Option Trading College

Subject: Controlling Losses
Instructor: The donFranko
Length: 3 sessions


Training  Home

Entry is Key...Exit is Everything! TM

Session 1 – Principals to live buy   

I feel this section of my training sessions is the MOST important part of any successful trading plan. First off, in order to properly learn how to control losses, you absolutely must have a solid set of principles in place....and then the trick is NOT to violate those principleseasy to say, hard to do sometimes.


Here are the principles I practice and respect every day of my trading life!


Principle 1 – BE HUMBLE!


How do you practice humility? You MUST have a plan of action before you ever put a dollar of real money into the markets. If you do not know where your are going, then you will never know when you have arrived.


Those who fail to plan have already planned to fail.


Principle 2 Record Your History


You must keep a daily log of your actions so you can learn from your mistakes rather than repeat them...again and again.


As intelligent as traders may think they are, there is no substitute for a well documented history of your winning and losing trades. If you "wing it" then you are doomed to repeat your history of losing trades and compound very bad habits. Learning from your recorded mistakes is the number one way to build a track record of trading success.


In the trading world, history does not just repeat itself, it actually accurately predicts your future if you fail to keep track of it.


Principle 3 Continuing Education


You must continue, relentlessly, in your education on trading. You will NEVER know everything because the world of trading is always changing.


Principle 4 Controlling Emotions


You must master your emotions within your trading practices. If you follow Principle 1, strictly, your emotions will be kept closer to neutral. Yes, I said closer, because you will never be able to keep them in a box. Principle 2 is the best way I know of to keep a very short leash on your trading emotions.


Principal 5  Money Management


Management of your money is critical to making a long-term profit in order to trade for a living. Many new traders (me included) take a cowboy approach to this business and literally get the snot kicked out of them. Not only do you lose your money, but many times, the sting is so strong, it affects your ability to recover the nerve to keep trying.


Principal 6   Relax


Take time off to enjoy life, family, hobbies, etc. Trading can become a ball and chain when you are struggling. You must have an emotional release to help ground you when times get tough. One way I do this is by taking a 2 or 3 day mini-vacation if I am having a tough week. If I am having a great trading week, I reward family members with gifts because it feels so good to give to others; and it builds confidence in my growth as a consistently profitable trader.


Once you develop a consistently profitable trading business, consider starting a foundation and use a percentage of your profits to help those less fortunate than yourself!


Principal 7   Know Thyself


Trust your feelings more than your brains ONLY if you have adhered strictly to Principle 1 and Principle 2. Trading is like learning to drive a stick shift automobile. You have to go through a steep learning curve before you can master the skills to act unconsciously.




Trading (Start Here)


Controlling Losses



A month in the life



A month in the life


Day Trading Intro


Covered Calls



Naked Puts

Naked Calls


Pair Trading




Model Portfolio

Day Trades

Lotto Trades



Training Links


Bull/Bear 180's

Day Trading

Risk Free Trading

Hit Options Lotto


Session 2 –  Compounding your money     



Here is some interesting statistics that you should be aware of before you start on your path to trading bliss:


Many traders have no idea about the power of compounding interest, nor do they have any idea what the actual cost of a loss is and more importantly, how much it takes to recover that loss.


Imagine a Billionaire (Daddy Warbucks) is presenting you with two choices.

(Note: there is no wrong answer)


The only rule is that you must make an immediate decision!



1. In one hand, Daddy Warbucks holds a check for $1,000,000.00 with your name on it!




2. In his other hand, he  gives you one penny ($0.01) and then says hew will double that penny every day for the next 31 days.




 Make your decision now!




Many people will choose number one out of greed more than knowledge.


It's been said that most instant millionaires will be broke in a short period of time because they do not know the true value of money; therefore, they do not respect it and quickly dwindle it to nothing because they never developed the skills to making money in the first place.


I am sure you have heard this saying, "You know, money certainly does not grow on trees!"


I have to take exception to this, because with property trading disciplines it can actually become a true statement; however, most people use it as a negative statement NOT to achieve wealth, when in fact, if you were to understand the concept of wealth accumulation and master the disciplines to making it work for you, then you will indeed say money does grow on trees.


How does one make a money tree trading?


It takes some time, commitment and a lot of (smart) work to grow a money tree and get a perpetual harvest that rewards you forever.


Here are the steps to creating your money tree:


First you must prepare your soil (Principle #1 #2 and #3)


Then you must plant your seed (fund your trading account)


Next you cultivate and take care of your tree as it grows (Principal #4 and #5)


As time moves forward,  your seed becomes a tree of money that you can pluck from daily as perpetual wealth is continually accumulated.


This is true wealth!


Wealth can renew, but riches can be wiped out—become wealthy and you, your family and your future generations can better control their destinies!


Now, remember my question above?


Did you choose the Penny?


Some people realize I am up to something and will choose the penny, but really do not know what they have done. They believe it will be worth more than the million dollars and are eager to see how long it takes; however, they have no idea what the compounding effect will do.


Let's look at a chart below for the results of a penny compounded vs. taking the Million Bucks!





It's simply amazing if you can grasp what this chart shows you about compounding your investment!


A simple penny (properly managed) can become a money tree that pays dividends for the rest of your life!


If you fail to grasp the concept of compounding, or refuse to put the discipline in place to make it work for you, then you are doomed to trading failure.


Compound your way to trading bliss!


Trade CompounderTM


Session 3 - Exit strategies     


Did you notice my tag line on the home page?


 "Entry is Key...Exit is Everything TM"


Well, those words I coined were learned from very hard and expensive experience. It's quite easy to get into any old stock or option position, and many, if not just about everyone does not know how to properly exit a trade. Most of the educational outlets like to sell you the "sizzle" and do not like to give you the "steak" or, in other words, the definite downside to trading.


I hope you genuinely take-to-heart my words and then have the wisdom to actually apply them—it will save you literally thousands of dollars and tremendous amounts of stress levels—because if you do not have a well defined exit strategy, then you are going to suffer a lot of financial pain!


A trader who does not count the cost has nothing to gain...The donFranko


So, let's look at the cost of a trading loss.


Many people plant a seed in hopes of developing a money tree; some get excited when the first fruits appear and pluck them; however, this is a big mistake—you must nurture your tree and develop it to its full potential before you start to enjoy the fruits of your labor.


There will be losses (more like setbacks if you have principle 1 in tact) that will happen; and if you are not careful, your money tree will not recover; and you will be forced to plant another one.


Taking profits from your money tree too early will diminish the growth of that tree and ultimately the BIG rewards it will give you—be patient and let it grow large enough to pay you handsomely.


Now, let's take a look at this chart below and see how losses can cripple you in NO TIME!




Percentage you



have to be right to 



recover your loss








 Could recover




 Hard to recover




Very hard




Extremely hard




Next to impossible




 You are out of business on this trade


*These figures do not take into consideration the outside cost associated with trading: commissions, trading expenses and taxes.


As you can see, you might think a loss of 33% or even 50% is acceptable on a given trade, but in fact, it's actually a huge burden to overcome. Simply put, if you are under capitalized and play with too much of your portfolio in any one trade, you can be quickly devastated!



The first strategy to avoiding massive trading losses in the markets is using all the principles I have outlined above. I would like to reiterate, LOUDLY, that you make a precise, well written, trading plan!


This must contain at the bare minimum:


1. Your goals for trading


2. Your intent each day


3. Your amount of risk you are willing to accept


4. Finally, and in my professional opinion, the discipline to stay in an educational program (books and/or seminars) at least once a month.


NOTE: The best thing you can do is find a successful trader(s) and get mentored by them.


The next strategy is picking the proper investments to risk your money in. How do you do that? You use tools like this website, proprietary trading software, CNBC, FOX, CNN, MSNBC (very loosely), and a good broker to execute your trades.


Let’s take a closer look at these choices:


1. Investment advisory web sites:


  • There are a plethora of choices out there. Everyone believes they have the "holy grail" of advice. Some of these sites may have good ideas and actually pick some winners from time-to-time, but I certainly would not believe they have it all figured out. I strongly encourage you to always seek advice from your trusted advisors. Many of the sites out there have great information and good picks etc., but ultimately the responsibility lies solely on you and your ability to make good trading decisions. Pick a couple of outlets based on their performance track records and use them with caution. I would encourage you to do your own due diligence and rely on us or others as confirmation of your own picks.


2. Proprietary Software


  • This could be mind-boggling to anyone if you have ever attended a stock trading or financial planning convention. You have choices for: Options, Stocks, Futures, Forex, Fibonacci pattern recognition, Real Tick, E*trade, REDI Plus, TradeStation, stock chart deciphering programs, money management advice and the list goes on into the hundreds...I have always said a psychotherapist could fill their appointment book up and make a killing at one of these events...lol


  • I have used a number of these programs and trading tools and the ones I have found that have helped me the most are: TC2000 Stock Charting and direct access trading platforms. I currently use: ThinkorSwim  from TD Ameritrade and the other brokers I have used are: OptionsXpress or CharlesSchwab or Scottrade. The next one I plan to use is TradeStation. Be sure to always choose a broker with direct access.  I am currently testing some new software platforms and will update this area once I feel they work well enough to recommend. I would avoid the discount brokers if you plan to day trade because the execution of your trades are skewed and the costs are higher over time.


3. CNBC and other news outlets


  • Everyone knows them. We all watch with anticipation every day what tidbits of inside information the talking heads and their "guru" guests can pass our way. They have all those "experts" who give us their pure  unbiased truth's) right? Not in my experience have I ever gotten consistent trade ideas. In fact, most of the day I just turn off the sound because I get tired of hearing the same story line spewed out by each of the talking heads over, and over again—most of the time I find the channel to be more comical to watch day-to-day.


  • What I did not know in the early days was by watching these news outlets would really cost me a lot of money. I found, through painful experience, those great and glorious guests (analysts for major investments firms) would come on and proudly proclaim their upgrades and downgrades on select stocks; and the general public (suckers...me being one of them back then) would just suck up that "specialized knowledge" and hit the buy button with enthusiasm. Sure, it worked every time and I made zillions...ha ha ha. Actually, it worked less than 5% of the time and I lost multi-thousands of dollars until I finally realized they basically know absolutely nothing. The upgrade/downgrade scam (yes it's a scam alright) has been used for eons to shake out retail investors and bilk the ignorant public out of their holdings and money to the benefit of savvy investors aka trading sharks e.g. fund managers, market makers, big time investors.


  • When you choose to watch these channels, you must begin to glean out the little truth's in their words and advice. Back in the old days of trading (pre 2000 bubble), those talking heads would come on and give you advice to buy or sell a security with great confidence and expertise. As I learned more and more about their manipulations, I came to realize that you need to listen closely and then do your own homework. So many times I have seen them tout a stock only to see it drop shortly afterwards. What is comical is after the big 2001 meltdown, the protectors of truth (the news outlets...ha! ha!) put in policies to ask those "gurus" of the markets if they actually owned any of the securities they promoted. Ironically, well over 80% of them will say "NO" they do not own the very securities they promote as "good buys"...you do the math!


  • When you watch these alleged "experts" a good rule of thumb is to pay attention to who is actually doing the talking. If you get a large brokerage analyst pumping or dumping a stock, especially after that stock reported great earnings or just before earnings, you have to really listen to their words, and more importantly, consider their motives. So many times I have seen a stock pumped, and in a few days it dumps below the price it was the day they were touting it as a "great buy." Most of the time, these purported analysts will be giving the ignorant buying public skewed information to (in my experienced opinion) line their pockets with profits. I know it sounds unthinkable, but you only have to listen to the news outlets around earnings season and then follow those very stocks to confirm what I am saying. As option traders, we have to do our due diligence before putting on a trade because of the outside factors like upgrades/downgrades and then there is always the mechanics of option pricing we cannot control: Time Decay, Delta, Vega, Theta, Rho...it's all Greek to me!


