As you say. It is not outright math that is the burr, it is the math over time.
Need to eliminate the big losses
- Thread starter SteveM
- Start date
As you say. It is not outright math that is the burr, it is the math over time.
One must assume that you are willing to take a loss of 30 dollars on each trade since you are willing to on one. What this indicates is that you are not using stops or are using very large ones and giving the trade "wiggle room". This has to be inferred quite correctly as the 30 dollar loss was given an avenue to achieve the loss---So it then follows that the system does not have a high degree of accuracy at all since the trades are moving against you quite a bit more than you are earning. Furthermore, you then have to have 6 fresh winners in a row to make up the loss. ---What happens if trade 12 is also a 30 dollar loss? Now you are underwater. Not to mention the loss of commissions. So, while in fact if the system could produce 10 out of 11 winners, it may be slightly profitable, but I am 100 percent certain that the system is a long term failure as 10 out of 12 winners make it a loser and it might be anyway with 10 of 11 and commissions factored in. Just think how much better the system would be with three 30 dollar winners and eight 5 dollar losers. --Family is in peril--.
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A large loss might be balanced by multiple smaller wins. But the fact that it occurs and recurs does suggest that large losses are unplanned within the strategy and that the depth of each large losses is similarly unknown.
Although the strategy might be running consistently in the money, the risk management plan is clearly inadequate so these are risks just not worth taking. If you're doing this you might choose to stick with it - but its not an out of the box strategy option for anyone else.
Although the strategy might be running consistently in the money, the risk management plan is clearly inadequate so these are risks just not worth taking. If you're doing this you might choose to stick with it - but its not an out of the box strategy option for anyone else.
Sounds to me like FreakofNature might be writing options. Though I can be wrong.
If you primarily sell DOTM options, you can literally have 99% winners for years and end up with one big losing trade but still come out profitable. For example, sell .05 delta OTM puts 90 days out and buy two .01 delta OTM puts to net .03 delta on the ES, (avoid doing this in super crazy years like 2008) utilizing maybe 30% of the margin to weather vix spikes like 2015 august. Unless we enter some type of end of the world scenario, you will see that you can pretty much burn the theta to half of initial credit and keep repeating the trade without any margin calls. Although your ROI won't be something crazy, if you have a decent amount of capital this can provide 10-30% per year. Sudden vix spikes can even be positive to the above trade. The more worrisome scenario for this trade would be a long-term slow bear trend. If the index drops 500pts slowly without vol spikes, it can end-up with large draw-downs.
The basis is that S&P wouldn't suddenly go to zero in one day unless you have larger dooms day scenario to worry about. In that case you have more to worry about than dollars as fiat money is likely going to be less useful. If you expect government shutdowns or some war just broke out or have another credit crisis or something, you'd have to take the first big loss and stop employing this type of strategy until the issue is resolved.
Not that I personally use this kind of strategy though.
If you primarily sell DOTM options, you can literally have 99% winners for years and end up with one big losing trade but still come out profitable. For example, sell .05 delta OTM puts 90 days out and buy two .01 delta OTM puts to net .03 delta on the ES, (avoid doing this in super crazy years like 2008) utilizing maybe 30% of the margin to weather vix spikes like 2015 august. Unless we enter some type of end of the world scenario, you will see that you can pretty much burn the theta to half of initial credit and keep repeating the trade without any margin calls. Although your ROI won't be something crazy, if you have a decent amount of capital this can provide 10-30% per year. Sudden vix spikes can even be positive to the above trade. The more worrisome scenario for this trade would be a long-term slow bear trend. If the index drops 500pts slowly without vol spikes, it can end-up with large draw-downs.
The basis is that S&P wouldn't suddenly go to zero in one day unless you have larger dooms day scenario to worry about. In that case you have more to worry about than dollars as fiat money is likely going to be less useful. If you expect government shutdowns or some war just broke out or have another credit crisis or something, you'd have to take the first big loss and stop employing this type of strategy until the issue is resolved.
Not that I personally use this kind of strategy though.
FON I used to trade that way, with a win rate of 9 out of 10 trades allowing trades wiggle room to come back into positive territory, it worked well enough until it did not work anymore and I lost 6 months of profits (talking 80K).
the problem with this and with whatever method you may have is that if at a certain point you do not have control on your trade (whatever the wiggle room you plan for) you will eventually be wiped out.it may take 6 months, it may take a year or more, but it will happen, unless you can stick to whatever exit plan you decide. And I find that is way harder to exit a trade that is becoming a big or huge loser than exit a small loser, which is still hard but doable.
the problem with this and with whatever method you may have is that if at a certain point you do not have control on your trade (whatever the wiggle room you plan for) you will eventually be wiped out.it may take 6 months, it may take a year or more, but it will happen, unless you can stick to whatever exit plan you decide. And I find that is way harder to exit a trade that is becoming a big or huge loser than exit a small loser, which is still hard but doable.
'You' should be having bigger winners than losers because of the nature of the market and if it's reversed you're not being consistent with size or it's a mental issue.If you're discretionary I would set some test such as tripling ones' account before feeling one has something/sees something.
Certainly there may be an emotion/discipline issue here but there may also be a trading plan issue also. Ask yourself these questions.
What is your exit strategy?
Does your exit strategy protect you from large losses?
Are you following your exit strategy?
Clearly you need to educate yourself further in laws of probability.
When you win 10 out of 11 and your loss is 6x your winner, you have a very profitable system, even if once in a blue moon you have 3 of those 6x losses in a row.
You see, just as it is possible to lose 3-4 in a row in my system, it's also possible to win 30-40x in a row, albeit both very very rare but possible, in the long run it all balances out but your thick head only concentrates on the unfortunate outcome to push your end of the debate, conveniently leaving the outcome that favors the system into profitability.
Family looking good and you, back to school or to the shrink for being so damn close minded; that goes for anyone else on this thread trying to debate fact.
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