Trade Options to Get Richer, Quicker! Here’s how.
- I’m sure many of you have already come up with your New Year’s resolutions: lose those extra pounds, spend more time with the family, quit smoking, etc. Whatever you hope to accomplish in 2010, I have some others for you to consider: five “rules of the trade” for your portfolio.
It’s time for us to reflect on our portfolios, take a good, hard look at how our financial situation stands now, and think about where we hope to be at this time next year and how we’ll get there.
So here are five New Year’s resolutions to help your fulfill your financial dreams.
Trade Options to Get Richer, Quicker! Here’s how.
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Resolution #1: Never Trade Just to Trade
Having an itchy trigger finger can turn a trader into his own worst enemy. I’d say this is the most common mistake among professionals AND non-pros.
Savvy traders know that there are times when the best action is to take no action. I never wake up and say, “OK, I need to find a good play. I’m going to pore over a list of good stocks and ETFs, and pick my favorite one.”
Instead, I know that it’s best to first get a good feel for exactly the way the stock or ETF trades before considering it as a profit opportunity. Otherwise, there’s no way to a good enough feel for the security’s price action, or for the other major players who are controlling the security’s price movement. The savviest players on Wall Street get to know several great companies or sectors for several months or years before taking a position.
Trade Options to Get Richer, Quicker! Here’s how.
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Resolution #2: Only Buy When the Fundamentals and Technicals Tell You to Buy
There are two stars that must be aligned: technical and fundamental.
If I get bullish on something, it is because the situation is such that a smart technical analyst and a smart fundamental analyst would both agree that the time to buy is NOW.
Generally, once I know that the company is well-positioned from a financial standpoint, I then make sure that I have a good understanding of what its charts are saying.
Then I get more detailed by checking who the major buyers, sellers and current shareholders are, evaluating their reputation and whether new major shareholders are entering the picture.
Trade Options to Get Richer, Quicker! Here’s how.
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Resolution #3: Don’t be Greedy; Small Profits Never Hurt Anybody
As long as I am profitable, I am happy. I only stick with a position because I think it has strong potential. I never stick with a trade because I have not yet achieved the profit that I want. The market doesn’t owe us anything!
Waiting for the profit that you feel is “owed” to you is another classic emotional mistake … and an emotion that makes a trader his or her own worst enemy. It’s just like holding a position because you are down 5%, and you only want to sell at a profit or at breakeven. The market doesn’t know you and doesn’t care what you paid for the position.
I make moves strictly based on what the indicators are telling me … NEVER based on the price of the stock.
Trade Options to Get Richer, Quicker! Here’s how.
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Resolution #4: Welcome Unsuccessful Trades
This is not the “go down with the ship” philosophy. My rules are simple. They are what have built fortune after fortune for myself and my clients, so listen to me here.
I might limit my downside to 7%, or I might cut my losses at 20%. Very often, I hedge my positions in order to limit my downside to a few percentage points. My stock-screening system usually keeps me from getting crushed. OK, I know that you can’t guarantee that a stock won’t take a beating here and there. And when I’m trading options, we take an occasional beating. But if I’m right more than I’m wrong, and I make a lot more than I lose, then I’ve achieved my goal.
Remember: We will have our slumps, and we will have a slew of unprofitable trades during some time periods of our investing life. It’s just part of the business. As hard as it is sometimes, though, we can’t get emotional. Keep a steady hand, and expect that losses will occur.
And just because a position goes the wrong way initially, doesn’t mean it’s a bad trade. Some of the biggest winners that I have had — ones that have traded thousands of percentage points higher — have traded lower first. If I hadn’t run them through my stock-screening system, I might have used a static rule of some sort (i.e., limited my losses to 7%) and, therefore, missed those winners that mean the world to your overall portfolio.
Trade Options to Get Richer, Quicker! Here’s how.
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Resolution #5: Use Options as a Way to Generate Income in a Flat Market
You can take in additional income every month by selling call options against your long stocks; i.e., covered calls.
Every month there are ways to have from 1.5% to 7% of the value of your stock positions either deposited into your account, or sent to your home in the form of a check. Every single month, many investors leave an absurd amount of money on the table. The worst part about it is that the only reason they don’t pick the found money up off of the ground, is that they don’t have the ability to see it. My heart goes out to those people who don’t understand — or perhaps know about — this potentially lucrative strategy that can help you to get paid simply for owning your stocks.
It’s simple, really, and all that you have to do is take a few hours to understand it. If you are familiar with the covered call strategy, you can make upward of 15% to 20% in a market that trades flat for 12 months.
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