Lesson Overview

No Guaranteed Trades

To start our discussion about portfolio management, it's important to fully understand that you will have losing trades often as part of any system (and especially this system).

Coming to grips with this now doesn't mean that we will lose money if we stick to the trading plan (because we will be profitable) but rather enables us to handle with professionalism any trades that go against us.

And while there is no such thing as "guaranteed trade" I'll remind you that in sports the team that wins at the end of the game NEVER is always in the lead during the entire game. The lead changes all the time and so does your profit loss until you end up winning. But it's about staying consistent and mechanically.

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Was This Helpful? Add Comments/Questions

  • Great question and the answer is you don’t – you can’t force trades and sometimes during these low vol markets you have to sit and wait for higher vol. The key here is that persistence and number of trades is a long-term goal and believe me you’ll make more money the few times that vol is high during the year than you will trying to force trades into a low vol environment. Does this help?

    • Jeff

      It does. Thanks. I know that forcing trades will likely end in disaster…think I just needed to hear from you that the good times (albeit fewer good times) more than makes up for the dry spells. Thanks.

Show Video Transcript +

As we start our discussion about portfolio management, it’s important to fully understand that you will have losing trades as part of any system. And yes, especially even our system, we are not perfect for from it, and you will have losing trades now and then.

It’s important that we start talking about losing trades now as a part of portfolio management only to give you an idea of where we’re going and how you can get there to the point at which you can make a lot of profitable trades after going through some losing trades.

Of course, coming to grips with this now doesn't mean that we will lose money if we stick to the trading plan because we will be profitable and have been for many years. But rather, this enables us to professionally handle bad trades that go against us.

Understanding and coming to grips, basically believing in the fact that you will have trades that go against you and trades that you just make really obscene moves that you just can’t do anything about and you lose a handful of money.

It’s going to happen, but if we’re smart about it and if we professionally enter and manage our trades, then in the end, we will be profitable if we stick to the trading plan.

I’ll remind you. I just wanted to use this as a great analogy to look through, but in sports, the team that wins at the end of the game is never always in the lead during the entire game.

If you look at basketball or football or baseball, it's never the team that scores first and is in the lead that wins at the end of the game.

We hear so many times of amazing comebacks of teams that were down 50 points in basketball or 28 points in football or 10 runs in baseball, and it’s never that team that is down always throughout the game that loses, it’s never the team that’s always in the lead that wins, lead changes hands throughout the entire course of the game.

And in the investment world and particularly when it comes to trading options, you’re going to have a profitable account and then your account is going to be down and then you'll be profitable, and then you’ll be down.

But over time, you stay consistent with this business and this trading plan that we’ve laid out for you; you will be successful in the end. It’s just a matter of time.

Let’s go through a couple of examples. I found this online, and I want to share it with you. But some of the greatest comebacks in NFL history just to prove this point… I’m not going to harp on this too much.

But you can see here the San Francisco 49ers down by 28 points and then came behind to win and look at just the score in the first couple of quarters.

In the first two-quarters of the game, they only scored 7 points, and New Orleans had scored 35 points, so they’re down by 28 points, then they get to half-time, and then they come out of half-time and just blow New Orleans out of the water and score a bunch of points and then get it to overtime and win.

It just shows you that if you're down big in your portfolio, it doesn’t mean that you can’t ever come back around, and if you lose a big chunk of money, that doesn’t mean you can’t come back around. It’s just about staying consistent.

You can see there’s a bunch of examples here. The Bills came back from 28 points, the Cardinals from 25, the Browns from 25, Eagles from 24, a bunch of people from 24 including a couple of times the Broncos came back from 24. It’s just impressive at just multiple, multiple examples of teams that have come back from behind.

That’s the kind of way that I think about trading, is that you have to realize that you got to have that end goal in sight that’s got to be a couple of years down the road, it can’t be tomorrow or next week or next month.

I’m sure you want to see consistency at that point, but consistency happens over many, many years. Remember that in this business, it’s all about being persistent and consistent, both, not one or the other.

Persistent, meaning you’ve got to place the same high probability trades and be persistent about making sure that your risk size is small, you’re on the right side of volatility with the right strategy and consistent means that you have to be able to place those trades over and over again.

If you’re placing the right trades, you're persistent, but you don't have consistency, meaning you only place one or two trades, you’re not going to be successful.

And if you're consistent in placing a lot of trades, but they’re not the right type of trade or the right high probability trade, then you’re not going to be successful. You have to be both persistent and consistent in this business to be a winner.

As always, I hope you guys enjoy this lead into this portfolio management and risk management section of Option Alpha. If you have any comments or questions, please add them right below in the video lesson page.

I’ll make sure that I get back to all of those so that you get your answers promptly. As always, happy trading!

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