*(This is not financial advise)
The Compound 20 Trading Challenge is a rules-based discipline and principled approach to options trading that focuses on the idea of increasing your account value through compounding gains over time. The challenge involves starting with a fixed amount of trading capital and, “making and taking” trading profits with each trade to gain a weekly profit goal of 20 percent. This disciplined strategy aims to manage risk effectively by applying rules and guidelines to follow on your trading journey to ensure potential returns and growth of your account value.
Compound 20 Trading Challenge allows you to take a systematic approach to keeping the growth of your account on track. Setting clear goals, rules, and guidelines are pivotal to realizing success in options trading. By no means is this concept discussed as an easy process, one of the main things that may be an obstacle throughout the journey is a trade going against you and suffering a loss. Incorporate risk management and loss mitigation to be successful in this process.
Options trading offers a fast-paced avenue for traders seeking to make larger profit margins and long-term growth. However, navigating this volatile terrain requires skill, strategy, and discipline. To harness the potential of options trading and produce consistent profits, traders often seek innovative methodologies. One such method popular in the trading community is the concept of a Compound 20 Trading Challenge.
Executing the Compound 20 Trading Challenge requires careful planning and execution. Here are steps outlined to serve as the foundation to implementing this strategy.
Power of Compounding
The power of compounding lies in its ability to increase capital exponentially over time. By reinvesting profits from successful trades, traders can exponentially grow their capital base. The Compound 20 Trading Challenge emphasizes the power of compounding, exponentially increases trading capital by reinvesting profits systematically to accelerate wealth accumulation. It is also a good idea to lock away a percentage of the profit from each trade and reinvest the remaining portion.
Set Clear Goals
Define your financial objectives, risk tolerance, and trading timeline. Establish realistic targets for portfolio growth and risk management. Goals to keep in mind are as follows:
- Set a weekly profit percentage to grow an account by weekly. In this case it is 20%, other case may be 50% or any other percentage based on risk profile.
- Determine an end account value which to grow account value to.
The use of a spreadsheet can illustrate a timeline and weekly progress it will take to get to your target account value.
Establishing Rules To Guide Options Trading
Setting clear rules will keep trading on track to realize success. A couple rules to consider are as follows.
Look for High-Probability Trade setups: High-probability trading strategies aim to increase the likelihood of profitable trades by focusing on specific setups and robust risk management. A trade is considered high-probability when multiple technical and/or fundamental factors align to suggest a higher chance of the price moving in the expected direction. An example can be when a stock is severely over-baught or over-sold, one can expect the price to revert to its running average price as stocks normally do what they do, they go up and down. High-probability trades are more likely to go in the direction you selected than going against you.
Allocate Trading lot sizes: Determine the percentage of your trading capital to allocate per trade. An optimal lot size is 10% of trading capital as the benchmark of the Compound 20 Trading Challenge so as to manage risk. Alternately when trading on smaller account values, identify a dollar amount for a lot size that gives optimal return in a timely manner based on risk tolerance.
Risk/Reward Strategy: Use a Risk to Reward strategy that is in your favor. Risk-reward in options trading is the foundation for consistent profitability. It’s not about being right all the time — it’s about making more when you're right than you lose when you're wrong. By controlling risk and aiming for favorable reward ratios, you protect your capital and give yourself the best chance to succeed long-term in a probablistic, leveraged market..
Taking Profits/Closing Positions: This involves establishing clear rules for closing trade positions to lock in profits made and to ensure a positive trajectory for the Compound 20 trading journey.
Other rules
Use a stop loss when scalping in the opposite direction of a clear trend.
Take profits when scalping in the opposite direction of a clear trend.
Set a minimum initial capital to start trading with.
Do not dollar cost average(DCA) more than a total of two positions against a trend so as not to be cut by trying a catch a falling knife.
Key Disciplines and Principles
Control over Trading: What’s next after achieving 20% for the week? The idea here is to go easy for the rest of the week and not feel pressured into taking additional trades. If an opportunity arises, sure take advantage of it, but most importantly; rest, research, and prepare for the following week. This gives total control over the direction of options trading and is key to a successful Compound 20 Trading Challenge.
Patience and Discipline: Success in the Compound 20 Trading Challenge hinges on patience and discipline. Traders must resist the temptation to deviate from the prescribed rules and strategies, or to chase after high-risk opportunities. Instead, adhere rigorously to the trading plan, executing trades with precision and consistency.
Identify Opportunities: Implement a strategy and a reason for entering new trades. Ensure a win is most probable when opening new trade positions. Conduct thorough market analysis to identify potential trading opportunities. Three techniques for entering a trade include technical analysis, fundamental research, current market happenings and sentiment indicators to identify high win probability trades. The reason to enter a trade must compel the chances of winning that trade. Study risk reward and enter trades when the risk reward is highly in favor of winning a trade.
Execute Trades: Once you've identified a promising opportunity, execute the trade according to your predetermined strategy. Maintain discipline and avoid overleveraging, even in the face of tempting prospects.
Risk Management: Central to the Compound 20 Trading Challenge is prudent risk management. By limiting each trade to a predetermined percentage of trading capital, traders mitigate the impact of losses on their overall portfolio. This approach helps preserve capital in the event of market movement against a trade and prevents catastrophic draw downs. Be sure to research other risk management strategies to incorporate into the options trading process.
Loss Mitigation: Decide whether to use a stop loss and how to handle losing positions helps protect trading capital and minimize losses during adverse market conditions.
Monitor and Adjust: Continuously monitor your trades and portfolio performance. Evaluate the effectiveness of your strategy and make adjustments as necessary. Stay adaptable and responsive to evolving market conditions.
Psychological Discipline: The structured approach of the Compound 20 Trading Challenge instills discipline and reduces emotional decision-making, leading to better trading outcomes. Emotions can play a big role in making poor trading decisions resulting in losses. When emotions seem to be creeping in refer back to your goals, rules, and targets to bring some clarity to the options trading process.
Post Profit Anxiety: Post profit anxiety is the feeling after closing a trade making a smaller than expected profit, then watching that instrument traded go up in value more. Even though a profit was made one can’t help feeling what if I could have made more profit. Keep this practice out of trading as this is not healthy to trading success. Appreciate the small profit made, and also the preservation of your initial capital. Falling prey to this practice can further complicate and cloud the analysis of future trades expecting the same profit potential is possible when indeed every trade is different.
Benefits of the Compound 20 Trading Challenge
Consistent Growth: By applying discipline to trading strategy and compounding returns over time, traders can achieve consistent portfolio growth.
Long-Term Wealth Accumulation: By harnessing the power of compounding, traders can build substantial wealth over the long term, achieving financial goals more efficiently.
The Compound 20 Trading Challenge represents a paradigm shift in options trading, emphasizing discipline, risk management, and the power of compounding. By adhering to a systematic approach to trading and routinely reinvesting profits, traders can navigate the complexities of the options market with confidence and achieve financial growth. While the challenge requires patience, discipline and perseverance, the potential rewards make it a compelling proposition for ambitious traders seeking to transform their trading endeavors.