What Percentage Of Trades Must Be Successful To Break Even Or Turn A Profit From My Investments?
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Originally Posted On: https://snipertrades.org/option-trading-tips/
Day trading tips and options trading tips aren’t necessarily one and the same–but they can intertwine.
Before exploring success rates and percentages, we’ll explain why options trading can benefit day traders.
How Can Options Trading Benefit Day Traders?
Options trading offers day traders the following benefits:
- Day traders can invest more at less risk because options trading doesn’t cost as much as standard stocks.
- Buying or selling a security comes with no liability.
- You’ll only lose the premium in a losing situation.
- Options prices may exceed the stocks they represent.
- Options trading can be successful when other investments and financial instruments fall short.
A crucial component of any valuable list of day trading tips or options trading tips is to examine the associated challenges, which are as follows:
- Options trading lacks liquidity.
- Therefore, the difference between the lowest and highest prices (the bid-ask spread) is wider with options trading than with stocks.
- Options trading premiums restrict the price movement.
- A loss of time can cut into gains.
Do Success Rates Matter in Options Trading?
Success rates matter in day and options trading–insofar as you need trades to work out to turn a profit. A non-existent success rate means you won’t make any money.
In fact, success rates tend to attract traders to options trading. You can trade strategies with up to 90% success rates in certain instances.
Provided all your trades are successful, you’re bound to be profitable.
However, let’s say that only 37% of your options trading exploits are successful. Does that mean that you’re not turning a profit?
While it sounds like losing out on 63% of your trades would automatically make you unprofitable, that’s not the case. You could risk less in those lost trades and more in your winning trades.
You’ll likely be profitable if your average losses per failed trade are low and average gains per successful trade are high. Again, though, this does require an existent success rate. Losing out on every trade doesn’t give you a chance to profit.
Nonetheless, success rates alone can’t dictate whether you’ll break even or turn a profit. If that were the case, you’d need to choose 50% winners to break even and 51% to be profitable.
Can I Turn A Profit While Losing More Than I Win?
Say you lose out on 100 trades, costing you $100 per deal. You’d lose $10,000. Technically, it would then take only one trade where you make $10,001 to be profitable.
Is that a wise approach?
Part of your strategy should revolve around achieving a relatively high success rate. Common sense dictates that you increase your chances of being profitable if you win most of your trades.
Prioritize the combination of profit rates with success rates while limiting your average losses when trades don’t work out.
Here’s One Of Our Best Day Trading Tips: Combine Quality and Quantity.
As a day trader, you’ll make a wealth of daily trades by definition. This high-volume approach brings into question the balance between quality and quantity.
More specifically, how do you balance quantity and quality when you have to make a high number of trades?
The answer to the above question will rest on your ability to master your craft in day and options trading. You’ll greatly help yourself by leveraging informational and educational resources to ensure your strategy is sound.
We’ll speak to the importance of not over-valuing low-profit wins. Options, in particular, can offer high success rates at lower yields. Don’t let that create a mirage in front of how much you’re actually making.
Another One Of Our Top Day Trading Tips: Limiting Risk To Ensure Losses Are Minimal.
Day traders shouldn’t risk more than 1% of their portfolio on one trade.
For example, those with a portfolio worth $80,000 shouldn’t risk more than $800 on a trade. Offsetting risk in this manner ensures one or two bad transactions won’t send you on a downward financial spiral.
Combining the above strategy with profit-taking levels and a stop-loss order can help you reduce your losses to 1%. More importantly, it can help you achieve 1.5%-plus in gains if your approach is disciplined and well-informed.
Here’s How A Potential Day Trading Strategy Can Play Out:
Let’s say you’re day-trading options or stocks with a maximum 4-cent risk and a 6-cent target. The risk/reward ratio would then be 1:1.5.
Then, imagine you have $30,000 and risk $300 per trade. As such, 7,500 shares per trade ($300/4 cents) ensures the risk remains within the $300 limit (without considering commissions).
Below is a potential scenario of how this strategy could turn out:
- You make 45 losing trades (45 x 4c x 7,500 shares = $13,500 in losses).
- You make 60 profitable trades (60 x 6c x 7,500 shares = $27,000 in profits).
- $27,000 – $13,500 = $13,500 in gross profit.
You then must consider commissions. Let’s say they’re $30 per trade. The equation would be $13,500 – ($30x 105 trades), which equals $10,350 in total profits.
Other Factors To Consider To Help Drive Profits.
Will you be day/options trading for a hedge fund or bank? Or are you an independent trader?
How much capital are you working with? Also, what markets are you trading in?
Lastly, how much time are you committing to day/options trading?
The answers to these questions will dictate the profits generated from your trades.
Want to learn more day trading tips and options trading tips? Contact Sniper Trades today to learn about the market insights we can offer you.