
# Bear Call Spread

## Strategy name and alternative names

**Bear Call Spread**. An alternative name is **Credit Call Spread**.

## Main characteristics

Bearish position.
It is a vertical spread involving an equal number of long and short calls on the same underlying asset and with the same expiration date.
It is a credit spread, which means you receive money to put on the position.
The strategy profits as long as the price of the underlying security remains below the breakeven point.

## Options used in the combination

Sell to open one at-the-money (ATM) call and **simultaneously** buy to open one out-of-the money (OTM) call.
The strike price of the short call is below that of the long call.
The advantage of this spread is that it benefits from time decay and provides an immediate inflow of cash.
The maximum gain and loss on the spread are very limited and well defined.

:::cut:::

## Risk profile

![](vbcs_exp-pnl-1024x576.png){.thumb}
Figure: Fig. 1, P&L Chart: The X axis is price and Y axis is profit/loss. The range of the Y axis is plus or minus the distance between the two strikes. The domain of the X axis is centered on the strike price of the short call.

**Maximum profit**
: The net credit received when you put on the spread.

**Maximum loss**
: The maximum loss occurs when the price of the underlying security hits
or rises above the strike price of the long call.
It is equal to the difference between the long and short strikes minus the net credit received.

**Breakeven point**
: At expiration, the breakeven point is the strike price of the short call plus the net credit.

**Key points**
: On a profit/loss chart (see above) where the X axis is price and the Y axis is profit/loss,
the value of the spread is a minimum at or above the long call’s strike price.
The spread is composed of three connected line segments.
The leftmost segment is horizontal from zero to the strike price of the short call.
The middle segment is a negatively sloped diagonal line starting at the strike price of the short call
and continuing until the strike price of the long call.
The rightmost segment is a horizontal line beginning at the strike price of the long call
and continuing to the right.
The breakeven point is the X-intercept.

## Preconditions to open this spread

You would put on a Bear Call Spread if you feel that the underlying asset’s price will remain stagnant
or decline through expiration, and wanted to profit if your prediction is correct.
The spread is more conservative than a naked short call, because the long call limits the maximum loss.
However, the long call reduces the net credit received compared to simply shorting the call.

## Greeks

![](greeks-1024x576.png){.thumb}
Figure: Fig. 2, Greeks

### Delta

An option’s probable price movement in relation to the price movement of the underlying stock.
The value ranges from `0` to `1` for a long call and `-1` to `0` for a short call where 0 means the option price is not affected by the stock price,
and 1 means the option prices moves penny for penny in lockstep with the underlying’s price.
Delta of whole spread thus ranges from a negative value to `0`.
While the overall spread is considered neutral, it is negative when the underlying price rises toward the short strike
and reaches a minimum at the average strike price.
As the underlying’s price continues to rise above the average strike, delta increases until it final returns to its maximum value of `0`.
In other words, the delta curve is symmetrical around the average strike price.

### Vega

Vega is the effect of the underlying stock’s volatility on the option’s price.
For example, a vega of `0.3` means that an option’s price will rise by 30 cents for each point increase
in the underlying stock’s implied volatility. For a Bear Call Spread, you want vega to drop after putting on the spread,
because you’d like the price of the underlying asset to remain stable. Vega is zero when the underlying’s price
is well below the short strike, and becomes increasingly negative until the underlying’s price approaches the short strike price.
Vega reverses and increases as the underlying’s price continues to rise, crossing the X axis (`vega = 0`)
at the average strike and continuing to rise until hitting a maximum somewhat beyond the long call’s strike price.
It then reverses direction again and approaches zero as the underlying’s price continues to rise.

### Theta

The time decay of an option’s price as the expiration date approaches.
At the close of expiration day, an option’s theta is `0`. Theta is lower for long expiration periods,
which means the option loses time value more slowly than it would for short expiration periods.
A longer expiration period increases the chance that the spread will expire in the money.
Theta for a Bear Call Spread is positive (which means the short spread doesn’t lose value over time)
until the underlying’s price rises to a point between the two strike prices.
At that point, theta becomes negative, because there is less chance that underlying’s price will return to the short strike price.

