Fitting Your Trade Strategy's Personality

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Each investor has a different expectation on what they can get from strategy, varying from risk tolerance, average time in trade, rate of return per trade, and annualized return for a strategy as a whole. These factors make up the “personality” of the trade strategy, and must fit the trader’s personality to function within the given lifetime of a strategy’s viability.

Your Strategy Should Match Your Personality

Or simply said, don’t try another trader’s strategy; most times it won’t fit your personality type. Some traders are happy with 40-50% trade win rate, but and are often trend-following systems, usually having longer trade duration, to allow for huge 5R or more trade returns. Some traders want higher win rates 60-70% (typically short strategies), 1.1 – 2R systems, but alternately accept larger risks.

Also trade frequency is a big deal for most investors. Do I have to trade every day? Sitting in front of a computer screen often micro-managing positions might not be productive use, and often will be a material opportunity cost of one’s time.

Most daytraders do not have the patience to sit in a trade for a week, or even years to see if a trade plays out, and will tie up capital in the process (that could be counterproductive measured against the SPX or 10Y note).

Each trader is different. Most strategies that other traders develop cannot be utilized by another trader.

Personally I want a multi-day strategy or multi-month trade duration strategy, this fits my current lifestyle, commitment, experience, and expectations I have seen personally in the market. Yet I have to build the risk of the strategy so I don’t take larger than expected drawdowns and fits within my drawdown rules I have set up for myself (risking 1-2% per trade).

Example:

Tastytrade primarily focuses around selling premium, but they focus on selling undefined risk. While selling undefined risk trades often yields higher returns (higher risk -> high returns) more often than not.

Personally, I do not like to trade with undefined risk because I recognize while it is often improbable, tail risks in these strategies can happen. I have seen in in the past with other trading systems where highly improbable streaks can occur. The saying goes, “The markets can stay irrational more than you can stay solvent.”

Tastytrade mostly emphasis 16 delta (1 SD) strangles as its go-to strategy. This probably fits Tom and Tony’s personality on why they want to trade this as a default.

Strangles are OTM, faster trades (15 days on average), compared to straddles (22 days on average). Both have undefined risk, yet straddles make considerable more money, however, they are also more risky.

I can be more capital efficient with a straddle, and collect more of a credit (typically stock has to trade within its 1 SD move over the life of the trade) with more risk. However, 90-100% win rate in high IV push me towards the straddle. I put wings on the trade to make it even more capital efficient. The backtests tell me IVR rarely comes around to mean revert, and when it does, take advantage by selling as much premium as you can, which is why I lean to the straddle.

To define the risk of the trade I put 10-16 wings on the straddle turning it into an iron fly. This helps me manage the risk more, yet could also extend the duration of the trade to 30 days (out of 45 DTE).

All of the things stated in the previous paragraph are mostly irrelevant because the over-arching theme to the strategy (on why both straddles, strangles, and iron flies all work, described in the video above) is the on backbone of MEAN REVERSION in volatility.

(This also works somewhat in the opposite direction with long calendars, which can work in low IVR environments, but requires high price debits, and probably has to be traded around with futures’ options to overcome the commission hurtle. The same concept exists though with a mean reversion backbone. That strategy is for another blog post.)

Final Thoughts:

There are thousands of ways or strategies to make money in the markets, finding them, and executing the strategy can be very difficult. Each strategy is different and should fit the investor’s personality (expectations, average return per trade, risk, number of positions, commitment, annualized return, and so on). This is probably why so many traders fail when trying to copy other trader’s strategies is because their personality does not match the strategy’s personality.


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