Someone suggested I start a tutorial/journal, so here goes. Let's ease into this in an unconventional manner. The best way to learn is being helped to figure things out for yourself.
If you've already got a consistently successful strategy, no need to read this thread, obviously.
If you've got a consistently losing strategy, that's actually easy to address: simply invert it. As George Castanza on Seinfeld said, since he had been a failure in everything he had done, he might as well start doing the complete opposite. And it worked out for him.
So, the purpose of this thread is to address breakeven strategies, because a lot of strategies simply are unable to get out of that rut. Let's define a breakeven strategy, it's where one winning trade of $100 is negated by a bunch of losing trades of $10 each, or the number of winning trades is equal to the number of losing trades and the profit and loss is the same in each. Anybody who has backtested simple strategies realizes that it is almost impossible to avoid breakeven or to avoid untenably large drawdowns in the process, which amounts to the same thing.
For this thread let's try and avoid "discretionary vagueness" as much as possible. By that I mean it is sometimes too easy to wave the hands and give vague reasons for things that leave too much open to interpretation. Music teachers are guilty of this: "you gotta learn to play what you feel, man" which doesn't help the students at all.
So ... breakeven strategies. Let's take a look at a couple simple ones to make sure we know what to avoid. For example, you hard code a 20-tick profit target and a 10-tick stop loss for every trade. This won't work because you simply gets stopped out twice as many times as you win. Markets are highly unpredictable, and prices move up just about as often as they move down.
So, you tweak the strategy, you try to identify higher probabilty trades where the chances of a win is somewhat greater than the chances of being stopped out. You find better success in certain time frames but worst luck in other kinds of markets because "higher probability" trades tend to only be thus in specific kinds of markets.
so you start focusing more on a disrcretionary approach which might have some success if your understanding of price behavior or indicators or whatever is reasonably accurate, but markets are known to eventually behave in ways that have no precedent which throws everything out the door until you can figure out how to interpret the new modus operandi.
So, for whatever reason you just can't consistently beat the market and win. What do you do? Well, one path of course is to continue trying to refine your understanding of markets, try to improve upon your strategies, trying different methods, etc.
Another way is approach it from a different angle. Let's say for whatever reason you're stuck with your breakeven strategy. You can't or don't want to modify it. What do we do in this case? First, let's realize that if you trade nothing but a single instrument (commodity future, stock, whatever) there's no amount of finagling that will improve it. So, you need to add something that's tied to the instrument but not in a 1-1 manner.
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Continuing from the previous post, let's look at options.
Options by themselves give you no advantage or disadvantage you don't already have in the underlying instrument. So don't bother trading options instead of the underlying because you're going to have the same results. (No, options are not "safer" they're just slower.)
OTM and ATM option premiums do not move 1-1 with the price of the underlying, which is good, but the cost of the option premium tends to negate any advantage over time due to the time decay, which is not good. Options are always priced exactly as they should be - since the advent of real time computer pricing, there are no longer any arbitrage opportunities.
Let's take a look at how a simple option + future strategy does not help you. You go long a future, it moves against you, you go long a put, which slows down the rate of loss on the future, but you've still got the same problem of needing to take the loss at some point and you're back to square one.
You might think you could sell an OTM call or initiate a vertical credit spread, or some such, but don't do that. Collecting premium is very risky business. Let's limit this discussion to buying premium only (buying options, not writing them.)
How can you take advantage of an options + futures strategy knowing that
(a) if the futures moves in your favor and the OTM or ATM option goes against you, you still get an overall profit
(b) if the futures moves against you and the OTM or ATM option goes with you, it slows your losses
(c) a way ITM option premium moves 1-1 with the futures price
(d) the longer you hold an option, the more you lose on premium because premiums decay due to time
Yes, this type of approach is definitely the way to start out thinking about it. Basically you want to make sure you are making more in one than you are losing in the other, keeping in mind that you lose option premium with time.