Most people who develop the desire to become a trader do so with the dream of producing 100’s of percent returns and making millions of dollars in profits from their trading. This is particularly true of those who pursue Gann theory, since they were inspired by Gann’s reputation, beginning in 1909 with his Ticker interview in which he produced 1000% return in one month, leading to the legendary millions in profits that he made during his career. These kinds of results are what every trader truly seeks, and yet, even many relatively successful traders lack a realistic strategy to produce these kinds of percentages let alone to build up their trading accounts to $1,000,000. So what are these missing strategic elements possessed by the Master Traders but lacking in the arsenal of the struggling trader? The KEY elements are a proper trading psychology, the ideal trading vehicle and a style of money management which allows one to compound smaller amounts of money into a larger fortune.
First let’s discuss trading psychology. What most aspiring traders do is study a few simple courses or go to a few seminars which seem to give them tools they can use. They begin trading with these tools and very quickly generate a string of losses, possibly even blowing through their entire trading accounts. This immediately develops a negative trading psychology which causes them to become fearful and hesitant in their trading, something they may not be able to shake for many years. They often begin to hold on too tight, meaning their stops are too close, so that even when they are right, they miss the move they had correctly anticipated, or they take their profits too soon, only to sit on the sidelines and watch the move continue on to produce large profits without them.
Alternatively, they will get into the wrong move and watch it go against them, without the proper protection, so their account burns away in losses. The real problem is they have just not obtained the quality and depth of education they need to even be trading at all, leaving them without a working strategy that is capable making the profits they so desire. Gann spent 10 years studying the markets before he found the tools and style of trading that he became famous for, and many other of the great traders took many years to develop their professional expertise. So you must be very careful to not begin trading the markets until you are very clear about the right way to do so, and have a clear working strategy that will accomplish the results you desire.
A fundamental element of this process that most traders completely lack a clear understanding of is the idea of money management. The money management strategies that the Masters used were very different from those used by most traders today, yet it is exactly this point that causes them to produce only marginal returns in their trading, even if they are able to accurately time turning points, and have a good understanding of market structure and action. The difference between money management strategies is the difference between growing your account by 30% a year, vs. compounding at rates of 100’s of percent each month. This is the great difference between the wannabes and the Masters. The Masters understand how to use only a very small percentage of their trading capital, invested into the proper trading vehicle which possesses the least risk and the greatest potential return, and then use money management to compound those profits over and over again into huge returns.
Now let’s examine the idea of the proper trading vehicle referred to above. Whether a trader is interested in the stock, futures or Forex markets, they often assume that the best approach is to trade the underlying stock or commodity, which is the greatest misconception held by unsuccessful traders. With the current volatility of the markets, there is nothing more dangerous to play than the underlying entity. So, you may ask, what is one to trade if not the underlying stock or commodity? The answer to this question is: OPTIONS! There is a prevailing myth amongst traders that trading options is more risky and dangerous than trading stocks or futures, but this couldn’t be further from the truth. Particularly in trading futures, one is continually confronted with the problem of the markets running stops, gapping open, or worst case, moving lock limit against them for a number of days, leaving one with losses even greater than one’s entire trading account.
Options, on the other hand, remove all of this danger by always limiting one’s risk to ONLY the amount invested in the premium and commission costs of the any options position. Yes, one can very easily lose this entire investment if a position goes against you, or if the market moves sideways while the time value of your position decays into the options expiration. However, the market can gap against you, swing way past what would be your futures stop position, or even move lock limit against you, and you will NEVER lose more than this core cost of your options position. In these days of great market uncertainty and volatility, many traders are afraid to even hold positions overnight, forcing them to become day traders, rather than swing traders, against their personal inclination. But trading options solves this fundamental dilemma.
Not only that, but many traders do not realize that the potential returns generated by the leverage of options positions can produce returns much greater than the returns that would have been produced had one successfully traded the underlying commodity or stock. A move in the underlying entity which would have produced 20-30% returns will often produce 300-1000% returns in the options, when you know which ones to select for your trading strategy. This insight alone is the first step in converting from a trader who makes regular 30% profits to one who makes 100’s of percent trading the exact same swings in the market. Yet, surprisingly, the majority of traders out there simply do not realize this, so are missing the greatest opportunity to become highly successful traders.
There are many people who have read options books or who have taken some of the many options trading courses available on the market. But unfortunately, most of these courses do not teach the effective options trading strategies used by the master options traders. So many educators out there and courses on the market were written by theorists or those who have not actually traded profitably, that you can practically count the number of successfully trading educators on one hand. This is why people go from one course to another without ever producing any positive results.
The problem with most options books and courses is that they quickly confuse people by exposing them to a barrage of complicated concepts, like delta, gamma, vega and theta, though most of these details are totally unnecessary in trading options the way successful traders use them. In order to justify their cost, they teach every bit of technical minutia about options, but it is not this minutia that shows you how to make large profits trading options. They show you all kinds of complex strategies like spreads, straddles, strangles, Iron Butterflies, and on and on, leaving you lost in complexities that you can never figure out how to make any money with. And the most important thing that they all lack is a clear trigger mechanism which tells you WHEN to enter your trades, leaving you dependent upon some further expensive service or software to tell you when to use all of these complex strategies.
So, let’s look at an example of trading options from a different and much simpler perspective. If we think the market is going up we are simply going to purchase Calls, and if the market is going down we will purchase Puts. Nothing complex, we are just going to go long or short using options rather than the underlying future or stock, but take our position in the same way, without complex options strategies. The first thing that you will notice is that it is much cheaper to place an options position than a position in the underlying entity. Take Apple Computer for example. On May 28, 2009, Apple is trading at $135.46. The cost of buying 100 shares of Apple stock would be $13,546.00, plus commissions. The cost of a Call or Put option to control the same number of shares is only $510.00.