4. The right brokerage    


  • This is a make-or-break choice, and you must choose wisely who handles your trade executions. There are two schools of thought out there. The first is to hire a licensed Series 7 educated (and I mean educated by actually trading his own live fully funded account vs. a reader of textbooks) Stock Broker to assist you with your investment decisions and trades. Using a stock broker can be an experience. You need to carefully select your broker and then be able to effectively communicate your goals and trading strategies with him/her. If you cannot come to a meeting of the minds, collect your money and find one who will see it your way.


If you are not as experienced as you would like to be, find a broker who is actually making more money than you (trading their own account) and then you can listen to his/her views on investing. There are so many brokers out there who claim to be successful who actually make less than $50k a year; and none of it is from trading their own accounts—to whom are you listening?


The second choice is those "cheap" discount brokers. Many investors think the $8.00 trade is the "deal" and do not realize there is a hidden cost. The bottom line on the execution of trades is to get filled. What you DO NOT want is a brokerage that re-routes your orders to their preferred market makers for the benefit of their bottom line. You MUST work with brokers that give you direct access to the trading floor if you plan on being a day trader of options.


With that being said, the "discount" brokerage houses are NOT the best choice if you are a day trader. I recommend you choose a broker that is "direct access" and make sure they do not route your orders to preferred market makers. If you are a long-term or swing trader, then you do not need to be concerned with this issue and can use the cheap brokerage outlets.


I currently trade with www.TDAmeritarde.com


Session 4 - Knowing when to trade   


  • Every time you think about pulling the trigger on a trade, you should first consider your exit strategy. If you can honestly say to yourself you stuck to your principles; then you can be confident you are on the right track; however, I did not say you made the right decision. There are many reasons to get into a trade and many more why you should not. Let’s explore some of the finer points of this concept.

Point 1 – Trading on emotion is a first class ticket to the poorhouse.


Point 2 – Trading on some analysts hype is worse than throwing a dart at the newspapers list of stocks.


Point 3 – Trading on a rumor is a great way to donate your capital to someone else's cause.


Point 4 – Having NO clearly defined trading plan is tantamount to driving on a winding mountain road blindfolded!...see principle 1



  • I am about to share with you a secret that will make you more money than just about any other strategy you can come up with. This one priceless piece of advice has taken me literally thousands upon thousands of dollars in losses and hours upon hours of study and seminars to find. It's little known advice, but worth every cent of wisdom you can lock into your head.
  • What makes a stock move and how can you profit from it?
  • The first thing that comes to most traders minds is a company that is making money. One with a low P/E ratio or how about a great book value? Sure, I can agree with you that these are all great qualities for the buy-and-hold crowd, but they are not the primary reason for short-term traders.
  • What you want is active ravenous movement that causes a stock to splurge with buyers or sellers. You need to trade on the future! How do you do that you might be thinking? How can anyone know the future? Well, if you are ready for the secret to the gold mine then here it is: 




  • These three words are worth untold fortunes to those who can understand them. Now I am not able to give you the complete details of this revelation with this free education...I paid too much tuition over the years to learn it!
  • So, if you do not want to pay tuition going it on your own, then you need to simply subscribe to my members only area or order my e-book for step-by-step training on how and when to use this valuable knowledge.


Profits Up!

The donFranko 


If you feel that I have taught you a valuable lesson, then consider Subscribing to my members only site for access to my live portfolio's, daily suggested plays and my Lotto Trades!


 Calls | PUTS | CHARTING | COVERED CALLS | l.e.a.p.s  | spreads NAKED PUTS | NAKED CALLS | PAIR TRADING | Training 



All rights reserved.


Privacy Statement  Terms of Service  Disclaimer


Contact Us About Us