11 Oct

When To Make Adjustments To Your Trading Plan


Well, it’s been a few days since I went vegan after watching The Game Changers. Again, I’m not trying to turn you into a plant-based eater or anything…

… but so far, it’s been working out really well for me.

Maybe, it’s the new healthy lifestyle… or perhaps I’m just more in tune with my thoughts — approaching the market with a well-developed plan — that has allowed me to pull in profits like these…

… for the most part, I’m going to be staying the course and feasting on profits, as well as delicious meals like this:

The point is, as traders, we’re always exploring ideas to improve our trading performance and maximize our profits.

Going vegan is just one off-the-court adjustment I’ve made…

… but trading regularly, there are times where we have to make split-second adjustments and decide whether we want to still be in a trade or not.  

Today, I want to review a real money trade and show you how you can adapt in real-time.

Knowing when to let it ride… and when to cash out

Part of being a great trader is knowing when you’re right… and when you’re wrong.

I can’t tell you how many times — over the years — where I turned a winner into a loser… and I’ve learned over the years that sometimes sticking to your plan too much can lead you to trouble.

More specifically, if something changes… and you don’t adjust your plan, that’s what could land you into some trouble.

I was bullish on the stock, and the overall market. More specifically, I noticed BABA was right around a trendline. BABA has held that trend line really well before and bounced off nicely back in August.

This time around, I was expecting that same pattern to hold… and what do you know? (*Spoiler alert: It bounced off the trend line and continue higher, just as I suspected.)

So the other day (October 8), I placed a strategic bet on BABA — a vertical spread — that limited my downside risk and allowed me to collect a premium. If you need a refresher on vertical spreads, read this post.

The only thing that I needed to happen was for BABA to stay above $165.

At the time, BABA was trading around $163.86 — but here I was placing a bet that BABA was going to be above $165 by the end of the week (the options I sold had an expiration date on Oct. 11).

That said, this was a riskier bet because I felt strongly about the trendline and would head up into the weekend.

Now, with the vertical spread trade, my profits are limited to the amount of net premium collected.

So, the quick math here is 100 * 100 * ($1.20) = 100 contracts * 100 multiplier for options * net credit = $12,000.

Making Adjustments

So let’s put this into perspective…

… I knew exactly how much I was risking… and my exact profit potential.

Of course, I was expecting BABA to have a massive move and bounce off the trendline hard — staying well above $165 before my options expired.

However, it’s trading… and we don’t always get the move we want.

Yesterday, BABA was trading at $167.29… and I was sitting in a $6,400 windfall.

With just one day until expiration, it would really be a gamble if I decided to hold onto the trade… even though I was bullish on BABA and the market headed into the weekend.

So in real-time, the decision I had to make was to either take the $6,400 winner… or risk $13,000 to make an additional $5,600.

At the time, the risk-reward to hold onto the position didn’t make a lot of sense. Maybe if I had some more time, say the expirations expired 2-3 days instead of 1 day… I would’ve considered holding onto them.

I took my windfall and moved on.

So what’s the key takeaway from all this?

Even if you have a trading plan, you still need to make adjustments and weigh your risk-reward.

For example, let’s say you’re long 1,000 shares of a stock at $25 per share.

If the stock drops to $23, you stop out of your position.

You only want to take profits if it gets to $29 per share.

Now, let’s say the stock gets to $28.00… and there’s an upcoming earnings event for the company (a volatile event).

You have to weigh your risks here or make necessary adjustments… you can either:

  • Buy put options to hedge your position
  • Set a stop loss at a price you see fit
  • Take profits
  • Take partial profits and move your stop higher

I get it… it’s difficult to understand at first… but if you need a strategy that simplifies all that for you — check out this short training clip.


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