Every business needs a plan, so does stock trading if you are serious about making trading a profitable endeavor.
The Surefire Profit Options Trading (SPOTtm) plan gives you a road map for profitable options trading and is designed to eliminate a lot of things that can, do and will go wrong for many traders. If you follow the SPOT plan and are disciplined in your trading, then you only need to worry about one thing: Maintaining your batting average.
Okay, let’s jump into it. The concept is quite easy actually.
In order for this plan to work, we need to be make sure we remain disciplined in our options trading: Fixed trading sizes, honoring profit target and stop loss on every trade.
Each month (week, or day, depending on how frequent you trade) we will divide our buying power into equal trading sizes. For example, if you average 10 trades per month, your trading size would be 10% of your buying power. In other words, if you have $10,000 to trade this month, then each trade size should be $1,000.
The other discipline that is equally important is exiting a trade when it reaches your profit target (limit), or maximum loss (stop) you can tolerate.
The worksheet (the “WL Worksheet” tab) below illustrates a hypothetical trader who averages 10 trades per month, with a 60% Win/Loss ratio. The trader uses a simple +20%/-20% limit/stop on every trade.
The overall P&L for the month comes down to +4%… not bad if you compare this to the performance of major indices.
For those who are interested in how the math is done, here it is:
60% Win/Loss Ratio (6 out of 10 winning trades)
6 Win = 6 * 20% = +120%
4 Loss = 4 * -20% = -80%
Proft/Loss = (120% – 80%) * trade size = 40% * 10% = 4% of total account, less commission & fees.
Go ahead, give it a try. Use the worksheet above to enter your # of winning and losing trades in a given period (ie. day for day traders, week/month/year for swing traders), and your limit/stop, and the worksheet will calculate your batting average as well as your overall profit/loss % for the period.
As long as you remain disciplined (fixed trading sizes & honoring your limit/stop), all you need to worry about is maintaining your batting average!
Now, here are 3 ways to kick your profitability to overdrive…
The example trading plan above uses a +20% limit, -20% stop on all trades. This will of course change depending on your trading style. If you treat each options trade as a roulette black/red bet, then you’ll either come out +100% or -100%. In this case you’re really counting on having a better than 50% W/L ratio to come out ahead overall.
What if you adjust your limit to +30%, and kept the same -20% stop? Try it and see how it will affect your P&L.
What if you kept the same +20% limit, and have a tighter stop at -10% for each trade? How will it affect your over P&L?
While this limit/stop scaling can have a significant impact on your overall profitability, keep in mind whatever limit/stop you plan should matche your risk tolerance.
Although the worksheet above illustrates a trader who does 10 traders per month, the same trading plan works for any time period, be it 10 traders per week, 10 traders per day, or 10 traders per hour!
The more frequent you can execute the SPOT plan, quicker your account will grow. All sounds good in theory, so what’s the catch?
Remember, for the SPOT plan to work you must be able to maintain your win/loss ratio.
Not everyone trades full-time and that is understandable. Even if you do trade full-time, it does not mean you are engaged in trading every day. In fact, veteran traders will tell you to spend majority of your day watching the market, and very little time engaging in a trade (see “5 Sins of Trading” in member’s area).
There are traders who are engaging in trades all the time and that is fine, too. However, the SPOT plan is not going to work if you can not maintain your win/loss ratio due to having way too many positions to manage, or trading way too frequently.
While time scaling can have a significant impact on how fast your account will grow, keep in mind however frequent you plan to trade you should have the time resource to execute it.
Improving Your Batting Average
Needless to say, improving your win/loss ratio is going to do wonders to your overall P&L. To be successful in picking high probability trades you will need 3 things: Fundamental analysis, technical analysis, and common sense.
At SRT we focus a lot on technical analysis, especially support and resistance levels using simple moving averages, stochastics, and Fibonacci levels because they work.
Here are some things to help you achieve higher batting average and consistent results:
- Calls on an uptrending stock that has pulled back to support.
- Puts on a downtrending stock that has rallied into resistance.
- Only trade and follow 1 or 2 stocks and get to “know” them really well.
If you need help with trade ideas and identifying support and resistance levels, join other SPOT plan members in our chatroom to get started.
Here are further readings to improve your trading knowledge/skills:
In closing, I just want to leave you with the moral of the story of tortoise and the hare. In the end, slow and steady wins the race. If you have been trading, and have not been successful. Stop and ask yourself why.