wisdom. Keep your losses small, let your winners run, no one ever went broke taking profits.
You can keep your losses small at order entry. It is possible to select defined risk trades and you do not trading too many contracts. It is not a good idea to put all you eggs in one basket.
The truth is most of the traders want to get most out of the trade and wait too long. The market is turning and their profit is diminishing. Would you not rather take a smaller profit than no profit at all? Many small profits makes your capital grow bigger.
Lock in Profits
I came across a financial channel which is seen on TastyTrade.com. They did an amazing study about how to manage winners. What they show is never been seen before. And all their conclusions are based on research and not from what people say or what is written in theory books. Watch the video and learn when to manage and close a trade.
Here’s the guideline manage winners and take profits and how to be successful at options trading: if your trade has achieved 25 percent gains, and you are not more than one third the way to expiration, hold on for more. If you haven’t gotten above 25 percent and your half way there, take profit. If you have achieved 50 percent get out and take your profits.
It’s all about trading the anti-fragile way. Not only should you be quick to take your profit, but you should be trading small and more often. Know your probabilities of success, distribute the load, and always leave an escape route.
If you close your trade with 25-50% profit you will have your profit much sooner then waiting for the options to expire. When you take profit you can your redeploy your capital in another trade. And maybe you make 2 profitable trades in the same time frame.
What if the price of the underlying moves the wrong direction? If a defined risk goes against me let it run, except when it is a big width butterfly. If it is an undefined risk trade, and you have still the same assumption for the option, roll the untested side for a credit. This will lower your cost basis but it will extend duration.
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