To select your strategy, below are some useful questions
- Which market(s) are you going to trade?
- What is the direction?
- What is the time frame?
- What is the volatility of the underlying and its options?
- What is the risk/reward?
Before the trade:
- What is the risk/reward ratio of this trade?
- What is the probability of success?
- What is the maximum loss acceptable for this trade?
- What is the expected return and target profit of this trade?
- Does the new trade maintain the balance or diversification of the portfolio?
During the trade:
- Has the trade reached the maximum allowed loss?
- Has the trade reached the target profit?
- Is the reward of keeping the trade open worth the risk?
After the trade:
- Did you follow the risk management rules on this trade? If not, why?
Tips on risk management:
- Create a money management policy
- Define a position sizing policy
- Maintain a diversified portfolio
- Adjust the trades or exit when it goes bad
- Buy portfolio insurance to protect against black swan events