Chris Rowe

Why You Should Never Trade a Stock or ETF Again

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Here's some advice that I have given that has made hundreds of people millions of dollars: You probably should never trade a stock or exchange-traded fund (ETF) again.

However, if you chose the right stock option or ETF option to trade, you will be taking on a fraction of the risk that the stock/ETF trader takes on. At the same time, you will position yourself to realize the same (or a much larger) profit when your assumption about the stock/ETF's next move is correct. 

I know everyone has heard that options hold more risk than stock, but the fact is, that's not always true. In fact, it's untrue in most cases. It's really all up to you and how much risk you want to take on. 

Stocks, ETFs are Necessary; Their Options are Where Your Power Lies

Let's say we had a $100 stock that we thought would trade higher. What if I told you the following:

* If it trades up 30 points, you would make 29 points (multiplied by the number of shares you chose to buy). In fact, if the stock traded up 100 points or 200 points, you would make nearly that amount.

* But if the stock traded down 30 points, you would only lose 10 points (multiplied by the number of shares you chose to buy). In fact, your maximum risk is only 10 points, even if the stock traded to zero.

Isn't that a good risk/reward scenario? It's better than the scenario that any stock/ETF trader can promise you. 

In fact, you don't even have to be right 50% of the time to make a fortune with that scenario. Being wrong sometimes is just part of trading/investing, so you should plan for it and factor in the possibility of a losing streak, because it will happen. 

Now, if you know that the risk/reward scenario above is available (and, by the way, it really is), would you invest your entire net worth in the stock idea? Heck no! That would defeat the purpose! 

You Have a Lot of Leverage at Your Fingertips …

What if you could make a list of all losses you ever took in the past, and you could reduce every single one of them -- while reducing the absolute maximum loss on all of the losses to less than 10%-15% -- and then you took the remaining money that you therefore didn't lose, and you invested that extra cash into the winners you enjoy later on in your life? What would your net worth be?

Well, this is something that is very possible and very simple!

... And the Trick is to Use it Wisely

But when people figure that out, they get greedy and immediately use that power to try to triple their net worth within six months instead of treating the process like a marathon. They turn their backs on the power they have -- almost immediately after discovering it -- and, instead, they increase their risk! 

Amazing, I know. But it's human nature to do just that, and human nature is very hard to fight.

If your net worth is $10 million and I gave you this risk/reward ratio above, would you risk $1 million per point (meaning that, for every point the stock trades lower, you would lose $1 million -- with a max loss of 10 points, or the entire $10 million), for the possibility of making $1 million per point on the upside with infinite profit potential?

HECK NO!

But that's what humans do when they realize the power of stock/ETF options. It's human nature. They over-leverage themselves like crazy and, when the trade goes against them, they blame options -- saying options are extremely risky. 

Anyone who studied human nature knows that it's human nature to blame everyone and everything else (not yourself), especially for financial losses. 

Did my risk/reward scenario sound risky to you? NO! It was simply the human behind the wheel with the ability to veer off-course.