The bottom line however, no matter what sort of investing/trading you wish to do, the most important thing is your risk management. I’ve been in this game for over 26 years. I’ve seen so many people “blow up” because when the market was hot, and they were making gains every day, that they thought they were geniuses. But, then the market decided to roll over into a bear market, or even just a good correction, and they got crushed, losing it all. It’s all about risk.
When you’re investing, you have to realize that there’s a distinction between trading the market and long term holding the market. You can of course daytrade in and out of positions too, taking a quarter point here or a half point there…it adds up. (and it’s not as easy as it sounds)
The bottom line however, no matter what sort of investing/trading you wish to do, the most important thing is your risk management. I’ve been in this game for over 26 years. I’ve seen so many people “blow up” because when the market was hot, and they were making gains every day, that they thought they were geniuses. But, then the market decided to roll over into a bear market, or even just a good correction, and they got crushed, losing it all. It’s all about risk.
Recently I got an Email from someone that said they had tried “making it too big” in the market, not realizing that it’s better to hit for singles, than swing for the fences as it usually didn’t work that well. Yes you might go “all in” on something and its your lucky day and you make a big gain. But, more often you’ll swing big and miss, and your account goes to nothing. Protecting your account is JOB ONE!. Nothing else matters, because if you have no money, you can’t invest, and you’re out of the game.
One of the worst things about a market like the one we’ve been in since the 2008/09 meltdown is that it’s Fed fueled, and central banks around the world are buying stocks. This is a new thing, we’re in unchartered water here. But this market is manipulated higher and higher, and a lot of people that are in the market now, only know ONE direction and that’s up. I’m afraid that one day they will learn that they weren’t that awful smart, they were just swept up with the tide.
So I want to mention a couple ideas for you all if you’re into trading stocks, but don’t want to get blown up. My number one, bottom line, all time best advice is USE HOUSE MONEY TO SWING FOR THE FENCE. How’s that work? Like this…
You take your major account money and you go into core positions, whether that’s dividend payers, or solid companies you want to sell covered calls against, etc. Then you take a much smaller amount of money and you play more frequently, trying to hit singles. They add up.
Let’s say you bought 200 shares of Ford at 13.80, because you liked the new F150 they’re coming out with. Then you see that just a week later it’s trading over 16.00. Why not take that profit and put it in what I call my “gamble bag?” All that means, is that I take those 1, 2 and 3 dollar wins and I let them pile up, and when I’ve got a decent pile of profits I use THAT money to take high risk gambles. I do not want to risk gamble my original account ever.
When you’re trading small and smart, taking a buck here, a couple there, or you get lucky and your 200 shares of AMD go up 7 bucks in a week (smile) it doesn’t take too long before you have a nice little nest egg to roll the dice with.
So, what kind of roll the dice do I mean? The ones with the biggest bang for the buck, without question, is out of the money weekly options. When you’re playing those; stocks that can go crazy high on any particular news blurb, or Fed speak, can make you crazy money.
Let me give you an example. On Thursday, the weekly “way out of the money” 2370 calls on google were asking 3 bucks a share. Lets say you thought that google would have a big day IF the jobs report came out good. So you bought those 3 dollar calls. Friday by noon they were 27. So, 300 bucks became 2,700.
Let’s say you had more house money than just 300 bucks. Well, 3000 dollars on that gamble got you 27,000 dollars. Yet you have NOT risked a penny of your original account money, you’re playing ONLY with the house money.
That’s pretty much my secret to sleeping well at night. I only do roll the dice plays with money I’ve already won by trading for those little singles and doubles here and there. That way, if I take 3000 and take a stab at something like a google because of the jobs report, or a roll the dice on AMZN over earnings, it doesn’t matter if it blows up on me and I lose 90% of it. It wasn’t mine to begin with ( in a way)
Naturally you have to do your homework and figure out what roll the dice play has the best chance of working out, and you want to do this with the WEEKLY options. They have the most bang for the buck by far.
Naturally they are not all going to work. But because of the leverage factors, you can actually lose more times than you win, and still come out on top. How’s that work? Easy, look at the example above.
Let’s say you had found an out of the money on XYZ a hot moving stock and you were convinced that because of earnings, or news or new product or what have you… that it was going to scream. You buy the way out of the money weekly call options for 3 bucks per share. You’re in for 300 dollar on the bet. Well, it doesn’t work, and you lose 300 bucks.
You do it again with ABCD, and again you lose 300 bucks. But you try it again this time on GOOG and “bingo” despite losing 600 bucks on two failure, you made 2,700 on google. Lost twice, won just once.
Because you “might” lose more “times” than you win, until you’ve built up a really nice fat gamble bag, keep your positions small. But trust me I know people that did that very play with 90 grand, because their gamble bag is so big, and they went home Friday with $810,000 dollars.
So it’s just some Bob basics. Keep your core stuff with your lions share of account money. Take a small amount and use that to trade some swings. Take your profits and build a gamble bag. When you have enough gamble money, try and find that one out of the money call option on the weekly chain, that “if the news is right” can go up 10x. Now you have a much bigger gamble bag.
The next bright thing one might consider is that when you make a big score on a roll the dice play, take HALF of that money and put it in your gamble bag, and take the other half and buy some silver Eagles or maybe a few half ounces of gold.
Playing with house money is always the best play, and has kept me out of trouble for many years. Just my 0.2 cents.