Ok Clients, Remember…
This is a different way to trade so if you are not comfortable doing what I am getting ready to layout, you don’t have to nor should you. It’s all based on how you want to manage your account.
I see a lot of new traders averaging down to try to “BE RIGHT” on their trade. This method blew out 9 of my accounts in the past and I highly suggest NOT doing it with one exception. Bull Spreads. A trader can do this effectively on bull spreads because you know your max risk.
This is about the safest way to “Average Down” because you know what your max loss is. Still remember that averaging down is not for the low funded account. Try it on demo if you are inclined
Everything I am going to talk about is based on the “Wally World 6 Million” trade below
Daily 415pm Expiration 16000-16400 16030 16036
Daily 415pm Expiration 15400-16200 16002 16007
Daily 415pm Expiration 15600-16000 15980 15985
Daily 415pm Expiration 15600-16400 15995 16000
If I am going to buy 16000-16400 and sell the 15600-16000 then I want to get the closest price possible to the floor, right? well right now the price shows 16036 which is 30something points higher than the actual underlying price.
If you want to trade 7 contracts but you want to minimize your risk. You can place buy orders:
Buy 1 @ 16036 This will put you in the trade.
Buy 1 @ 16026
Buy 2 @16016
Buy 3 @ 16006
Your average price will be 16016.
Your max risk will be $112 for 7 contracts. You can know that you wil not lose any more than $112 if your trade fails.
Each point will be worth $7 so if price moves 50 points in your favor, then your profit will be sitting at a $280 profit. If price does what it did Thursday and over 300 points in your favor, you will be sitting on a profit of $2,100
If price falls 300 points against you, your max loss is $112.