# How to protect your capital



## bryan1111 (14 June 2014)

hi everyone, 

looking for some tips and tricks on protecting your capital.


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## luutzu (14 June 2014)

*Re: How to protect your capitol*



bryan1111 said:


> hi everyone,
> 
> looking for some tips and tricks on protecting your capital.




To know what you are doing.

To then assume that even if you think you know what you're doing, that you could be wrong, and if wrong, there's still enough cash to keep going and learn from your mistakes [i.e. do not bet on how the market or your stock will move at what time]

Do not listen to people on forums


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## cornucopian (15 June 2014)

Learn to use options. Collars are best way to protect your $ if you are worried about a crash. It's almost like an insurance policy for your portfolio.

Diversify into different assets- stocks, international bonds, gold, currencies and some real estate.

Consider dividend paying stocks as they tend to be less volatile.


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## bryan1111 (15 June 2014)

great responses thanks, 

I currently trade options, I guess I was meaning to be more specific out my trading capitol. 

I.e atm when i trade i only trade 20% of capitol on one trade. I exit any trade once i reach 20$ - 30 % profit, 

and have a stop loss of 20 % .


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## IFocus (15 June 2014)

Bryan google trading risk to ruin using your numbers it wont be long depending on your win lose ratio.


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## minwa (15 June 2014)

bryan1111 said:


> great responses thanks,
> 
> I currently trade options, I guess I was meaning to be more specific out my trading capitol.
> 
> ...




You "only" trade 20% of your capital on a OPTIONS trade, that is enormous risk in my opinion, unless you were trading some deep in the money leap stock replacement. 20% loss on 20% of your capital is 4% of account per trade, that is if the loss doesn't gap through you which usually does with options. I hope you have very high win rate because losing streaks will wipe you out pretty easily.

Sounds to be you are undercapitalised to trade options to have to trade such a large position (probably ASX options - 1000 parcels & high brokerage I am guessing).


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## bryan1111 (16 June 2014)

minwa said:


> You "only" trade 20% of your capital on a OPTIONS trade, that is enormous risk in my opinion, unless you were trading some deep in the money leap stock replacement. 20% loss on 20% of your capital is 4% of account per trade, that is if the loss doesn't gap through you which usually does with options. I hope you have very high win rate because losing streaks will wipe you out pretty easily.
> 
> Sounds to be you are undercapitalised to trade options to have to trade such a large position (probably ASX options - 1000 parcels & high brokerage I am guessing).





Currently paper trading with a account balance of 5k. 

I am only trading Straight puts and Calls as Spread strategy will just destroy me with brokerage (however I am practicing those on the side)

I have a win to loss ration of 50 %. as follows l,W,l,W,W,L,W.

I have found that to trade with any less than 20% i basically break even due to brokerage. 

I know the easiest answer for any one would be save your cash and start with a bigger trading balance. 

Surely it must be possible (hard , tricky ) but definitely possible.


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## burglar (16 June 2014)

bryan1111 said:


> Currently paper trading with a account balance of 5k. ...




Keep paper trading! 

You are way undercapitalised!


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## bryan1111 (17 June 2014)

burglar said:


> Keep paper trading!
> 
> You are way undercapitalised!




how much did you start with Burglar ? If you don't mind me asking ? 
having a large capitol is defiantly an advantage, 
I may be undercapitalized, however that doesn't mean I wont make it not if i have a plan discipline and good capitol protection, 

I am seeking advice on how to protect my trading capitol not to be told i will be stop out in 5 trades.


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## cynic (17 June 2014)

bryan1111 said:


> ...having a large capitol is defiantly an advantage,...



It certainly is!! Larger amounts of starting capital empower the trader to make much larger losses! (I speak from experience!)


> I am seeking advice on how to protect my trading capitol not to be told i will be stop out in 5 trades.



When my friends ask my opinion on how to protect their trading capital, I usually opine that the best way to protect one's capital is to tuck it under the mattress and not trade it!!

