BigT4X Weekly Learning Lesson # 3
Stop Losses vs Partials – How to use Partials when Swing Trading?
Let’s deal with the obvious. If you:
• Day Trade (hold up to 3 days)
• Swing or Invest Shares
YOU NEED a Stop loss!
• 10% max stop for Shares
• 30 – 50% max stop for options – ideally closer to 30% than 50%
But if you Swing Options…may I introduce you to the concept of Partials and how you can create a Synthetic Stop Loss that most times will be SMALLER LOSS than traditional Option stops.
First…Position sizing matters – see my Learning Lesson # 2
The Partial method scenarios (Proper PS):
• Trader A who has $50k ATA would have only 5% or $2500 available per position
• Trader B who has $10k ATA would only have 10% or $1000 available per position
Key Learning Point:
With the concept of Partials a trader takes the Position size allocation above and does NOT trade the whole thing all at once. Instead, they divide it into 4 or 5 parts! They ONLY trade a fraction of the position size with each trade – the first part entered likely on a reversal/breakout and additional parts on dips or breakouts that confirm the trade direction. Thus…
• Trader A would have 5 partial trades of $500 (1%) = up to $2500 per position
• Trader B would have 5 partial trades of $200 (2%) = up to $1000 per position (note: Due to option sizes – likely they have only 3 partials because $200 options are difficult to find)
In a normal Option Trade scenario, a Trader would buy the entire position all at once and then use 40% Traditional Hard stops:
• Trader A would stop out at $1000 loss leaving $1500 remaining
• Trader B would stop out at $400 loss leaving $600 remaining
However, the Partial trader after only Partial # 1….say the worst case happened and the trade just drops and it expires worthless:
• Trader A would have lost $500 or 20% of the allocated position size