SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Is Timeframe Your Biggest Mistake?


Few days ago I came across an excellent article by Dan from Theta Trend. The article is called Awareness and Taking Losses and discusses some of the aspects of trading psychology, especially how traders react to their losses. I respect Dan very much and I found out that we share a lot in terms of trading philosophy.

I would like to share some of the thoughts expressed in the article and add my own perspective.

 

Honesty and Transparency Above All

 

Dan writes:

 

"As we wrapped up the month of April, the sample account took another loss. Once again, due to RUT. When you take two monthly losses in a row with a high probability trading system, it stings a bit. My goal is always to accurately represent what I’m doing and not pretend to be some guru with a 100% win rate or who conveniently fails to disclose trading results. I firmly believe in honesty and transparency rather than deception or what you’re hoping to hear."

 

SteadyOptions took three monthly losses in a row, also with a high probability trading system. Yes, it stings. But do you really believe that anyone is able to trade without losses? Whoever claims to not having any losses simply fails to accurately report his performance. Our results are fully documented, every single trade is on the performance page, winners and losers. Similar to Dan, I believe in full transparency. For a trading strategy that produced triple digit returns 5 years in a row, 3 losing months in a row is statistically expected at some point.

 

Dan continues:

 

"Armchair traders will say that we should change our strategy or not have been trading the strategy, but changing strategies every time we lose means we effectively have no strategy. Additionally, knowing when a strategy will work or won’t work is 100% impossible unless you’re Goldman Sachs, the Fed (arguably the same as GS), or a high frequency trading firm.

 

Wise words.

 

Probability Is Not Certainty

 

One of the reasons to our performance this year was a new strategy (RIC - Reverse Iron Condor) we introduced and described in Lessons From Q1 2016 Earnings Season article. It was those 4-5 losers that contributed the most to the negative performance. We discussed why this happened in the article and in more details on the forum. This is a high probability strategy - however, probability doesn't mean certainty. Sometimes even high probability strategies produce few losers in a row.

 

The RIC strategy bets on big post-earnings moves which happen 90% of the time for some stocks. To put things in perspective, NFLX, GOOG and LNKD produced some of the smallest post-earnings moves in history. What are the odds?

 

Dan mentions that the start of 2016 has been challenging for many, if not most or all, non-directional options traders. We experienced it with our butterfly strategy. After booking 7 winners in a row, our last two trades became big losers due to wild market moves in February-March. Again, those are strategies that we have been using with great success, but no strategy wins 100% of the time. Those two big losers along with few big RIC losers impacted the most our 2016 performance. Rest of the strategies actually performed pretty well.

 

9a2918fc21f7e289d24955cec5b12613.gif

 

How could the Fidelity Magellan fund make 29% per year from 1977-1990 while the average investor in the fund lost money? It's because investors always visualize the path to look like "your plan" and when it's not, the powerful impulse of fear and greed wins out (causing inflows around tops and outflows around bottoms).

 

After a string of losses, what's next?

 

SteadyOptions produced outstanding returns in the previous 4+ years. To put things in perspective, consider this: if you started investing in the stock market in 2007 based on historical returns of ~10%/year, then watched your money losing half of its value, would you quit? Some people would. Those who didn't, watched their money triple in the following 7 years. If you quit each time few losing months happen, you will just become part of DALBAR statistics. Losses are part of the game, and if you can not endure losses, you should not be trading.

 

I would strongly advise not to think in terms of "how and when to recover". Just continue executing your trading plan if you believe it still has an edge, and the results will come. This is exactly what we intend to do. Focus on following your trading plan not the short term results of it. Robust strategies are profitable in the long term time frame.

 

“It is critical to understand human nature if you want to succeed at investing. I’ve seen this time and time again. I’ve had investors who have been with me for years, getting great performance, and then suddenly we have a bad year or a bad couple of years, which we’ve told them about ahead of time, right, because we can always show them that nothing works all the time, and they still bail. Basing their decisions on short-term results is in fact the biggest mistake investors make.” - Jim O’Shaughnessy

 

Start Your Free Trial

 

Related Articles:
Are You EMOTIONALLY Ready To Lose?
Why Retail Investors Lose Money In The Stock Market
Are You Ready For The Learning Curve?
Can you double your account every six months?
Performance Reporting: The Myths and The Reality
Lessons From Q1 2016 Earnings Season

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Premium at Risk

    Should options traders consider “premium at risk” when entering strategies? Most traders focus on calculated maximum profit or loss and breakeven price levels. But inefficiencies in option behavior, especially when close to expiration, make these basic calculations limited in value, and at times misleading.