If you owned the actual stock, it is very likely that you could experience volatility swings that would quickly move more than $510 against you, so that it would be difficult to even place stops with less risk than you would have in taking an equivalent options position. However with the option, the market could move against you significantly before moving in your anticipated direction and still keep you in your position, without ever risking any more than the cost of that option, $510 plus commissions. The cost of your options position is less than a reasonable stop loss, and still protects you against gap opens, lock limit days, or even market closures due to some kind of disaster.
Now let’s do a quick comparison of the difference in potential returns generated by an options position vs. a position in the underlying stock. Following is a chart of Apple showing a nice bull move from March 9, 2009 to the beginning of May, from 83 to around 130.
This is a bit over a 50% move in the stock, so if you had owned it, you would have made a 50% return in about 2 months. But let’s take a look at what kind of return you could have produced with options on the same move. Had you purchased the “at the money” July 80 Call options in March, they would have cost $12.65 each, or $1,265 plus commissions for your position. The next chart of the July 80 Calls shows that over the next 2 months those at the money options increased in price to $54.00, a 326% gain in the options value for the same swing in the same period of time.
With the options, your $1,265 investment would have returned $4,135. That’s over 6 times the percentage gain than the position in underlying stock produced in the same period. This gives a very quick and dirty example of the difference between trading options vs. trading the underlying, but these same results can be seen in any market. Knowing this, you have to wonder why anyone would trade the underlying stock or future over the options. You must ask yourself which you would rather have traded in this scenario. If you give the obvious answer of the options position that produced 6 times the return, then you must ask yourself why you are NOT trading options? You can clearly see that the difference of taking the same trade but using a different trading vehicle not only reduces your risk, but produces much greater returns from the exact same swings in the market. This is the essential difference between what the experts understand and take advantage of and what the amateurs completely miss.
Now let’s quickly take a look at the idea of the money management and how the more sophisticated options traders used it to compound profits in a way that the wannabe traders only dream of. While this was a very strong move in Apple, many markets regularly produce equivalent swings, so let’s look at how the Masters would have traded a sequence of such swings. After a first successful trade like that above, many normal traders would trade the next swing in the same way, with only a small investment. The great traders, however, took a completely different approach, and would reinvest the accumulated trading profits in each of their next trades. Their reasoning behind this is that they only began with around $1000 investment, and they look at their continued trades as just an extension of that initial $1000, their psychology being that if they are wrong, and lost it all, they would only really have lost $1000 of their initial trading capital. Often, after the first trade, they would even return the initial risk capital to their trading account so that their initial trading capital never deteriorated. Then they would invest the balance of those profits in each next swing. Let’s say that we found a sequence of similar swings producing the same return as this initial trade:
- $1,265 x 326% = $4,135.00
- Return the initial $1265 to your account so as to never deteriorate your initial capital, leaving:
- $2,870 x 326% = $9,356.20
- $9,356.20 x 326% = $30,501.12 $30,501.12 x 326% = $99,433.95 $99,433.95 x 326% = $324,154.68
- $324,154.68 x 326% = $1,056,744.26
Here we have just compounded a small $1000 investment into a million dollars in only 5 trades! This is the method of compounding profits through strategic money management that the Great Market Masters, like W.D. Gann, used to generate the millions that they became famous for. If you have not worked out a strategy of this kind, it should be no great surprise that you are not having the kind of success that the Masters demonstrated. It is surprising that no one really tends to bring out these points, though it is clear that this is the difference between the men and the boys.
Now some of you may think that this is just an ideal case and that you could never find a consistent string of 300% trades, but actually these trades occur much more regularly than most people realize, when you understand the insider secrets to such options trading strategies. Actually, there are even better trades that regularly present even 1000+% returns, when you know where to look, and how to find them. Only part of the game is in knowing the right vehicle to trade and the proper money management system to compound the returns. The other Key is in having the right trading triggers to determine how to find and when to enter these kinds of trades which produce the huge returns that the old masters used to produce.
Finding these sometimes seemingly simple keys and strategies is the difference that separates the successful traders from the amateurs. But when insights like this are understood, what are otherwise considered to be simple technical analysis principles can now operate as powerful technical triggers for the types of options plays described above. In order to take maximum advantage of such options trading strategies, one needs to develop an ability to forecast important turning points in advance, so as to be able to identify and trade profitable trends. Many teachers and tools attempt to produce these results, but most end up being hit and miss, or are simply too complicated for the average analyst to comprehend and effectively apply.
However, our advanced options trading course, Market Vibrations, W.D. Gann’s How to Make Profits in Modern Markets, takes this particular approach to using options to create highly leveraged positions to a new level. It is THE book on what we would call Gann's system of Leveraged Position Trading. We consider this strategy to be the best approach that traders can take to producing large profits from small investments with very limited risk.
The intent of this course is to provide a trading strategy that allows for large returns from low risk investments. Trades have an average risk:reward ratio of 1:10, with a minimum return of 500% per trade to maximum returns exceeding 5000% per trade. The strategy employs straight forward analytical techniques explained in Gann’s How to Make Profits in Commodities to identify high value trade setups which can be employed using highly leveraged options strategies to generate large but safe returns.
The analytical techniques and strategy taught in this course do not require any prior Gann knowledge or any past trading experience. They can be easily understood and applied by any trader, new or seasoned, to great effect with very little time or difficulty. The strategy is based upon “leveraged position trading” so requires little time or effort to manage. Minimum capital requirements are very low, so someone with an account as small as a few $1000 can effectively implement this strategy. For full details see the link below.
