Are you ready to unlock the key to success in credit spreads course trading by mastering the art of trade sizing based on your risk tolerance and income goals? In this lesson, we’re going to delve into the critical topic of trade sizing. While it may sound less exciting compared to strategies and market analysis, understanding trade sizing based on your risk tolerance and income goals is paramount to your success as a credit spreads trader.

Trade sizing is not just about numbers; it’s about safeguarding your capital, managing risk, and ensuring that your trading aligns with your financial objectives. In this article, we will break down the transcript from the course and distill it into actionable trade sizing tips.

The Importance of Trade Sizing

Trade sizing is often underestimated by novice traders, but it is a cornerstone of sound risk management. It determines how much capital you allocate to each trade, ensuring that no single trade can wipe out your account. Without a proper trade sizing strategy, you expose yourself to unnecessary financial risks.

Trading Credit Spreads

Credit spreads are a popular options trading strategy, involving two options: a short option and a long option. The goal is to capitalize on the spread between the two options. However, this strategy comes with inherent risks, making trade sizing even more critical.

Understanding Your Risk Tolerance

Before you start sizing your trades, you must understand your risk tolerance. This isn’t just about what you can handle in a single loss; it’s about how much you can endure during a losing streak.

Calculating Maximum Loss During Losing Streaks

To assess your risk tolerance effectively, you need to analyze historical data and backtests. Look for periods of consecutive losses to determine if you can emotionally and financially withstand such downturns.

Determining Trade Size Based on Risk Tolerance

Once you’ve established your maximum loss acceptance during a losing streak, calculate the maximum risk per trade as a percentage of your account. This will be your trade size.

Factoring in Early Exits

Remember that your actual losses may not always reach the maximum risk you’ve set. Implement an exit strategy, such as exiting when the stock breaks your strike price, to minimize losses.

Determining the Number of Spreads per Trade

Consider the width of your spreads and the collateral required. This will help you determine how many spreads you can trade per position while adhering to your trade size limits.

Analyzing Potential Monthly Earnings

Estimate your potential monthly earnings based on your calculated trade size and the expected return per trade. This can help you set realistic income goals.

Conclusion

In conclusion, trade sizing is far from a mundane aspect of trading; it’s a critical component of risk management and financial planning. By understanding your risk tolerance, calculating trade sizes based on that tolerance, and factoring in early exits and collateral requirements, you can better protect your capital and align your trading with your income goals.

Remember: Trading credit spreads can be both rewarding and challenging. It’s not about how much you can gain in a single trade, but how you can consistently grow your account while safeguarding it against significant losses. Take the time to assess your risk tolerance, crunch the numbers, and trade responsibly. Your financial future as a credit spreads trader depends on it.

Would you like to access the entire video course now? Here’s the backdoor link to The Ultimate Credit Spreads Trading System Course for FREE! This backdoor link won’t be available long.

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer