MarketLife Ep 15 – Dealing with strings of wins and losses

Podcast-Cover300Three more reader questions this week: how do we deal with runs of wins and losses? What about applying technicals to non-linear (or derived time series), and how do we translate trading strategies to options from the underlying instruments?

Alan asks:

Hi Adam, hope all is well.  I was mulling over a trading question, and would like your professional perspective.   I have noticed that over the last several months that breakout trades have rarely worked.  The current stock market seems to lack any momentum, up or down.  If you accept my premise, how does a pro handle it?  Do you sit and wait for a better market environment, or do you keeping trying with less risk?

In the answer, I talk about:

  • Markets go through “regimes” in which some types of trades work and others don’t.
  • Therefore, trading systems also have strings of wins and losses.
  • Some ideas for dealing with these string, and how the right answer will vary depending on your psychology and the specifics of your trading system.
  • Behavioral aspects might trump mathematically correct answers. (See my post on discipline here.)

Adithya asks two more questions:

At a recent gathering of traders , I heard one of the more experienced traders describe how to use charts on options time series.  Even applying technicals like moving averages ,trendlines etc.

I took his question into a bit of a different direction, and talked about technicals applied to non-market time series, but I think the concept applies to derivative time series as well. Short answer: ehhh… maybe. Be careful. I’m suspicious, but most things don’t work like people think they do anyway, so it’s a hard question to answer.

While I agree that you can apply technical analysis to anything that is actively traded , options in particular have very specific characteristics – in particular a non linear response to price moves , and a bias wrt time decay , and finally the volatility of option price changes dynamically through the life of the option (fairly volatile at the beginning , to low volatility at expiry unless the option is exactly at the money.

I wanted to get your thoughts on this. Is it ok to apply technicals (and maybe build a trading system) on options? I expect the backtest to work out as it worked on the underlying futures. But am not sure if technicals that usually apply to linear instruments would be applicable to non linear options without any modification.

If I could make text flash, I would. (Well, I could but I’d have to Google the html and you can just pretend I did.) I think the biggest question here is assuming that a trade on a derivative would work out as on the underlying, but Adithya has provided the answer himself: do the backtest and find out. Do the backtest; do your out of sample, and do proper walk forward. Correct system testing protocol will protect you and will answer this question for you, but, with subjective tools, it’s not simple to test. Good question and good food for thought.

To both of these gentlemen: thank you for your questions! This show is really evolving based on reader feedback and discussions, and I’d love to have more of them. Drop me an email with any questions you might have.

If you enjoy the podcast, one of the best things you can do for me is to leave me a review on iTunes here. The reality of the modern publishing world is that user reviews and comments help build audience faster than nearly anything else, and I thank you very much for your help!

Also, if you like the music for this podcast, then be sure to check out Brian Ashley Jones, my friend, and a fantastic singer-songwriter.

Enjoy the show:


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.