This may sound strange, but many winning options and futures traders actually have more losing than winning trades. But they still make huge profits over-all. To understand why, you need to know how the risk/reward ratio in options & futures trading works.
If you don’t understand this critical rule, you’ll fall into the two big traps that catch unwary new investors. You’ll put too much of your cash into too few trades. And you’ll panic the first time you hit a losing trade.
Let’s look at an example. If you are risking $375 to gain ten times that amount, you can lose eight times out of ten – and still come out way ahead. Let’s do the math together, so you really understand this, because it’s critical to your success!
First, we’ll assume that you’re going to make a series of 10 trades, each with a limited risk of $375. Eight of these trades will be losers, so you’ll be out $3,000. But your gain for each winning trade is $3,750. Write the following figures down, because it will help you to really learn this principle:
A) Number of Losing Trades: 8
B) Risk for Each Trade: $375
C) Total Loss (A x B): $3,000
But, if you win two times out of ten, and each time your profits are ten-fold, how much will you gain?
D) 2 Winning Trades x $3,750: $7,500
Now let’s calculate your profits:
E) 2 Winning Trades less Losing Trades:
(D minus C) $4,500
That’s a really healthy bottom line! You have risked $3,750 but you’ve made a profit of $4,500 – more than 100%!
You can lose eight out of ten – and still make a nice profit. But most people want to get rich right now, the first time they trade. They look at futures like a lottery ticket. And when they don’t win the first time out, they decide that options & futures are too risky – and they give up.
The bottom line is: your strategy must allow for losing trades.
Other Exciting News
Join the
Options Industry Council
September 5th, 2018, at 3:30pm Central Time
Join Ed Modla of the OIC for a FREE educational webinar on "Managing Risk with Options!" Join OIC instructor Ed Modla for a session that will cover the essential portfolio risk management strategies every new and experienced investor should know.
This session will focus on how options can be used responsibly to preserve and manage capital.
Tomorrow, you could begin doubling your account every single month starting with one letter.
The letter will come from a 20-year trading professional named Ian Cooper. He says, “In 2017, following my trades you would be doubling even tripling your account some months. Let me show you how.”
He will show you exactly what to do... and he’ll give you the blueprint for just $1.
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