 What's up everybody? JTW of Team Xtrades here with the first in a series of educational videos that are a crash course I've developed based on my experiences doing one-on-one mentoring with new traders a Couple of quick housekeeping items make sure to hit that like button below Also, make sure to turn on notifications and subscribe to our YouTube channel here to catch updates on all the latest educational content for traders like you Also a quick disclaimer that the contents of this video are not intended to be financial advice And I am not a certified financial advisor You're 100% responsible for the investment decisions you make the following is purely my opinion that I am sharing for educational purposes So with that let's get started So when I say risk management to folks Typically the first thing that comes to mind is position sizing. So I think it's best that we start by laying some Framework for what our max position size should be based on how large our account is So if we're talking about an account that's trading with $5,000 or less Generally speaking, I would recommend a 10% max position size So if we're using the example of a $2,000 account that allows us essentially $200 per trade For accounts that are on the $5,000 and up-size I recommend 5% as a general rule of thumb If we're using a $5,000 of the bare minimum account size to use that max position percentage 5% of that $5,000 account gives us about $250 per trade Obviously you can continue to scale the present position size down depending on if you have a larger and larger account So if you have a hundred thousand dollar account You could easily scale that down to a 1% position size and still be afforded a decent dollar amount to execute your trade plans with When we're talking about these max position sizes, these are not to exceed percentages for anyone trade on anyone ticker with a directional bias So what I mean when I say that is if you're putting the max position size into long-term Apple calls So let's say 10% of a $2,000 account and Apple calls giving yourself some time and You see that Apple may be Making a downside move for a short period and you want to not be totally exposed to the losses You might incur during that Downtrend you might open some short-term Apple puts with let's with let's say 5% of your available buying power. So overall you've got 15 percent tied up in Apple But because it's not all tied up in a directional bias It's not more than 10% saying it's going to be a bullish scenario for Apple You are staying within the bounds of these guidelines. I am providing for position sizing One of the more common mistakes I see newer traders making is that they want to use what they're going to stop out at as far as Loss on the trade as their exposure limit instead of using the Total amount to open the position as the factor that they're using to determine what their position size is So instead of using our prior example with the $2,000 account using a $200 max position size They will use a $200 loss as a means to still achieve that Overall maximum risk exposure on the trade, but the actual cost of entering the trade is much greater than $200 So to run that through a little bit further just using these examples that I've spelled out here So if we use a $200 contract purchase, so that's 10% of that $2,000 account And let's say our trade plan gets invalidated and we wind up stopping out at a 30% loss on those contracts That turns into a $60 loss or ultimately 3% of the account Where that was standing when we open the trade now if we keep our Losses to essentially that type of scenario and let's say it's a worse case Situation and we take nothing but losses Before we ultimately run that account down to zero if we're only taking a 3% loss per trade that results in allowing us to take in Total 33 trades however, if I go back to that scenario where We're using the 10% Being 10% of the account being where we are actually stopping out and not limiting the buy to open Amount to 10% of the account. Well now we're down to only 10 trades if we take nothing but losses starting out as a new trader It's important especially for newer traders that you have as many opportunities To learn and develop and get better as a trader early on without knocking yourself out of the game too quickly Obviously, it's going to be very easy to blow an account if you only have 10 trades to make starting out Versus being able to have three times as many trades if you're being smart about your actual position sizing So next I want to talk a little bit about contract selection. This is another Area where I see newer traders making a lot of mistakes and Typically those Mistakes are either they are going way too far out of the money with their strike selection Or they are buying contracts with very little time on them for the trade to work out So some general rules that I personally have in place For newer traders that I work with contracts have at least three and a half trading days on them Early on into learning how to trade Obviously more time is better. I've never had anybody reach out to me and say hey man These option contracts are doing really well, but they've got way too much time left on them Also important in the contract selection process is picking the right strikes Strikes should generally be no more than two to three strikes out of the money depending on the contract expiration So if we take a look at this Tesla example to the left You can see that if I give myself Five trading days, which would be this coming Friday's expiration on December the 2nd And I look at my strikes as being 185 being my at-the-money strike because Tesla is currently trading at 182 86 My 187.5 strike being one strike out of the money 190 being two strikes out of the money and 192.5 being three strikes out of the money If I'm giving myself Five days, which is pretty close to the bare minimum of time on a trade and Let's say I want to go two strikes out of the money. So I want to take the 190 strike It's going to cost me at least $325 to get into that trade So if I'm working with a $2,000 account, I've got a 10% max buy to open position size I obviously cannot afford $325 a contract and still respect my rules for position sizing So what this ultimately means is that it may take time to earn the ability to trade some tickers Especially those that have high volatility and more expensive options contracts Starting out. I definitely recommend finding tickers That aren't overly volatile and don't have very inflated options contract prices while you're getting your strategy and your system in place but eventually You'll grow as a trader and your account will grow and eventually that $325 per option contract once you've hit let's say a $10,000 account size and you're using a 5% position size which allows you $500 for the trade Well now that 325 is very affordable. So again, that's what I mean when I say it may take some time to earn the ability to trade some tickers So now let's talk a little bit about proper risk reward and trade planning Trade planning is something I will cover in-depth in a separate video But for now, let's talk about a risk-to-reward setups. So if we use this Tesla trade plan that I developed for our members at x-trades during one of our morning podcasts where we were looking to take puts on Tesla and The plan in this particular Scenario was to take puts below or on a break of 2 15 42 support We then had price targets at 2 10 36 201 14 and 192 10 being our third and final price target to the downside. We had a stop-loss average down level at 2 19 23 whether we are shorting shares or playing options in this particular scenario in either case we want to make sure that we have the proper risk reward with regards to the distance of the Move on the underlying asset between our entry in our first price target in the distance between our Entry in our stop-loss level as you can see in this particular case our risk-to-reward ratio For us to hit PT1 With our stop-loss at 2 19 23 was a 1.36 risk-to-reward as you are developing Your trade plans based on the chart and the price action of a particular ticker you may find yourself spotting scenarios where your risk-to-reward is much greater than 1 to 1 in some cases 2 to 1 or even 3 to 1 3 to 1 setups. I would consider those a plus setups 2 to 1 setups are still a setups. That's still pretty good 1 to 1 setup should be considered sort of be setups. They meet the bare minimum requirements For us to want to get into a trade But obviously we want to have more than just the bare minimum before we throw money into the market for newer traders You will want to focus strictly on a plus setups where your risk-to-reward by the time you hit your first price target Is 3 to 1 that will allow you to be Wrong More frequently but still overall profitable because you'll only need to beat essentially a 33.3% success rate on your trades if you're limiting your risk-to-reward setups To a 3 to 1 scenario or a plus setups and early on you're going to be wrong a lot more than you're going to be right Now as you can see our trade plans typically do have more than one price target and you can hit Pts 2 and 3 So in this particular case the overall risk-to-reward set up on this Tesla trade plan was actually 6.39 to 1 if we got PT 3 Without stopping out versus what it would have cost us to stop out But again, we want to really make sure that we're judging our setups based on That PT 1 distance from our entry and the stop-loss distance from our entry So if you follow all the guidelines that I've provided so far in this video You should put yourself in a position to trade Sustainably for long enough to learn and develop a system that is ultimately profitable for you But in closing I do have a few final tips First and foremost focus on education first and find yourself a trading community That allows you to grow and expand as a trader. Obviously my personal recommendation is X trades X trades was instrumental in my development as a trader personally and I can't say Enough about the folks on the team at X trades and their abilities to help Teach newer traders how to become profitable and trade for a long duration of time While you're learning don't be afraid to start off paper trading especially until you get the mechanics of opening and closing your positions and you get the basics of Charting and trade planning down to a science next make sure to adjust your starting position size based on The risk to reward or the type of setup the plan is providing for you especially For anything less than those a or a plus setups make sure that you're always putting some consideration into the possibility of having to average down or Potentially average up on a trade that's working in your favor if you start off with the full five or ten percent of your Account based on your account size as you're starting position size Obviously, you've left yourself no room to add to that directional bias at that point and last but not least lotto's are fun But until you are trading Profitably for a long period of time and you're essentially Working with a small fraction of your profits or you know quote-unquote house money To put a very small stake into a lotto trade Generally speaking and until you've hit that point. I recommend avoiding lotto's as a rule of thumb So with that I'd like to thank you for your time and for watching this video one final reminder to Tap that thumbs up button and subscribe to our YouTube channel here for Updates on the latest educational videos coming out from the team at X trades Also one note that there is a link below for a 20-day free trial for anyone interested