Tag Archives | trading markets

Focus on a Single Strategy?

Derek raises an important question at StockTwits University.  This little synopsis does not do it justice. Read the post.

"Anyone trading markets for a period of time knows that knowledge does
not translate into profits.  In fact, the illusion of knowledge has
broken some of the most intelligent participants including Long-Term
Capital Management… 

So should traders and
investors seek to expand their knowledge base, or focus on one strategy
they can repeat over and over?

…basing one’s livelihood on a
single mean reversion strategy is a sure way to the poorhouse in a
runaway bull or bear market.  If you’re going to nail down an edge, be
sure you have some way to measure when that “edge” has been taken away
by too many adherents or changing market conditions.

I think the essence of the discussion is brought together with this line from milktrader:

"It doesn’t hurt to be comprehensive in your knowledge and targeted in your approach""


Derek's comments hit home, and milktrader's summary makes the point clearly.

Knowledge is a good thing.  A better understanding of the concepts, the easier for the trader to understand how options are priced in the marketplace.  And that understanding provides a good estimate of how the Greeks change and thus, potential profits and losses. 

I always try to keep thing simple.  As Derek points out, the single-minded approach of trading iron condors, no matter what's going on in the market, is unwise.  I agree.  It's a comfortable strategy to trade, but risk is ever-present and I don't know if this strategy is a winner – as a stand alone strategy – over the longer term.

Fortunately, we are not forced to trade iron condors at all times, and other strategies can be adopted.  Those include iron condors with appropriate insurance.

As long as the condor trader does not believe this is a free-money methodology (do such people exist?), and makes a serious effort (because it is serious) to manage risk effectively, he/she ought to be able to handle the market's ups and downs.

However, the question remains:  Why stop there?  Why not expand your knowledge to other aspects of option trading.  There are new strategies to understand.  There is the important topic of skew, which makes a real world difference when using options.  I admit that this is a topic I've ignored at Options for rookies.

Bottom line:  I'm in agreement with both gentlemen quoted:  Learn.  Understand what you can about options.  Grow as a person and trader. It's okay to focus on trading a single strategy (most of the time) – especially when you are well-armed with knowledge that allows you to transform dangerous situations into opportunity.


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