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One strategy vs. multiple?

Discussion in 'General Discussion' started by Trader G, Mar 4, 2016.

  1. Trader G

    Trader G Well-Known Member

    Andrew Falde posted a good video about overlaying multiple strategies to smooth out the equity curve:
    http://www.faldecapital.com/the-simple-theoretical-formula-for-smooth-and-steep-returns/
    I understand the premise and I have been considering what trade would be a good supplement to my M3 style trade (bearish butterfly?). However, I would be curious what others think. Outside of time diversification, what other benefits do you get with multiple strategies? Would you be better off with a single position, scaling in and morphing it depending on how the market moves during the trade (like Locke's M21 approach)?
     
  2. GreenZone

    GreenZone Well-Known Member

    The main issue with what Andrew Falde is doing is to use a set of different combinations of trades which you do all the time (for now).
    So you'll always have a bullish trade on, and also a bearish trade on.
    If you were in an M3 and you got a big down move, now your trade is potentially hurting......but in the instance of having a bullish and bearish trade on at the same time, then the bullish trade may be hurting, but the bearish trade is doing very nicely.
    This "hedge effect" tends to smooth out your equity curve, as Andrew demonstrated.
     
  3. Carsten5000

    Carsten5000 Guest

    @ Ron - Which Trades would you recomend to combine together to smooth the equity curve? Andrew Faldes 60-40-20 together with a bearish butterfly? (tradet with only a tos-account, without having optionvue or optionetexplorer by a beginner...)

    kind regards

    C5000
     
    Last edited by a moderator: Jan 27, 2017
  4. PK

    PK Well-Known Member

    Maybe too late to contribute something to this discussion. I have made an effort in the past to trade multiple "complementary" strategies in parallel. Even with a small account there are ways to do that. And it works. When you have a big draw-down in long-term trend following trades, you make money in non-directional weekly trades, lose a lot in your directional spreads, but get something from your contrarian rotation of sectorial ETFs. Great, BUT. For my psychology too much stress. Moreover, what was designed as complementary eventually turns out to collapse in parallel when markets melt down (yes, you may lose a lot of money in stocks, commodities, bonds and many other assets at the same time).

    And even if diversification works as designed, I do not like to lose 30% with one strategy, even when I know that in the long term run other strategies will make up for this loss. I personally prefer the "matrix-like" style of the Road Trip, defending a position by applying an arsenal of complementary tools such as overlaying butterflies, condors, credit and debit spread. A different story is to have strategies in place that hedge against fast down moves or slow but nonetheless eroding "up-trumping" markets.

    I personally trade two core strategies. Non directional broken wing butterflies in almost any market. In strongly bearish markets with VIX above 21, I start exiting positons to recover cash until the dust settles. In strong bull markets, I shift 50% of my capital to vertical put credit spreads. I always have some far OTM VIX calls in my account to hedge against black swan events (never needed so far; but the same is true for the fire insurance for my house and I do not question paying for it). When volatility is collapsing such as in the recent Trump market, I start moving capital into long inverse VIX-replicates such as SVXY. Similarly, when volatility drops and VIX is below 12, I start putting on long vega positons to compensate for the short vega exposure of my core positions. I am still in the process of tweaking the triggers and capital allocation for these different strategies, hoping that the system will perform well.

    Any ideas and discussions on this topic welcome.
    Best,
    Peter
     
    Gabor Maly likes this.
  5. ACS

    ACS Well-Known Member

    Every strategy performs differently under various market conditions. To me a diversified plan is having a stable of two or three trades that cover the main types of markets you will run into and that you can switch off as conditions change. Something as simple as a Bearish Butterfly for high volatility and a Road Trip for quieter markets might be a good place to start.
     
  6. PK

    PK Well-Known Member

    It may sound strange, but when I analyse the past years of my trading account, my big losses have one thing in common: the believe that markets cannot move up any more because there aren't any reasonable reasons to keep moving up (like the recent 12 consecutive highs of the Dow). I lost little or even made money in any of the melt downs from the dot.com crisis onwards (with the exception of a hopelessly oversized USD/JPY trade I opened just before the japanese earthquake some years ago), but I never succeeded in managing well markets such as the current up-trumping market. I guess it is all about psychology. I feel good when I spend money for insurance against black swans but I feel stupid when I spend money to hedge against white trumps ;)
     
    Trader G likes this.
  7. Trader G

    Trader G Well-Known Member

    I have the exact same problem. I attribute it to sitting in front of my computer and watching the flash crash live, seeing what Aug 2015 did to my trades, etc. The SPX spends more time going up than down yet I can't shake the feeling that the next "big one" is coming (picture me clutching my chest Fred Sanford style). Even now, with this relentless move up I am expecting Trump to say something tonight that will drop the market through the floor. What works for me is pulling all indicators off the chart so overbought/oversold won't creep in to my consciousness, sacrifice some of my profit and put on hedges, and adjust my trades to plan no matter what I think will happen. I wish I could say I was successful all the time in conquering my negative market bias, but it is a work in progress.
     

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