Low-risk and options trading
A common perception among the general retail investing and trading public is that in order to garner large profits, you must take on big risk. So where does this view come from?
This view comes from the fact that most people perceive volatility and leverage as high risk. Therefore, if low-risk and options trading engages in the markets during periods of high volatility using a leveraged product, the odds are very low high risk, but the profits can be huge if things work out. This is the common perception. In other words, ignorance can also produce low-risk and options trading. In this case, there are many folks that have a vested interest in telling you that low risk is commensurate with low returns.
The lesson here is to be careful where you get your information and make sure you low-risk and options trading do your homework. As to whether there is any truth to the idea that there must be high risk in low-risk and options trading to have high profit margins, long time readers of these articles know by now that it is indeed possible to take trades with very little risk when you can find the turning points.
But on the other, implementation can be very challenging for some. When we look at putting on a trade, the three most critical components are the stop, the entry and the target. For the lowest risk entry, we should always enter the market as close as possible to the point where we are going to be proven wrong. This would be where there are pockets of unfilled orders that originate a strong move. We refer to these as supply and demand levels. In the chart below, we can see what the picture of a low risk entry may look like.
In it, we can see that the Swiss Franc Futures on this day rallied off a congestion area highlighted in yellow and then pulled-back into that zone. The retracement into the zone presented a trader with a very low risk trading opportunity. The reason this low-risk and options trading a low risk trade is because the entry was fairly close to the point where the level would be invalidated; put another way, the point where we would be proven wrong. In addition, since there was no supply for a good distance, this increase the profit potential thus making this trade a great risk versus reward opportunity.
This can only be done by having a strong understanding of institutional supply and demand. Speculating in the financial markets is about putting money at risk with the expectation that for that risk, we will be compensated commensurately. Is Low Risk Trading Possible? Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever.
Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all low-risk and options trading, please obtain permission.