In my trading process, it's never about one trade, it's about the system. The paradox is that ~90% of profits come ~5% of trades, so it's imperative to create an environment that can catch big moves, while keeping losses contained. I have no way of knowing where the next big trade is, so my basic philosophy is to de-emphasize any one particular trade. This is done through placing small ~equal amounts of risk as a % of my portfolio per trade.
Below is a note I took in Evernote on a recent trade I entered. I intentionally excluded the name of the asset traded, because I want to highlight my thought process on how I'm trading, not what I'm trading.
5/22/16: "XXXX 145 SEP PUTS look like a good bet. The risk I'd have to take for one contract is where I want to be relative to assets under management, and the potential reward is high relative to risk. The cost is about $370 per contract. XXXX can realistically touch back down to its 52-week low of $130; this would make my Put contract in-the-money by $15, or $1500 per contract--nearly a 4-1 risk/reward scenario.
I'm using the aggregate of the all-time high price of $213, the 52-week low of $130, the price retracement up to $190, and the continuation of the downtrend as the price headed down to $168, as anchors to determine a high risk/reward opportunity. The opportunity is only viable because the Put contract is aligned with my conservative risk management.
The price of XXXX peaked at $213 on FEB 2015 and hasn't reached those levels since. This trade is a good place to bet on the downside. It will no longer be viable when XXXX goes back to $190 per share."
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