#1 My Risk Management Plan

by admin on March 22, 2012

In this post, I am going to share my risk management plan on how to protect my money. 😀

It is not a foolproof plan and I believe it will be an ongoing process of slowly getting it right.
This plan is something that I feel will work for my style of trading. Please feel free to read through and change it to fit your style :D.

Current trading level?

Before I began I think it will be good to share what is my current trading knowledge.
1) Never traded any financial instruments with real money before.
2) Worked in a brokerage house before thus I understand terms like limit, market and stop orders.
3) Roughly know how to read a balance sheet.
4) Tried virtual trading with FOREX before but never put in any money to trade.

That’s all, the above 4 points sum my trading knowledge. So I am no expert to begin with and if I can go through the process of reading up on futures and options so can you :D.
The reason to show my current trading level is let you understand why I chose a very conservative plan and to help any new traders like me have something to work on.

Risk Management

I will be using mostly what my mentor Dave from Smart Passive CashFlow is teaching, so do check out his website where he gives out a great ebook that can help you get started :D.
Dave always mention to me that the most difficult part in trading is to manage your emotion.

After reading some books (Getting Started in Commodities by George A. Fontanills) and listening to the podcast by RatioTrading, I come to a conclusion that in order not to be taken over by your emotion, you need a trading plan before you execute the trade. So even if the price does goes back up to a favorable point, if it hit your ‘get out’ mark, please exit the position.

Therefore the first thing I need to have is a trading plan.

Trading Plan for Option Selling (I will be following some of the method taught from “Getting Started in Commodities by George A. Fontanills”):
a) Know how much you willing to invest?
For the start I am willing to invest roughly USD$5,000 and I am only going to trade one contract at any one time.
For corn, the initial margin required is roughly USD$1,000, therefore I should have enough to prevent any margin call.
eg. Whenever I sell one option, I will roughly have USD$4,000 for the futures contract prices to move.

b) What is the maximum risk you willing to take per trade? eg. when to cut loss?
By following my mentor’s ebook, I will cut loss when the position goes against me by more than 100% of what I have collected initially.
eg. If I sell an option and collect a premium of USD$200, I will close the position (buy back) if the premium goes to USD$400. In this case I will lose USD$200 which is 100% of what I have collected.

c) What are the criteria in order to enter a  new position?
As this is going to be quite lengthy, I decided to write an entire post about how I perform my research on corn and why I am confident enough to sell the options 😀 (so stay tune for more information about this!)
However as what my mentor mentioned in his ebook, I will sell roughly 15% away from the current price on a contract with slightly around 3 months to expiry (not too long or too short to expiry).

So in short, do know when and why to go into a new position and also when to get out. The most important part I believe is to follow through the trading plan.
I will most probably execute my first live trade in less than one month time, so do watch out for my post.

Thanks a lot for reading my post and have a great day!
Cheers,
Charles

Disclaimer: The author is not a licensed financial advisor and the information is provided for educational and information purposes only.
Trading commodity futures and options have large potential rewards but also contains a high level of risk and is not suitable for all investors.
Only risk capital should be used when trading futures or options.
None of the information provided constitutes a solicitation of or a recommendation to buy or sell any futures or options contracts.
Please seek the advice of a professional financial advisor before investing your money in any financial instrument.

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