For amounts too small for a real market, pairs (or spread) trading of synthetic products (where smaller position sizes are allowed) can sometimes prove to be an effective alternative.

As always, care needs to be taken in the selection of any FSP/broker. Many financial service providers have a well earnt reputation for nefarious practices. Any investor that chooses to depend too heavily upon the protections of ASIC does so at his/her financial peril!!!


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## burglar (17 June 2014)

bryan1111 said:


> how much did you start with Burglar ? If you don't mind me asking ? ...




It is no secret,
 I am easily the worst trader here! 

I have had up to $30K in the market. 
Over 14 years, I have irretrievably lost $18k.
I have been in the red three times.

But that has absolutely nothing to do with your reality.


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## cornucopian (17 June 2014)

Paper trading is useful, but I think it gives a false sense of trading capabilities. It's easy to make money on virtual trading platforms, but you don't feel the emotional part of a trade when the money is not real.

It's ok to lose some money as long as that loss is manageable and you learn from those mistakes. Everyone loses money. I stick to simple option strategies- covered calls, collars and cash secured puts. I never get into naked option trades and have avoided trading on margin. 


It will be tempting to use your broker's funds, but stay away from it. As you gain some experience, it is ok to get a margin account. I think the easiest way to lose $$ is by trading on margin.

Don't get too greedy. Mr. Market will kill you. I have lost too much money and I wish someone guided me when I started....


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## bryan1111 (17 June 2014)

cornucopian said:


> Paper trading is useful, but I think it gives a false sense of trading capabilities. It's easy to make money on virtual trading platforms, but you don't feel the emotional part of a trade when the money is not real.
> 
> It's ok to lose some money as long as that loss is manageable and you learn from those mistakes. Everyone loses money. I stick to simple option strategies- covered calls, collars and cash secured puts. I never get into naked option trades and have avoided trading on margin.
> 
> ...





Thanks guys, 

I Have 5 k to begin with I'm using a trading platform with real time data. My brokerage fee is $45 and I will only trade straight Puts and Calls. I will not borrow money to trade at this point or for the foreseeable future. 

I agree That paper trading does not allow me to train my emotions. But it does allow me to see if I can trade on a basic level. 

My strategy is
trade puts and calls till i have 15k 
introduce spread trading @ 15k ( i currently paper trade spreads as well separately.)


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## cynic (17 June 2014)

bryan1111 said:


> ...But it does allow me to see if I can trade on a basic level.



NO!!! It doesn't! 

This is a popular misconception with newcomers to the market. There is often a chasm of difference between the theoretical and practical arenas of human endeavour - trading is certainly no exception!!!!

Paper trading can be useful for eliminating some of the more obvious duds from amongst one's trading strategy candidates, but beyond that, it will tell one precious little about one's capability as a trader!!!


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## ROE (17 June 2014)

burglar said:


> Keep paper trading!
> 
> You are way undercapitalised!




5K is too low, fee will eat up most of your profit.

I dont trade options, I use it to generate income only, so open but NEVER close...so I just pay one way ticket
fee and even then I think it is too much for my liking ..most of my options expire worthless ... > 90%

Just straight long and short stocks Minimum 25K parcel max 100K


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## payday (17 June 2014)

bryan1111 said:


> Thanks guys,
> 
> I Have 5 k to begin with I'm using a trading platform with real time data. My brokerage fee is $45 and I will only trade straight Puts and Calls. I will not borrow money to trade at this point or for the foreseeable future.
> 
> ...




Bryan - just do it. If you want to eventually trade successfully then you have to start. Just like anything in life. Just do it. The best lessons are not the ones that you learn second hand but the ones you experience yourself. $5000 is not a lot of money at all, but that means it won't hurt if you do lose it all. Keep learning as you trade and record your hits and misses and review them. And keep your mind open for new trading tactics etc.
Good luck. Trading can be very rewarding but only if you keep at it.


