The business of retail traders, like professional trading firms, are nothing but probability in risk and rewards.
You got to have winning edge strategy, ability to execute strategy consistently; and manage the trading in disciplined and professional manner. There is really no free money under the sun.
Every trader experienced at least once a while some trades that go against them, not matter how thoroughly he/she executed the strategy, analysis and preparation. This is just of part of games.
The important part is how do you manage the losing trade?
Let's assume that your portfolio already are well balanced, the beta weighted delta are within your risk tolerance threshold. The following are some reflections through my own trading experience.
1. Keep trade size small and Give enough time DTE
I cannot emphasize enough the importance of keep trades size small.
Let's you have $10,000 account. You should keep at lease $3,000 as cash ; the total buying power to used for trade should be around $3,000; the rest of can be used for long position or neutral position. etc.
The available buying power is necessary for you to manage any losing trade or roll the position.
To give your trade enough time is also very critical, usually at least 30 to 45 days. In option trading, time plays important role, Time is money" even more so true in this business.
2. Roll the losing trade for more time
This is my preferred method. As I entered all my trades based on TA , if there was surprise market movement, I always prefer to have more time to confirm direction biases
For typical strategies like vertical spread, CSP etc, I prefer to enter the positions based on the roll strategy will give your more time to evaluate market conditions and your own direction bias. When you roll, especially when market goes against your assumption of direction, the margin required can be suddenly increased lot. If you don't have available buying power, or your trading sizes are too big, the rolling can be difficult.
3. Open the opposite the trade
I don't use this method often, but if I am confirmed that my initial direction bias was wrong, to cut the lost, I may open the opposite the trade to cut lost. Be very careful and patiently to do this type of trade, though. This way can greatly reduce the loss, if executed correctly and at the right timing.
4. Accept the lost and move on to the next new trade
You always should take losing trades into consideration when calculate risk and reward.
For example vertical spread at .30, roughly, you should have about 70% chance to win the trade, if your vertical spread is about $1 wide, the l premium received from the trade $0.10, which is only 10% of return; the probability of win is 70%. In following illustration, you can see, for very trade, you risk $9, to win $1 and over 10 trade, if exactly as 70% probability, you chance is profitable is lower.
In order to have better Risk/Reward, either you have to increase the premium received, at least above 20%; the PoP arould 70%, you need to take more trades to let statistics work out in your favor.
There is really no free money under the sun, it requires hard work, diligence and discipline to follow the rules.
