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SFO article Hi Jay (call me Mark)
Glad to hear you found the article helpful. Thank you.
1)Why 2 x 5? Good question. To a point, choosing the
ratio was close to random - but - because my primary purpose was to sell
puts I had to be certain that I received enough cash when opening the position
to make it worthwhile. In other words, if the stock were to open 5 point
higher the next day, and I were unable to sell my long puts at any price
(because of no bids), then I wanted to have a reasonable profit. 2 x 5
gave me enough cash to satisfy that condition.
As I said, it's sort of random. The lower the ratio, the less
downside risk. Thus, on these spreads, I try to find a combination of
downside risk and upside reward that makes me comfortable. Each trader has
a different comfort zone and risk tolerance.
2) Much more difficult
question. It's important not to let a few large losses wipe out many
winning trades. There are no hard and fast rules for me. I often cut
losses when the stock give a sell signal on my charts. But, I am not a
strong believer in technical analysis, so besides charts, I cut losses when I no
longer believe the stock will behave as I hoped it would or when potential
losses look too large.
Time I hold the trade is not
important (to me), so that does not count in making the 'take loss'
decision. I don't want to evade the question, but each trader needs his
own rules for getting out of losing trades. One sound rule might be:
Risk no more than x% of you capital in any single trade. If you lose that,
quit. Many traders use 2% as a rule of thumb. Thus, a trader with
100,000 in capital cuts losses at 2,000 for any given
trade.
You are very welcome.
Mark Sir,
A very helpful article. Two questions.
1. Why did you do a 2 by 5 spread? What criteria did you use? The amount of the credit, the risk/reward, etc? Why not a 3 by 7 or a 1 by 2? 2. On page 72, second paragraph "Knowing when to cut losses
is a crucial skill....." What types of criteria do you use to cut losses; support resistance, moving averages, days in the trade, etc? Thank you so much for answering these questions. Jay Goldby |
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