Getting Ready To Trade

Good evening everyone!  It's a rainy night here in north Florida.  I meant to get this up yesterday but the J-O-B was occupying all my attention.  Anyway, I think I left off last time talking about the rules I use to trade credit spreads.  If I recall correctly I think the first two rules were to trade only Bear Call Spreads and to avoid volatility producing events like earnings reports, lawsuits, etc.

My next trading rule is to not be greedy!  Some websites promise 10% per month or 5% per week.  If those guys can do that consistently than more power to them. Make that money bro!  However, I've found that with big rewards come big risk.  It's my goal to limit risk as much as I can.  So each month I'm not looking to hit a home run I just want a base hit.  For me that translates to making no less than a 2% return (to include commissions) each month.  2% doesn't sound like a lot but that's over 20% a year!  I think that's a good goal to reach for.

My next rule has to do with math, statistics and probability.  I could spend an hour explaining how all the math works but that would be totally boring.  All you really need to know is that there are probability calculators available that can actually use a stocks historical price movement and some other factors to determine what the odds are that a stock will rise (or fall) to a predetermined price that you select.  With credit spreads the lower the probability of success the higher the potential reward.  In my travels on the Internet I've seen that some people are comfortable with probabilities of success at or around 70%.  I admit that's certainly better than Vegas, but when I have 50K on the line I want the odds really stacked in my favor.  So when I trade I like to have probabilities in the mid to high 80 range.  I've found that I can easily make my 2% per month with trades having at least an 80% chance of  winning.

The last rule I have has been the hardest for me to follow.  Always stick to the first four rules!  When you start having success you start believing you're the man and are smarter than the market.  You start telling yourself you can make 5% per month instead of sticking with safer trades in the 2-3% range.  You begin to see that there's more money to be made on the "put" side instead of the same old boring "call" trades.  Let me warn you! Don't go off the reservation out of greed!  The market WILL beat you up!  Here's a great clip about greed.  I can't say I agree though......

Anyway, it's Spring Break time.  We're headed to the mountains tomorrow.  Next time we'll talk about the best broker to open up a trading account with.  Good night!