### Gamma

This is the rate of change of delta – the responsiveness of the position to the underlying’s price movement.
In a Bear Call Spread, gamma is negative below the average strike price, which means delta will decrease in the direction of the stock move.
Gamma is positive above the average strike, and a further upmove by the underlying asset increases delta.
If the underlying moves far above the average strike, gamma re-approaches zero.

## Dynamic illustrations

![](vbcs_time.mp4){style="width: 100%; height: 100%;" autoplay="autoplay" loop="loop" controls="controls"}
Figure: Fig. 3, Time decay animation: Describing physics of the spread’s price as time expires.

![](vbcs_vola.mp4){style="width: 100%; height: 100%;" autoplay="autoplay" loop="loop" controls="controls"}

Fig. 4, Volatility dependency animation: Describing physics of the spread’s price when implied volatility rises or falls.

## Position example on current market conditions

Assume the share price of XYZ stock is `$100.00`.
Sell to open one XYZ 100-strike call with 60 days until expiration and simultaneously buy to open one XYZ 105-strike call
with the same expiration for a net credit of `$1.27`. Neglect commissions.

**Net Credit**
: `$1.27`. You receive `$127`, which is escrowed in your margin account.

**Maximum profit**
: `$127`

**Maximum loss**
: `100 x ($100 – $105 + $1.27) = -$373`

**Breakeven point**
: `$100 + $1.27 = $101.27`

## How to manage position

You are bearish on the underlying asset and would like the underlying’s price to remain stable or decline.
Here are a few things to do if the underlying’s price moves.

### Weak upward move

If the underlying security weakly moves above the short call’s strike price but you remain bearish,
you could close out the spread and replace it with a long put or long straddle to take advantage of a drop in the underlying’s price.

### Strong upward move in underlying stock price

If the underlying security moves above the breakeven point and you are afraid it will continue to rise,
you can convert the Bear Call Spread into a Short Call Ladder Spread by buying one or more OTM calls at increasingly higher strike prices.

### Strong downward move in underlying stock price that you expect to continue

You could sell to close the long call and recoup a little of the premium.
This would transform the position to a naked short call with unlimited risk.

## Variation

The Bear Call Spread has a negative risk/reward ratio, meaning you can lose more money than you can gain.
If you are long-term bearish on the underlying asset and want a better risk/reward ratio, you could put on a Deep ITM Bear Call Spread,
in which both the short and long calls are deeply in the money. Because the value of deep ITM options are due mostly to intrinsic
rather than time value, a surprise upward move in the underlying’s price would have very little effect
on the price difference between the short and long calls. Thus, upside risk is minimal.
Conversely, the net credit on a Deep ITM Bear Call Spread should be close to the difference
between the two strikes, since time value is relatively small.
You can structure a Deep ITM Bear Call Spread such that the risk/reward ratio approaches `1:9`.

## Summary

A Bear Call Spread limits your gains and losses in well-defined ways.
The standard Bear Call Spread has an unattractive risk/reward ratio, but you can improve the ratio by using deep ITM calls.
A further risk with a Bear Call Spread is that you are in danger of being assigned whenever the underlying’s price is above the short strike price.
If you are assigned, you must deliver the underlying asset at the strike price, which will cut into your profit or cause you a loss.
Even though you’ve covered the short call with a long call, you still must establish a long position for at least one day so that you can deliver it.
If that occurs, the long call won’t help you unless the underlying’s price rises above the long strike,
since the long call’s strike price is the maximum price you’ll have to pay for the underlying asset.



# Straddle

## Strategy name and alternative names

**Straddle**. An alternative name is **Long Straddle**.

## Main characteristics

Neutral position. It is a combination involving an equal number of long puts and long calls at the same strike price and the same expiration date.
It is a debit combination, which means you must pay to put on the position.
The strategy profits when the price of the underlying security moves up or down beyond the breakeven points.

## Options used in the combination

Buy to open one at-the-money (ATM) call and simultaneously buy to open one ATM put.
Both options derive from the same underlying stock and have the same strike price and expiration date.
The advantage of this combination is that it benefits from volatility, independent of the direction of stock price movement.
Both the put and the call have (potentially) unlimited upsides but limited loss exposure.

:::cut:::

## Risk profile

![](straddle_exp-pnl-1024x576.png){.thumb}
Figure: Fig. 1, P&L chart: The X axis is price and Y axis is profit/loss. The range of the Y axis is maximum loss to potential gain. The domain of the X axis is centered on the strike price.

**Maximum profit**
: If the stock price rises, the profit on the call leg is unlimited, and is equal to the difference between
the underlying’s price and the call strike price, minus the premium on the straddle (we’ll ignore commissions).
Upside potential on the call leg is unlimited.
If the stock price falls, the profit on the put leg is virtually unlimited, and is equal to the difference
between the put strike price and the underlying’s price, minus the premium on the straddle.
(Technically, upside potential on the put leg is limited to the strike price of the straddle minus the premium,
because a stock price can drop to no lower than zero.)

**Maximum loss**
: Premium paid, which equals the premium on the call plus the premium on the put.
Occurs when the underlying’s price at the expiration exactly equals the strike price.

**Breakeven point**
: There are two breakeven points on a straddle.
The upper breakeven point equals the strike price plus the premium paid.
The lower breakeven point equals the strike price minus the premium paid.

**Key points**
: On a profit/loss chart (see below) where the X axis is price and the Y axis is profit/loss,
the value of the combination is a minimum at the straddle’s strike price.
The strike price forms the base of a V-shaped curve, that is, two diagonal lines with opposite slopes
that rise from a point with (X,Y) coordinates of (strike price, stock price minus premium).
The maximum loss, at the strike price, is the premium. The left (put) leg of the V rises as the stock price falls
and is bounded by the y-axis. The right (call) leg of the V rises without limit as the stock price rises.
The left and right legs of the V cross the X axis at the breakeven points.

## Preconditions to open this combination

You would put on a straddle in the hope that the underlying stock will quickly break out or break down from the strike price.
You would choose an underlying stock that is relatively volatile, as this increases the chances that the stock price will move away
from the strike price (see the vega chart).
You don’t need an opinion on price direction to profit from a straddle, if the stock price moves a sufficient amount.
Some traders put on straddles just ahead of a corporate announcement, jury verdict or earnings announcement,
in the hope the news will move the stock price.
Your biggest fear is that the price of the underlying stock will not move far enough away from the strike to recoup all your premium.

## Greeks

![Fig. 2, Greeks](greeks-1024x576.png){.thumb}

### Delta

An option’s probable price movement in relation to the price movement of the underlying stock.
The value ranges from `0` to `1` for a long call and `-1` to `0` for a long put
where `0` means the option price is not affected by the stock price,
and `1` means the option prices moves penny for penny in lockstep with the underlying’s price.
Delta of whole spread thus ranges from `-1` to `1`.
At the strike price of a straddle, the deltas of the put and the call cancel each other out,
which is why the straddle is delta neutral.

There is a wrinkle when the stock price does not exactly match the strike price.
If the call is slightly in-the-money (`ITM`), it will have a slightly higher delta value than will the put,
giving you a positive delta position that, in the short term, gains on the upside and loses to the downside.
The reverse is true if the put is slightly ITM.
This is only a concern if you sell to close the straddle before expiration;
If you hold till expiration, the effect of a slightly non-neutral delta evaporates.

### Vega

The effect of the underlying stock’s volatility on the option’s price.
For a straddle, higher vega translates into higher option prices, all things being equal.
For example, a vega of `0.3` means that an option’s price will rise by `30` cents for each point increase
in the underlying stock’s implied volatility.
Buying a straddle during periods of high implied volatility can be disadvantageous,
because a volatility crunch will collapse the time value of the put and call premiums.

### Theta

The time decay of an option’s price as the expiration date approaches.
At the close of expiration day, the option’s theta is `0`.
Theta is lower for long expiration periods, which means the option loses time value more slowly
than it would for short expiration periods.
A longer expiration period increases the chance that the combination will expire in the money.
Theta for a straddle is negative (which means the combination loses value over time)
because the options lose value over time due to time decay.

### Gamma

This is the rate of change of delta – the responsiveness of the position to the underlying’s price movement.
In a straddle, gamma is positive, which means delta will increase in the direction of the stock move.
On an upward stock move, a positive gamma dictates that the delta of the straddle becomes increasingly positive,
while on a downward stock move, the straddle’s delta becomes increasingly negative.
You can thus profit from a move in either direction with a straddle.

## Dynamic illustrations

![](straddle_time.mp4){style="width: 100%; height: 100%;" autoplay="autoplay" loop="loop" controls="controls"}
Figure: Fig. 3, Time decay animation Describing physics of what’s going on with combination’s price when time goes towards expiration.

![](straddle_vola.mp4){style="width: 100%; height: 100%;" autoplay="autoplay" loop="loop" controls="controls"}
Figure: Fig. 4, Volatility dependency animation Describing physics of what’s going on with combination’s price when an implied volatility rises or falls down.

## Position example on current market conditions

Assume its mid-January and United Technologies (UTX) is trading at `$110.00`.
Buy to open 10 UTX March 03 110 calls for `$2.60` each, buy to open 10 UTX March 03 90 puts for `$3.20` each.
Neglect commissions.

**Net Debit**
: `$2.60 + $3.20 = $5.80`. You pay `$5,800`.

**Potential** **profit**
: `10 x (|strike – stock price| – $580)`

**Maximum loss**
: `$5,800`

**Breakeven point 1**
: `$110 + $5.80 = $115.80`

**Breakeven point 2**
: `$110 – $5.80 = $104.20`

## How to manage position

This is a debit combination with limited risk and unlimited reward.
Here are two things you can do.

### Strong move in underlying stock price

1. If the underlying stock moves beyond the breakeven point,
   you can sell to close the out-of-the-money (OTM) option to recoup a little of the premium.
2. If the ITM leg has gained significant value despite time decay,
   you can sell the ITM option for a substantial profit.
3. You can sell to open an option (put or call) one strike further OTM than the strike for the favored leg,
   thus converting one side of initial straddle into a vertical spread.
   This will compensate you for the initial premium you paid.

### Strong move in underlying stock price that you expect to continue

You could sell to close the OTM option and use the proceeds to buy more contracts of the in-the-money option,
at a strike price of your choosing.

## Variation

If you have a mildly bullish inclination, you can put on a strap, which is a straddle with more calls than puts.
If you have a mildly bearish inclination, you can put on a strip, which is a straddle with more puts than calls.
You’ll make more profit with either variation than you would with a straddle when you correctly guess
the direction of stock movement, but you’ll profit less if you guess incorrectly.

If you already own the underlying stock, you can create a synthetic straddle by purchasing ATM puts.
Similarly, if you have already shorted the stock, you could buy ATM calls.
This works best when the stock price is very close to the option strike price.

## Summary

A straddle limits your losses to some amount between zero and the premium
if the stock price remains between the two breakeven points.
There is no profit limit on the upside, and the downside profit is limited only
to the extent that a stock price can’t fall below zero.
If the stock price moves substantially, your ROI will be smaller
than it would be from a naked long call or put position,
but you would have to correctly guess the direction of the movement to realize the higher ROI.
You might be able to make a profit on a straddle even if the stock price doesn’t move.
This is possible only when the implied volatility of the straddle jumps soon after purchase
and thereby expands premiums (through an increase in time value) above the amount you paid.
You could then sell the straddle for a profit, albeit probably a small profit.



Weekend readings, 2016/12/30
============================

## Paul Krugman: And the Trade War Came

> Corporate America is still in denial about the prospects for a global trade war,
> even though protectionism was a central theme of the Trump campaign.
> … The … relevant legislation gives the occupant of the White House remarkable leeway should he choose to go protectionist.

