As an options trader, you have to take risks in order to produce a nice return. Unfortunately, not all trades turn into wins. Bad news here or there can quickly turn a potentially nice profit into a loss. The key is learning how to take calculated risks and avoid devastating losses.
First things first: You need to learn how to curb your enthusiasm. I’m often approached with news about the next big thing. “Bob, you have to get on board with this one. It’s the next Facebook/Google/Microsoft, and it will take off like a rocket ship.” Uh-huh. If I had a dollar for every pitch like this, I would be a gazillionare.
But here’s something missing from the pitches I receive from both novice and professional investors: Not a ONE ever says a word about loss. This is not a fun topic, of course. We only want to win, and we have little regard for what may be on the other side. Losses are part of trading, and if you think you’re only going to win all the time, you are in for disappointment. Losing is part of the game, just as much as winning is.
The safest way to take risks
It’s appropriate to take risks, but there’s a big difference between reckless risk taking and safe risk taking. Taking a step on the risk curve requires discipline, patience and willingness (and acceptance) to lose money. In other words, it’s all about risk management.
The safest way to take risks is to diversify your portfolio. You may have heard this advice wrapped in a pithy quote, “Diversification is the only free lunch on Wall Street.” Indeed!
If you’re looking to invest in some crypto names, consider six or eight digital currencies rather than just one. With that sort of diversification, you spread out your risk and avoid limiting yourself to a sink or swim result (most of the time).
Remember that the number one rule of risk management is never put all your eggs in one basket. It’s the surest way to end your career as an options trader.