How to Lessen Your Risk in a Trade, Part 3

Over the past few days we've been looking at protecting positions. Yesterday The Daily Battle Plan Model portfolio took profits for the 14th time in 15 trades this year. This type of high probability trading is the goal and historically the set-ups triggered in the Daily Battle Plan have been correct well over 85% of the time in testing that goes as far back as 1993.

What we always want to do at the same time is to identify ways to protect ourselves during the times when markets move significantly in one direction, especially when they are pulled extremely far from the 200-day moving average and snap back like they did in March through late last week.

We discussed stops not being the best choice as they cause you to get whipped, the test results show them to hurt performance, and they do nothing to protect you from overnight risk.

Position sizing is a better way to protect yourself, as you can structure your portfolio in such a way that no one position can cause you too much harm (I like this a lot).

Another way to lower risks, and is today's topic, is to use options. This can be done with long calls and puts (though not recommended) or with credit and ratio spreads (I like these better).

When you are trading with high probability strategies as we do in the Daily Battle Plan (and which are also taught in our Swing Trading College), using credit spreads and ratio spreads takes positions that have been historically correct 85% of the time and with the proper spread strategy, can improve the results to above 90% correct while limiting your risk (this is very solid).

The one downside to spreads is that the gains are limited. Therefore on days like yesterday, when we are fully short the S&P having shorted the last piece at Friday's close at 87.06 in the Model Portfolio, the gains in the spreads are far less than the gains for those Battle Plan subscribers who shorted the SPY, bought SH, bought SDS or shorted the E-minis.

Ultimately it comes down to you looking at the statistical results of the strategy and then deciding how much gain you are hoping to achieve while taking the minimum amount of risk. This answer comes with time and experience and eventually it leads you to the strategies you feel the most comfortable with based upon your long term goals.

If you want to learn how to do this in a professional manner, you should attend our Swing Trading College (it's the 6th time we've held it). The next Swing Trading College begins in a few weeks and if you would like information on it, you can attend a free presentation I'm conducting online on Wednesday at 4:30 pm. The Swing Trading College covers high probability ETF trading, stock trading, options trading, E-mini trading along with putting together a program that allows you to identify high probability set-ups each day. It remains the most popular learning program we offer due to the success of the many traders who have graduated from the program over the past few years.

To attend my presentation tomorrow, call 1-888-484-8220 ext 1 and tell them you'd like to attend. And if you have any questions on it, feel free to email me at l.connors@tradingmarkets.com.

Tomorrow, in the Trading Lesson of the Day we'll look closer at leveraged ETFs.