    By Michael C. Thomsett,

    • 0 comments
    • 128 views
  • Diversified Leveraged Anchor Performance

    In our continued efforts to improve the Anchor strategy, in April of this year we began tracking a Diversified Leveraged Anchor strategy, under the theory that, over time, a diversified portfolio performs better than an undiversified portfolio in numerous metrics.  Not only does overall performance tend to increase, but volatility and drawdowns tend to decrease:

    By cwelsh,

    • 1 comment
    • 298 views
  • The Best Chart I’ve Seen in 2020

    The best visual aids for learning are often very simple. The chart in this article was created by Paul Merriman, using data from Dimensional Fund Advisors. I primarily use Dimensional Funds in building portfolios for my clients. There are many takeaways from this chart, and I’d like to share a few thoughts that stick out most to me.

    By Jesse,

    • 0 comments
    • 281 views
  • Traditional or Roth Retirement Account?

    When US investors save for retirement, there are many important decisions that have to be made including which investments to use as well as which type of accounts to fund. Tax favored retirement accounts such as 401(k)’s and IRA’s should be utilized to the maximum extent possible because of the opportunity for tax advantaged growth.

    By Jesse,

    • 0 comments
    • 309 views
  • My Favorite Investing Books, Blogs, Papers, and Podcasts

    There are so many excellent sources of investment education available today that I thought a short post about some of my personal favorites could be beneficial. Below are different forms of content that have been particularly impactful to my investment philosophy, and they are not in any specific order.

    By Jesse,

    • 0 comments
    • 644 views
  • Go For Gold! The Business Behind The Dazzle

    The price of gold is often in the news—sometimes it's rising, and other times it's dropping but for the most part, it has been on a steady increase for many years. It is certainly worth more now than it did twenty years ago. When its price is on the rise, we may have thought about the benefits of selling our gold for profit and making some passive income from it.

    By Kim,

    • 0 comments
    • 353 views
  • Using Bullish Calendar Spreads to Profit on MSFT Stock

    A calendar spread is an income trade where the trader sells a near term option and buys a longer-dated option with the same strike price. Usually this is done with monthly options, but it can also be done with weeklies. They are long volatility trades so can be a nice addition to a portfolio as a way to offset some short vega.

    By GavinMcMaster,

    • 0 comments
    • 679 views
  • 3 Principles to a Successful Investment Experience

    Although not an exhaustive list, what I’ll present in this article are three core principles that overwhelmingly stack the odds of a successful long-term investment experience in your favor. These three principles are asset allocation, diversification, and rebalancing.

    By Jesse,

    • 0 comments
    • 463 views
  • Important Tips For First Time Currency Traders

    Diversifying your portfolio is important for all investors, and currency investments are a great way to do that. However, there are a lot of misconceptions and common mistakes that first time currency investors make, and this leads to big losses.

    By Kim,

    • 0 comments
    • 490 views
  • Iron Condors or Short Strangles?

    In my early option trading days, I favored selling iron condors over selling strangles. I thought that selling a strangle was too risky because the potential loss was “undefined”. I thought this made sense because this is what I’d hear from other people that were more experienced than I was.

    By Jesse,

    • 0 comments
    • 2,051 views

  Report Article

We want to hear from you!


Guest David Gellman

Posted

What can I say. Those words could not be any more true!

People who bail do so because they do not know any better.

Or worse, they DO know better but they allow emotions to control

the intellect.

Share this comment


Link to comment
Share on other sites

Kim

 

With the track record you have shown and the transparency you provide, the only way you could loose my respect is by throwing in the towel and changing to a ''new system''.  Keep on doing what you do.  

 

P.S.  I've been an active member for about 3 months :) ... but intend to stay stay for a long while

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido