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Rules for Money Management

It is said that the game of golf is not played on the green but between your two ears. The same can be said of trading. Your mind-set and the preparation of your mind are all important. You must be focused on the who, what, when, where, why, and how of a situation in order to formulate your course of action. While it is not easy, it is simple.

Strike Price, Premium, and Synthetic Options

When you purchase an option, you must decide whether you are going to purchase an in-the-money, at-the-money, or out-of-the-money option. Depending on which option you purchase, you will pay either an expensive or a low-cost price for your premium. The price that is paid for the option premium plays a significant role in how successful an option can be in the long run.

The Elegance of a Synthetic Option

A standard option has one risk management objective, to limit loss to the premium paid. That’s it. It is not designed to follow the market’s rhythm or flow. When you are wrong, your trade ends. For a synthetic option, things are not quite the same. Being wrong is just the beginning of something great.

Pros and Cons of Day Traders

There is nothing more important to a day trader than being flat the market at the end of the day. No matter the circumstances (win, lose, or draw), making sure that no capital is at risk of being exposed to overnight market gaps defines what day traders are all about. This attitude is both good and bad. The good is that it keeps traders focused on their activities, making sure they take no opportunity for granted as well as teaching them the discipline to exit losing trades quickly and efficiently. The bad is that many winning market decisions are cut off at the knees.

Using Options As a Primary Alternative

When a swing trader uses an option as a primary alternative to a stop loss, the intent is to reduce or diminish any exposure to loss while at the same time staying one step ahead of the market. This is directly tied into the money management plan that is already in place. Large money managers will have in place a standing risk of loss that can’t exceed 2 percent of their account value, while individual traders may be more liberal, allowing as much as 5 to 10 percent of their accounts to be at risk at any given time.

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