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## burglar (17 June 2014)

bryan1111 said:


> ... I may be undercapitalized, however that doesn't mean I wont make it not if i have a plan discipline and good capitol protection,
> 
> I am seeking advice on how to protect my trading capitol not to be told i will be stop out in 5 trades.




I've been around the block, read a post or two.


1 in 10 get there (wherever that is).
Of those, 1 in 10 stay there.

Some get there twice.
Some never give up trying.

"Winners are losers that never gave up."!

I'll write whatever you want to hear.
Though I prefer truth to fairy tales.


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## minwa (17 June 2014)

bryan1111 said:


> Thanks guys,
> 
> I Have 5 k to begin with I'm using a trading platform with real time data. My brokerage fee is $45 and I will only trade straight Puts and Calls. I will not borrow money to trade at this point or for the foreseeable future.
> 
> ...




5k to 15k from profits or from other income ? If you can triple your money trading calls and puts don't bother introducing spreads - don't make it more complicated if its tripling your money.


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## cynic (17 June 2014)

minwa said:


> 5k to 15k from profits or from other income ? If you can triple your money trading calls and puts don't bother introducing spreads - don't make it more complicated if its tripling your money.




I can triple my money by keeping it in the bank at 3% p.a. if I'm willing to wait more than 30 years!


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## Sharkman (17 June 2014)

starting out by doing long option strategies will probably be very unforgiving. getting just the direction right is not enough. you have to get the magnitude of the move and the timing right as well. it's hard enough getting just the direction right as it is. if it doesn't move as much as you were expecting or as soon as you were expecting, your return could end up being -100% on the trade, even if you do get the direction right. 

when i started out trading options i mainly did covered calls and cash secured puts, so IMHO those are a less harsh (but by no means gentle!) introduction to trading options. it lets you think things out beforehand, perhaps deciding ok i would sell my stock if it reaches this level, so i will sell covered calls here, or i think this stock is well supported at this level and i would be fine to buy here, i will sell puts at that strike.

i found those strategies much easier to deal with from an emotional point of view, at least when starting out. even if the stock price moved beyond the "point of regret" at expiry, i would just rationalise it and think well without the benefit of hindsight i was planning to sell the stock at this level anyway, at least with the covered call i collected some premium. although you'll surely need more than 5k trading capital to short options.

but if you really want to start out trading long options with 5k capital, the very first thing you should do is get yourself a decent broker. $45 brokerage will kill you - that's almost 1% of your capital eaten up per trade, and that's before you've even crossed the spread! if it's ASX options you're looking at, trust me - you *cannot* assume they will give you the mid every time. if the MM really isn't interested in dealing that particular contract, he will not fill you until you go all the way across the spread.

plus, you will have to pay that brokerage again (and cross a second spread, probably a much wider one) on your winning trades, because if your long call is ITM at expiry, you won't have the capital to take delivery, so to realise your profit you'll probably have to shove in a sell to close order at expiry. brokers have been known to simply abandon clients' ITM call options at expiry if they do not have sufficient cash to take delivery of the stock. and when it comes to ITM puts - without margin they probably won't let you take on a short stock position at all. those obstacles are not impossible to overcome, but i would say they will probably make your trading life very, very difficult.


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## cornucopian (18 June 2014)

bryan1111 said:


> Thanks guys,
> 
> I Have 5 k to begin with I'm using a trading platform with real time data. My brokerage fee is $45 and I will only trade straight Puts and Calls. I will not borrow money to trade at this point or for the foreseeable future.
> 
> ...




As others have pointed out, you are under capitalized and your brokerage fees are expensive. It is ok to start with a small amount and see, but consider getting a broker with lower commissions. $45 is outrageous!

I am positing a link from my broker's website. It talks about the *10 mistakes new options traders make. 
*
http://content.tradeking.com/wiki/download/attachments/1819/WhitePaper001.pdf

I am not compensated for my post. It's just a good reference guide for newbies.