*Looks like a trade war is here…read how to benefit from this [here](https://optionworkshop.net/blog/trump-won-and-you-missed-the-rally-now-what-part-2-goldsilver-precious-metals/)*

:::cut:::

[http://www.marctomarket.com/2016/12/dollar-equities-and-yields-fall.html](http://www.marctomarket.com/2016/12/dollar-equities-and-yields-fall.html)

## How Important Is Information from FOMC Minutes?

> FOMC minutes releases can have sizable impacts on Treasury bond yields.
> The impacts are largest when the tone of the minutes differs greatly from the tone of the statement,
> presumably leading markets to change their expectations of future monetary policy.

*Analytical look at whether FOMC minute releases sway financial markets and how so*

[http://ritholtz.com/2016/12/important-information-fomc-minutes/](http://ritholtz.com/2016/12/important-information-fomc-minutes/)

## Near-Term Call Buying in UVXY

> Paper bought over 7700 UVXY Dec30 8 calls paying as much as .20 and as little as .13 throughout the day.

*At the highs today, UVXY touched $8.92, meaning the option buyer here potentially made more than 70c/share or $539K in 2 days on an investment of roughly $130K….wow!*

[http://www.theoptionsinsider.com/near-term-call-buying-uvxy/](http://www.theoptionsinsider.com/near-term-call-buying-uvxy/)

## Can Trump Pick Up Enough Crossover Democrats to Avoid Senate Filibusters?

> Republicans control the executive branch and both houses in Congress.
> That does not necessarily mean Trump can get the legislation he wants passed.

*A great analysis about how easily Trump’s policies can get past Congress*

[https://mishtalk.com/2016/12/26/can-trump-pick-pick-up-crossover-democrats-to-avoid-senate-filibusters/](https://mishtalk.com/2016/12/26/can-trump-pick-pick-up-crossover-democrats-to-avoid-senate-filibusters/)

## Artificial Intelligence, Automation, and the Economy

> This report examines the expected impact of AI-driven automation on the economy,
> and describes broad strategies that could increase the benefits of AI and mitigate its costs.

*Whitehouse article on the opportunities/threats and policy responses as related to AI*

[http://ritholtz.com/2016/12/artificial-intelligence-automation-economy/](http://ritholtz.com/2016/12/artificial-intelligence-automation-economy/)

## Aggressive Call Buying in CLF

> Traders are buying CLF Jan06 weekly 10 calls for .04.
> These options are 20% out of the money with just a week to expire.

*With Trump coming into office, this trade may work if there’s more talk about fiscal stimulus*

[http://www.theoptionsinsider.com/aggressive-call-buying-clf/#ixzz4UMdC5zyy](http://www.theoptionsinsider.com/aggressive-call-buying-clf/#ixzz4UMdC5zyy)

**We wish all our customers and readers a Happy New Year!**

**As always, Thanks for Reading! :)**


# One Easy fix for traders getting stopped out too early or cutting profits too soon

If you’ve traded actively for at least a few months or years, you’ll know all too often the agony that comes
with getting stopped out of a position and immediately, the trade takes off.
A similar but lesser form of agony is felt when a trade has hit your price target and you proudly sell your position.
Except, it keeps going and going...

:::cut:::

I know I’ve felt these emotions more times than I can count.
If only there was some magic indicator which would give me the expected range of the overall market,
I could better set my stop loss and profit taking levels.

Fortunately, I eventually figured out that the VIX index is a simple and solid indicator for this.
[What is the VIX index?](http://www.investopedia.com/terms/v/vix.asp)

I instinctively check VIX throughout the day to make sure it is within "normal ranges" when putting on and taking off trades.
Just take a look at the below chart:

![](chart-1024x588.jpg)
Figure: Data: January 2, 2004 – December 16, 2016

Whenever the VIX is under 17, the S&P500 daily range averages less than 1% (High of day minus Low of day).
And most of the time the VIX is under 14, the S&P500 range averages less than 0.7%.
However, when the index is trading close to 17 or higher, more extreme moves in the S&P500 can be expected with much greater predictability.

