It has been a one wild ride since the beginning of this year. After a more than 20% return last year, my account has been down about 20% this year.
This was largely due to the low volatility strategy that I thought I mastered, yet apparently I did not.
As I mentioned previously, Trade Apgar test really opened my eyes about how to set up low volatility trades, which were essentially diagonal spread trades. However, the prediction accuracy of the test is not that accurate based on more recent trades. In fact, I am guessing maybe it is only slightly better than flipping a coin…. maybe 60%.
Then I came across to this podcast, in which it talked about a coin flipping test. The test subject were basically asked to adjust their bidding sizes on a machine with 60% chance to show a head. The test subjects were aware of this information, yet many of them lost.
The optimum betting strategy is to keep each bidding size small and repeat as many time as you can. The optimum allocation size is 20% according to the Kelly Criterion.
This data is somewhat comforting because it means that as long as the trade setup has a 60% of winning chance, as long as the allocation is kept below 20% (which I have no intention of using such high number for each trade), I just need to do as many trades as I can and the overall result should be a positive one.
When looking at some of the recent trades however, I started to see high volatility strategies suit better for my personal comfort zone, in which the trade setup has 70-80% winning chance.
Up until this point, I have been allocating about 2% of the total capital to each trade disregard to whether it’s a low or high volatility trade strategy. Moving forward though, I should probably allocate only 1% to the low volatility strategy trades and 3% to the high volatility strategy trades.
Let’s see what happens……