A Trading Estimations exercise for the Credit Spreads trader

Toying with some thoughts in this post where the idea is to quickly estimate potential annual returns depending on the strategies and capital allocation we use, while also adding some theoretical losses along the way.

Let's say I'm trading a 100K account and that I want to deploy at least two income positions every month (max 18K per position, so 36K of capital working on each expiration cycle). Because there will be positions in two cycles at the same time, that leads to a total exposure of around 72K, which leaves room for a hypothetical 5th trade and also adjustments.

Options trading course - Adjustments, Risk Management and the Greeks

In the past three years several newsletters, brokers and "fake gurus" have offered to write an article on this blog in order to get visibility for themselves. So far, I have only agreed to a couple of them. Both are real traders, both with proven results and no BS advertisement, nor crazy profit claims. That's because I hate fake non-transparent traders and the financial media in general that only looks for readership in order to increase their advertisement dollars. So, after more than 3 years blogging and dozens of requests for affiliation or guest posts, only two have made the cut. OptionsTradingIQ is one of them, and the reason is because he is a real trader, with real results and an always appreciated no BS approach. Someone that I personally respect a lot for his exquisite risk management techniques. He has written a couple guest posts on this blog in the past which you can read here and here. If you like his thoroughness you may be interested in the following offer.

Risk/Reward, Profit Factor and Profitability of Trading Strategies

It is amazing how many traders, specially newbie traders, emphasize how this or that system wins 80% or 90% of the time, as if that is the only thing that matters. When in fact, only the combination of the success rate plus the risk/reward ratio of the trades should be analyzed as a whole.

The Dynamic position size paradox

In my previous post Risk a percent of your account per trade I talked about money management and capital protection basics, by only risking a fixed percent of your trading capital per single trade, and showed how to adjust your position size in a Forex play to meet this goal regardless of how far or close your stop loss is from the entry.

Given that we adjust the risk at our will by regulating the position size on every trade, we can say we are using a dynamic position size technique. Now let's analyze this interesting occurrence that has more to do with Math than trading but it is something to keep in mind for our game.

How to risk a percent of your account per trade

Many of us have read something like "Only risk x percent of your account per trade", as a rule of thumb. However not many of us, specially in Forex have a clear idea on how to achieve this. So, let's get down to business.