Here is a breakdown of the graph in table format:

| VIX Values     | S&P 500 H-L Averages | # of Occurrences | %age of Occurrences |
| -------------- | -------------------- | ---------------- | ------------------- |
| under 11.01    | 0.61%                | 92               | 2.8%                |
| 11.01-14.00    | 0.74%                | 919              | 28.2%               |
| 14.01-17.00    | 0.96%                | 793              | 24.3%               |
| 17.01-23.00    | 1.22%                | 768              | 23.5%               |
| 23.01-30.00    | 1.78%                | 397              | 12.2%               |
| 30.01 and over | 3.35%                | 295              | 9.0%                |

Even traders who do not trade options must pay close attention to the VIX index to avoid exiting positions too early and getting whipsawed.
Equally important, when volatility is low, don’t expect big moves especially in names highly correlated
to the S&P500 index in terms of direction and beta.
In low volatility environments, you must take profits earlier and keep a tighter stop loss.

Here, we’ve provided an easy way to roughly gauge the market ranges for the day, but we could of course dig much deeper.
For instance, we could combine volume, sector and many other factors
in our analysis and come up with more accurate measures of range not just for the overall market,
but also for certain sectors and stocks.

Perhaps, in the future, this analysis will come, but for now, pay attention to the VIX.

Until next time….Always stick with your risk limits and Happy Trading!



Trading like this can be fatal for you, Part 1
==============================================

I was 24 years old and it was July 2007.
I was sitting on the fixed income trading floor of BNP Paribas at the time and was just itching to take a big short on the stock market.
Equities had been rallying in the face of a crashing fixed income market.
It was like smiling into the fist of a much younger Mike Tyson.

I finally pulled the trigger after months of waiting and shorted as much high beta stocks my margin would allow.
After all, that’s how the legendary Jesse Livermore used to do it right?
I doubled my money in a matter of weeks and was on an emotional high. I truly believed I had found my calling in life.

:::cut:::

High off the initial win, I routinely maxed out my account by shorting S&P e-mini futures contracts.
I had one thesis and that was the stock market was going to crash due to the subprime crises brewing underneath the exuberant indices.
I could feel it in my bones – this was my short of a lifetime!

Fast forward 6 months, gone were my profits from my “big short” and gone also was my initial capital.
Easy come easy go, but the emotional pain persisted for much longer.

I’ll never forget the feeling of waking up to a $25K loss even before the market opened.
I closed my short in disgust by 9:45am…only to see the market close negative for the day.
The catalyst was the introduction of the TARP program to ease the strain on the financial sector which had no real impact for months.
But staring at such a big loss had totally incapacitated me mentally and even physically to react in the proper manner.

Yes, I had caught the top in the market and Yes, I doubled my money at first, but I lost everything.
The emotional suffering was made infinitely worse because just after I gave up,
the markets really started crashing, where -500pt days became routine.

I found out the hard way just how physically, psychologically, and economically taxing trading the wrong way can be.

A trader who fails to keep his emotions in check often make common mistakes that trap them in a vicious cycle:

* Revenge trading
* Not respecting stop loss levels
* Forcing trades, especially when losing money
* Chasing trades for fear of missing out

The psychology of trading is so fundamental to a long and healthy trading career. I wish I had read this article when I was 24.
If you are having issues keeping your emotions in check, do yourself a favor
and read [part 2](trading-like-this-can-be-a-fatal-for-you-part-2.md) of this article. Closely.


Trading like this can be fatal for you, Part 2
==============================================

In the first part of this article, I briefly discussed a rather painful early trading experience during the financial crises in 2007/2008.
I was short and still [somehow killed my account](trading-like-this-can-be-a-fatal-for-you-part-1.md).

I let my emotions dominate my trades earlier in my career.
My self-worth was tied to each dollar made or lost.
I was many things back then.
Too eager, too risk-loving, too young.

Eventually, learned that my trading career is like a war that never ends.
Every minute of trading is a battle with others trying to separate me from my money.
If we fail to manage our emotions, we become easy targets.
After blowing up my account multiple times, I learned some very painful lessons.

