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Averaging In: Part One

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One of the worst feelings for a trader is to miss the train as it leaves the station. By that metaphor I mean that to not have on a position, the correct one, after having spent the time and energy to reach that trigger point as the trader watches in total frustration the unfilled position blast off into instant profit-ville is one awful feeling. So how does a trader, especially an options trader, avoid that unfulfilled horror?

What I do is ... I get the trade on! I do that by using one-third of the pre-set risk capital dedicated to taking the trade at the first available time to execute it. I use limits if I think the liquidity is suspect. I use market orders when liquidity is ample.

I cannot expect to be so fortunate at that time and price as if I leapt onto that train heading instantly to profit-ville. In fact my thinking is that I probably am not that smart, and thus I have to expect slippage and have allowed for the potential that I am early in taking the trade. Very rare is the trade where I am late to the party.

How I handle each and every trade setup is done by what I call averaging in. I never expect to receive instant gratification via a very quickly profitable trade. When that does occur I tip my proverbial hat to the market and capture the gain if my percentage of profitability sets up to capture it (capital at risk divided by the profit, or say a $2.00 risk and $0.60 gain setting up, the value popping thus to a $2.60 bid, which equals 30% profitability).

The old stock market trader's adage of "little and often fills the purse" is an old adage because it has efficaciously been proven for a few centuries now (I found that saying in a stock trading book, copyright 1902!). Think of the adage as hitting singles, while not swinging for the fences trying to hit a home run with every trade.

With time always in play when trading options, as well as price movement, the options trader must allow for chaotic price movement at the inception of the trade. The way I prepare and handle this chaos is by splitting up the funds that will be at risk into three separate parts that are equal in capital allotted to each.

Those three separate and equal (as per capital allotted) parts form the basis for what will become the average price for the fully executed position as all pre-set allotted capital comes into play. Part two will show how, why and when each part is executed (or not!).

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