You're about to learn 3 secrets of successful option traders. And when I say secret I don't mean something that others don't know about. It's actually something people know about, but have yet to discover just how powerful it is...
I've had the honor of mentoring hundreds of option traders and every single successful trader I know follows this approach.
But first let me quickly share how I discovered this secret as you may be making the same mistake I made.
When I was 20 I was introduced to real estate investing, but I wasn't savvy with money management. Fast forward a few years and I had overextended myself on credit and had absolutely no backup plan.
My exact thoughts were, "I don't need an emergency fund or 401K. I'm going to be rich!" I dreamed of nothing but mountain tops (success). I didn't factor any valleys (problems) into my plan.
I was so focused on real estate that I forgot one of the cardinal rules of investing, diversify your income streams.
I took every bit of savings I had and poured it all into real estate. Things were going great for the first three years until I encountered my first major problem.
This is when I realized how flawed my plan was.
It started with one problem, one unit, and it slowly escalated into several back to back problems.
It took me three years to build up my real estate business. It took less than six months for me to lose everything.
I needed money and so my friend introduced me to a multi-millionaire who was a stock option trader.
It took him all of 10 minutes to point out what I was doing wrong: putting too much focus on making money.
He then shared Secret #1 with me: he advised me that as an options trader I should risk roughly 1-2% of my total account value on any one trade.
And Secret #2 was to never have more than 50% of my account out in the stock market at any one time. I've since reduced this down to 10% based on my experience as an options trader.
And this 2/10 formula is what I share in my options coaching program. Some people trust my wisdom and just follow what I teach. Others have problems with this approach and say things like...
"But Travis, if I invest 1-2% of my account on a trade, I'll never get rich following that plan. And leaving 90% of my money in cash...that's just wasteful. Having all that money sitting in cash is not productive. I'd rather be earning something on that cash instead of letting it sit there being eaten up my inflation."
Valid questions and the 2/10 formula does seem counter-intuitive, but here is the mistake they are making....
"What puts option traders out of business, making money or losing money?"
Have you ever heard an option trader say, "hey I quit trading because they made too much money?" No you haven't!
It's losing money that causes option traders to give up on their dream of becoming rich and financially independent.
And this leads to Secret #3 of all successful option traders: you always, always, always, trade to protect yourself from a loss. When you protect yourself from losing money you avoid the #1 reason why people fail (losing money).
Most new traders only think about how much money they can make. They see the 2/10 formula and they only think of how much more money they can make if they invested more.
But let me show you a real life example of how this works….what I'm about to share with you is our secret sauce. It's why my students have a 63.83% success rate in an industry that has a 90% failure rate.
For example: $10,000 to trade with and only $1,000 out in the stock market at any one time.
Worst case scenario: lose all $1,000. Cool, you're good to go and still have $9,000 left.
Avg. Case Scenario (most likely to happen): five $200 trades. Each trade represents 2% of your total account and no one trade can take you out so to speak.
Total profit: $260 (or 2.6% of $10,000).
Multiply that 2.6% by 12 months out the year and that equals 31.2% on your total account for the year and you only had 10% of your account invested at any one time.
AND at the same time you were protected from losing all your money which is what happens to most amateurs and greedy people. So what do you do with the 90% not invested? Whatever the heck you want to do with it.
Again, all successful option traders follow the 2/10 formula (or some variation of it) because it protects you from losing a ton of money. But don't believe me, believe your experience. Trade my way and your way side by side and see which approach works best for you (smile).
To Your Success, Trader Travis