As promised, I will share with you my framework to keep psychologically sane while trading and also what to do when off balance.

:::cut:::

PREVENTION

The key is to prevent yourself from being off center psychologically.
Once you let emotions take over, it is time to stop trading.
There are a few guidelines I have developed over the years that I follow day in and day out.
It has helped tremendously.

Prevention is also my number one goal because once you self-destruct, it will take much longer to gain back what you lost.
Below, the orange line shows the corresponding gain you need to offset a particular loss (in blue).

![](hpHfx5I.png){.thumb}

**Here are my processes for prevention. I look at these every day before and after trading to make sure I’m inline.**

1. Set realistic goals – my goals have nothing to do with percentage returns or amount of money to make.
   They should fully be within my control.
   **It is crucial to develop a trading strategy that fits with your personality which makes it easier to abide by your trading plan when things get tough.**
   Know where to enter, exit and think about how you will react under various probable scenarios are before making any trade.
2. **Absolutely do not trade first then plan later while staring your fluctuating account balance. As long as I follow my guidelines, I have achieved my goals.**
3. Space out your day – I set hourly alarms to remind myself that for certain times of the day,
   I should be taking different types and amounts of risk.
   For instance, from 11:30am-3pm EST, I am rarely trading and if I am, my risk is minimal.
   I generally risk about 1-2% of capital on trades during heavier trading times and only 0.25%-0.5% during the lunch hours.
   **Having an alarm go off every hour also helps me to refocus and follow my trading guidelines.**
4. **Take a break if performance is subpar** – I stop trading for 1 hour after 3 losing trades in a row
   and stop trading for the day anytime I lose 5% of my capital.
   I stop trading for 2 days if I have 3 days in a row of losing trades.
   If performance continues to be poor, I decrease risk limits to 0.5% per trade.
   Additionally, I also skip 1 day of trading if I am up more than 10% of my capital in 1 day
   because I tend to take stupid risks following big wins.
   **Remember, you don’t get paid for the number of trades you take and you don’t always have to trade. Rather, it is extremely important to have no positions on most of the time so you have a better chance of staying objective.**
5. Monitor yourself – **Always take notes on each trade so you can improve faster.**
   How did you feel before and after making the trade?
   Were you nervous, regretful, angry, excited?
   You will be surprised to see familiar patterns forming over time and you will know how you should feel
   when you are in the right or wrong trades.
   For me, I don’t trade or dabble in tiny positions when I am sick or feeling unwell.
   Why go into battle when you are not 100%?

*But what to do if already in a massive loss or if already your emotions have clouded your judgement? Here are some things to consider:*

1. STOP – **Take a break right away if you are feeling off center or are trading recklessly. Close your trades and take a 10-minute walk/break.**
   You’ll thank yourself later.
   After all, there are 250 trading days every year and 10’s of thousands of trades to go.
   **Don’t try to hold on and make all your money back today or try to hit a home run the very next trade.**
2. Reassess – Have a think about why you lost money.
   Did you follow your trading plan?
   Can you do something to improve your strategy?
   If the market is too volatile or acting strangely, I sit out and watch the market for a few days just to get my feel back.
   **I get very excited when I can learn from my losses and improve my strategy for future trades. No strategy works forever so you must routinely step back, study your recent trades and try to make adjustments.**
3. Trade smaller – **After a string of losses, I force myself to trade much smaller, risking only up to 0.5% each time.**
   It’s better to add to the positions later when they are profitable and during a consolidation period.   
4. Call on other experienced traders or friends to talk about your situation and hopefully they can provide valuable perspectives.
   There are many coaching services which can keep help to keep your psychology in line.

Finally, taking a break doesn’t mean giving up.
Every time I have taken a break and reviewed my mistakes, I have come back stronger.
Through self-improvement over tens of thousands of trades, you will gain confidence in your strategy and in yourself.
By using this as a guide, I hope you also will find your unique path to skillful and calmer trading.

Blog #trading

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