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## beachlife (18 June 2014)

If you really want to trade options then consider switching to US options.  The brokerage is much lower, contract sizes are smaller, and the spreads are tighter.

But if you are trading directionally then I would question why you want to play with options.  CFD's will give you good leverage, better position sizing ability and no time decay.  $5k in a cfd account is plenty to start with and most brokers offer min $10 commission on aus stocks.  You could easily position size for a 2% of account risk per trade which will keep your risk per trade relatively small.

Best of luck.


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## bryan1111 (18 June 2014)

cornucopian said:


> As others have pointed out, you are under capitalized and your brokerage fees are expensive. It is ok to start with a small amount and see, but consider getting a broker with lower commissions. $45 is outrageous!
> 
> I am positing a link from my broker's website. It talks about the *10 mistakes new options traders make.
> *
> ...




okay next question. 

Who knows a cheap broker for options ?


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## minwa (18 June 2014)

beachlife said:


> If you really want to trade options then consider switching to US options.  The brokerage is much lower, contract sizes are smaller, and the spreads are tighter.
> 
> But if you are trading directionally then I would question why you want to play with options.  CFD's will give you good leverage, better position sizing ability and no time decay.  $5k in a cfd account is plenty to start with and most brokers offer min $10 commission on aus stocks.  You could easily position size for a 2% of account risk per trade which will keep your risk per trade relatively small.
> 
> Best of luck.




CFDs have a "daily financing charge" which is like interest = time decay in another form. You will also be fighting a harder spread than with liquid options. Options have gamma in your favour, you gain more deltas as position move in your direction and the decrease of delta as position moves against you slows it down. CFDs are prone to gaps, calls and puts are not.


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## cornucopian (18 June 2014)

bryan1111 said:


> okay next question.
> 
> Who knows a cheap broker for options ?




I am based in the U.S so I don't have any idea about low cost Australian brokers.

I know few u.s brokers that accept Australian citizens. The fees tend to be much lower. Interactive brokers is probably the cheapest option if you want to trade. They have minimum balance requirements and expect monthly minimum commissions, but it should be cheaper than most Australian brokers.

https://www.interactivebrokers.com.au/en/index.php?f=commission&p=options2


Can someone tell me why are brokerage fees so expensive in Australia? I see the average trade fee is about 20 AUD. Do the brokers provide better service or is just lack of competition? I pay $4.95 and I am looking for a cheaper broker.

https://www.amscot.com.au/register/rates/rates.aspx


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## beachlife (18 June 2014)

minwa said:


> CFDs have a "daily financing charge" which is like interest = time decay in another form. You will also be fighting a harder spread than with liquid options. Options have gamma in your favour, you gain more deltas as position move in your direction and the decrease of delta as position moves against you slows it down. CFDs are prone to gaps, calls and puts are not.




I recently did a cfd trade on BHP for 2000 contracts.  The daily financing was insignificant at $1.05.  I didnt have to worry about which month, which strike, open interest, implied volatility, or market depth and the spread was 1c.  And dont forget short trades earn daily interest, but again insignificant.

CFD's dont gap, stocks gap and when they do both the related options and cfd's gap with them.

Options have their place but cfd's are far superior for newbies learning with a small account.  I traded options for years and would never go back.


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## IFocus (18 June 2014)

cornucopian said:


> Paper trading is useful, but I think it gives a false sense of trading capabilities. It's easy to make money on virtual trading platforms, but you don't feel the emotional part of a trade when the money is not real.
> 
> .







bryan1111 said:


> Thanks guys,
> 
> 
> I agree That paper trading does not allow me to train my emotions. But it does allow me to see if I can trade on a basic level.





Gents just on these points about paper trading if I can clear up a few miss conceptions.

1st rule is any trading method you think up you paper trade it to death and more.

2nd rule is repeat the above.

Paper trading actually proves your system and at the same time helping your psychology as you build a defence against all those nasty emotions. 

How can you even begin to understand how you should trade a system if you jump in and get caught up with a whole range of emotions leading to making bad decisions.


