Two Simple Ways To Increase Your Options Win Rate
The Smart Profits Report: Issue #324
Thursday, June 29, 2006
Two Simple Ways To Increase Your Options Win Rate
By Karim Rahemtulla
Chairman, Mt. Vernon Research
You often hear complaints about how the rich receive investment breaks, how the laws are designed to let the rich pay less taxes, and how the rich don’t do enough good with their money. But earlier this week, you saw the world’s two richest men combine their fortunes in an extremely positive way.
Renowned investor Warren Buffett’s $30 billion donation of his $44 billion fortune to the Bill & Melinda Gates Foundation is thought to be the biggest non-governmental donation in modern finance. In the end, both men will have pumped more than $70 billion into the Gates Foundation. That means more than 80% of their wealth will now be used to benefit others…
These were not fortunes made in shady back rooms, from illicit smuggling or from warmonger profiteering. They were made publicly and honestly through innovation, hard work and smart investing. (And it’s important to note that they made the decision to part with their hard-earned cash - a personal choice, rather than one mandated by elected governments officials seeking to appease constituents or win elections.)
While you might not attain Buffett or Gates-like wealth, you’re certainly in a position to generate some wealth of your own by making heads-up investing decisions. Today, let’s look at two simple ways to increase your options win rate.
What Does Your Track Record Look Like?
In yesterday’s Smart Profits Report, D.R. Barton asked whether confidence is born from successful investing, or whether successful investing breeds confidence.
It’s a good question, and D.R. went on to give you three ways in which you can grow your investing confidence. (If you missed it, see the Crib Sheet below). But today, I want to follow up on that and focus on a couple of simple things you can do to evaluate your own system and become a better investor.
Take a look at your own trading track record. How often do you win?
With stocks, you should be aiming for a 60% to 70% win rate. But it’s trickier with options because:
- They move quicker than stocks
- Are often more volatile
- Lose value due to time decay
Your judgment also needs to be better, such as which way the option will go, how far, by what time, etc.
What To Do When Your Trades Go Against You
So, what do you do when your trades go against you? Sulking about it and getting frustrated won’t work. Neither will panicking. Here’s a better way…
- Know Why You’re Trading: Preparation and research is everything. Make sure you know the reasons why you’re investing in a security. It doesn’t matter what system or strategy you use - if you can’t answer the question and be able to support it, you need to do more research. Often, it helps if you’re familiar with the business the company is in and why it makes a good investment. Write these reasons down before you make the trade, so you’re clear.
- Review and Expand: Despite your best-laid plans, trades will sometimes go against you - it happens to everyone. When they do, review it. Look at the charts, the fundamentals, the technical analysis to see if there’s anything you missed or could have done differently. Diversify and expand your knowledge of trading systems, investment tools, company data and the way the industry/sector works to give yourself a better chance next time.
Harness this with the confidence-building techniques we gave you yesterday and there’s a strong chance that you’ll soon enjoy some great improvements in your trading success.
Good Trading,
Karim Rahemtulla
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Today’s Smart Profits Cribsheet
- The key to successful trading starts with the basics. In yesterday’s Smart Profits letter, D.R. Barton highlighted three ways you can build up your confidence when investing. Combine that with today’s message and you should soon improve your winning average. Check out Smart Profits #323, Trading With Confidence: How You Can Develop More Confidence In Your Trades.
- Want more on “fundamental” and “technical” analysis - and how to incorporate them into your trading strategy? Visit our Smart Profits Glossary to brush up on these terms.
Related Articles:
- Fundamental Analysis: Three Screens for Technical Traders
- Technical Analysis: Two Simple Tools for Spotting a Technical Trend
- Options Trading Strategy: A Five-Question Screen to Find the Perfect Option
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