March 19, 2010, Newsletter Issue #148: Consistency is the key

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One other thing we should mention. Don´t vary the percentage you allocate trade by trade. Don´t double up on a trade after a loss hoping to win your money back right away. There´s a technique some blackjack players use in which they double their bet after each loss, the idea being that eventually the cards will turn in their favor and they will be ahead. That´s fine (we suppose) if you´re betting $10 chips since you likely will have a sufficient bankroll to stay in the game long enough for that to happen. But options trading is not so forgiving. The wins are not as frequent, the market may be turbulent and volatile, your system may be flawed, and you might run into a series of trades that will wipe you out. Sure, you may get out of the hole with that one winner, but what if it doesn´t come in time? If you´re sitting on the sidelines with no cash, there´s positively no way to benefit from those big winning options trades. And as the saying goes, you miss 100 percent of the shots you never take. One reason we focus on consistency is that options buying by and large involves more losing than wining trades. In exchange for having more losers than winners, you will also achieve bigger average profits on your winners than on your losers. Success is dictated by using proper money management to stay in the game long enough to reap the rewards of the bigger, though less frequent, winning trades. This brings up an issue that we have not addressed - increasing one´s allocation after a series of winners. This is just as dangerous as increasing the percentage after a losing trade. Why is this so? Remember that there will always be losing trades. Guessing which trade will be profitable and which won´t will have dire consequences if you guess incorrectly. Putting a higher percentage in a loser and less on a winner will ultimately lead to decreased profits. Of course, allocating more to the winners and less to the losers would result in huge profits. But given that you will likely encounter more losing than winning trades, the odds of picking correctly are stacked against you.

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