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## cynic (18 June 2014)

cynic said:


> NO!!! It doesn't!
> 
> This is a popular misconception with newcomers to the market. There is often a chasm of difference between the theoretical and practical arenas of human endeavour - trading is certainly no exception!!!!
> 
> Paper trading can be useful for eliminating some of the more obvious duds from amongst one's trading strategy candidates, but beyond that, it will tell one precious little about one's capability as a trader!!!






IFocus said:


> Gents just on these points about paper trading if I can clear up a few miss conceptions.
> 
> 1st rule is any trading method you think up you paper trade it to death and more.
> 
> ...




Whilst I agree that paper trading is a great way for newcomers to learn that little bit more about financial markets before exposing capital to risk, one further misconception needs to be cleared: 

Paper trading might disprove some systems, however the trading of a system (whether live or hypothetical) usually only proves the performance of the system over the actual duration of the trading. It proves nothing about the future performance of the system.

Further to this, paper trading often neglects to account for important (and performance hampering) logistical considerations such as depth of market, slippage etcetera.

Failure to disprove a system by trading (whether live or hypothetical) does not constitute proof!!!!


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## IFocus (19 June 2014)

cynic said:


> Whilst I agree that paper trading is a great way for newcomers to learn that little bit more about financial markets before exposing capital to risk, one further misconception needs to be cleared:




Disagree professionals paper trade, test or sim systems until they understand their volubilities. Newbies should do this and more to help understand market conditions where it might work this will determine their returns not the system.
Can you imagine NASA sending people to the moon without extensive testing or training, would a professional military not test and train the troops to deal with the emotions of killing some one?
Markets are emotionally harder than any of these 



> Paper trading might disprove some systems, however the trading of a system (whether live or hypothetical) usually only proves the performance of the system over the actual duration of the trading. It proves nothing about the future performance of the system.





True but the deal is you actually get to see what markets it works in. This is the holy grail if you insist on trading in a crap market or where you method is unsuitable because you don't understand you lose money the old adage of being out of the market is a position relates to this.



> Further to this, paper trading often neglects to account for important (and performance hampering) logistical considerations such as depth of market, slippage etcetera.




Its not meant to



> Failure to disprove a system by trading (whether live or hypothetical) does not constitute proof!!!!




Again its not meant to


Further to this a long time ago I belonged to a trading group of men and women the men all jumped in and were trading the women all paper traded.

The women traded far far later and made money .....the guys all loss money.......every single one of them me included.


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## cynic (22 June 2014)

Imagine an untrained "wannabe" professional sportsperson sitting in a crowd theorising about tactics whilst watching a professional competition.

Do you really believe such a person can expect to become an accomplished professional after months or years of such "training"?

Of course not!!! The spectator hasn't even played a single game!!!!

When people "paper trade" they aren't actually trading - they are simply observing price action generated by those actually playing the game!!!

Please note that whilst I usually recommend some spectating (i.e. paper trading) to "wannabe" newcomers,  I believe it is important to confer an awareness of the scope and limitations of such practices.

They're a great way to preserve capital whilst observing price action and a relatively cost free method of eliminating some of the more obvious "duds" from one's arsenal of potential trading strategies/methodologies, however,hypothetically profitable strategies often fail when deployed in a live trading environment.

I've been witness to many newcomers deluding themselves into thinking that their hypothetical performance will translate into reality. Fortunately the real market usually proves very efficient at re-educating those unfortunate enough to subscribe to such unrealistic perspectives.


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## Nudist (21 December 2014)

cornucopian said:


> As others have pointed out, you are under capitalized and your brokerage fees are expensive. It is ok to start with a small amount and see, but consider getting a broker with lower commissions. $45 is outrageous!
> 
> I am positing a link from my broker's website. It talks about the *10 mistakes new options traders make.
> *
> ...




Hi I just came across your post. Are you saying that you are registered with tradeking? My understanding is you need to have a US Social Security number to do that


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