“Just one donut.” I’ve said it. You’ve said it.
The problem is that the donut in question is 13 inches across and 2 inches thick.
These are the internal arguments we use to allow ourselves a little extra treat. It won’t break my diet. It won’t hurt me. It’s fine.
The justification of wanting just one donut can be a slippery slope.
To be transparent, I rarely indulge in anything sweet. If I’m going to satisfy a craving, my top three choices, in order, are cookies, cinnamon rolls, and donuts.
Here’s where the problem starts. There’s a donut shop inside a gas station about an hour from my house, a place we’re rarely near.
They make some of the most amazing apple fritters I’ve ever had, with a glaze that carries just a hint of citrus. They’re delightful.
They sell out most days by 10 a.m.
When my wife was going to be in the area, she asked if I wanted a donut. I chuckled and said, “Sure, but just one for me.”
She laughed and placed an order ahead of time, guaranteeing ours would be waiting and not sold before she could pick it up.
That sounds like a simple story. There’s more to it.
This isn’t only a high demand, limited commodity. It’s also not your average donut.
The one donut in question is an apple or raspberry fritter measuring 10 to 13 inches across and 1½ to 2 inches thick. Their standard little glazed doesn’t come close.
Somehow they fry these things all the way through without any of it tasting overcooked or greasy.
Yes, just one filled an entire box.
I could go on about the tasty concoction. I’d rather talk about buying and eating this donut as a risk management discussion.
Again, I generally don’t eat donuts anymore. Eating a donut isn’t the same as eating raw carrots even at identical calories.
If I’m going to eat one, it needs to be limited to a reasonable portion. Just because it’s technically “one donut” doesn’t make eating the whole thing reasonable.
Just because it’s a huge donut, likely 10x the fried dough delightfulness of a standard one, that doesn’t mean I can’t have any of it.
It only means I need to portion it and spread out the eating.
If I decided it was reasonable to eat one donut a day, and I chose this donut, I’m certain I’d end up with significant weight and cardiovascular problems.
Yet again, life is just an analogy for trading.
When I decide a risk is reasonable and take a trade, I have to make sure the riskier trades are managed more precisely.
Trading intraday futures or options without confirmation of a trade signal is eating a donut. Trading a stock position in the indexes with a trade signal for a longer-term hold is eating vegetables.
It’s still fine to take the donut trade. The risk has to stay reasonable.
In my case, I won’t risk more than 1% to 2% on any intraday trade. If the potential and the target are HUGE, that doesn’t give me permission to overleverage or over-risk.
I still have to approach it like the giant fritter.
Here’s what that looks like in practice. My normal /ES or SPX opportunity might target 10 points ($500) with a 3 point stop loss ($150).
Say today’s setup is pointing to a 70 point target with 21 points of risk. I can’t call that “one donut” and eat the whole thing.
I position it down.
That /ES or SPX trade can be portioned into micro contracts using MES or XSP, which takes 10% of the risk for the same structure.
Instead of risking $1,050 to make $3,500, we scale it to $105 of risk for a $350 return. Same signal, still a donut, just a manageable bite.
Our account doesn’t end up in the hospital.
The size of the donut matters far less than the portion. The size of the trade matters far less than the piece of it we’re willing to put at risk.
We can still take high risk, high reward setups, as long as they’re managed and controlled.
We can somewhat have our fritter and eat it too.
You can see what a properly portioned donut trade looks like in real time. We take them in the 10% Club trading room every single day.
The signals and the discipline stay the same, sized so nobody goes to the hospital. Come sit in and watch us cut the fritter.
Blake Young
Senior Market Strategist, TheoTRADE
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