I thought I had a pretty good strategy going but its got a terrible flaw. In the last 3 months, I've only had 4 red days but they were huge losses. The rest were green ranging from $300 to $4000 in profit. The biggest loss day was $25k.
I was using a scalping strategy where I wait for $SPY to take off or plunge then time the top or bottom with an ATM option for a quick 10-30 second trade. This works great except when I'm wrong – then I average down at the next top or bottom and try to recover. This also works great except when SPY seemingly wont reverse and I run out of capital to average down.
There's got to be something to this strategy if I only had 4 red days in 3 months, but those 4 red days erased $45k worth of gains. Some of those days I would've made it all back waiting 5 more minutes,
I use the MenthorQ levels to try to time my entries and the 9/20 EMAs and VWAP but nothing else.
Any advice?
Advice on moving forward with scalping strategy
byu/jwtoolfan inoptions
Posted by jwtoolfan
18 Comments
This sort of strategy can work well, but you need to figure out when to admit you’re wrong and quit for the day. Basically some days the market will work how you expect and some days it won’t. You need to recognize that the market isn’t cooperating that day and quit for the day. Set a cutoff and if you hit it you’re done for the day.
Your down days will still be larger than your up days, but the idea is to cap your losses so that you’re overall profitable because you have more up days.
Sounds like you need to set a stop loss when you buy and quit for the day if you’re on the wrong side of things.
I scalp SPX options using VWAP and the trick is to hold onto your winners for 5 mins instead of 30 seconds. Your profit will double or triple if you’re not scared.
If your red days are $25K, your green days should be $25K.
You need to start using stop or trailing stop lol
You need to have a better understanding of the strategies specs. You need to know your win rate and risk/reward ratio. If you’re winning 90% of your trades but your risk/reward is risk 20 to make 1, your expected value is negative. EV = probability win * amount made if win + probability loss * amount loss if lose. If you’re making 2k 90% of the time but losing 25k 10% of the time that is a negative EV strategy.
My only suggestion would be that if this is using long option or debit spread that you size so that it can go to zero and your losing days/trades are not larger than your winning days/trades.
you mentioned if you waited for 5 minutes but ran out of capital that possible your size is too big to stay in the drawdown. Have you tried it using smaller size that fits the amount of capital available to sustain the drawdown and see it through?
It’s called pennies in front of steamrollers for a reason
Avoiding those 3 sigma moves is ???
If you can do it, you’d be richer than any of us…
All about risk. Proper option trading strategy should reduce risk not increase it. Too many people are just guessing and hoping when they use options instead of only using them to leverage opportunities.
All about risk. Proper option trading strategy should reduce risk not increase it. Too many people are just guessing and hoping when they use options instead of only using them to leverage opportunities.
Oh, to add to my other comment (making this a separate comment so you see it), something you might try is exiting with a tighter stop and then re-entering. So for example let’s say your strategy has you buy an option for $1k. The trade starts going against you and normally you’d hold on until the option hit $500 and then average down to recover. Well, what if you exited at $800, then rebought with 2 options when it hits $500? More complex, but you end up with the same position and saved $300.
Idk man my advice is just trade leaps on anything but spy lol. You’ll have so much more breathing room and so many more opportunities. Not going to tell you how to trade but scalping 0dtes is risky, leaps have a way better R:R
I had this problem with a winning strategy once, and it was all psychological. For instance, I bet your -25k day started out as an unexpected -2k and from there you tried to get it back & only made things worse. Less & less adherence to the rules & the realities of the probability on each successive play, probably. Step one, stop “averaging down.” This strategy is a fallacy unless you have theoretically unlimited funds. Another thing is that you need to look at how many trades you are making in a day. There is an optimal number and it’s generally not a high number either. Think about it— if you could profitably make 40 trades in a day, when the market only goes in 2 directions, much of that profit could’ve been made under the umbrella of fewer, longer-held trades which captured the direction of the profit (this does not include statistical arbitrage strategies, which do work on 100s of trades). So stop trying to get it back after you have a loss that slaps you in the face and stings, try to understand why you weren’t able to anticipate that loss— when you have a truly masterful strategy, even your losses fall within the realm of your expectations. Unexpected losses mean there is still a big missing piece specific to the strategy that only you can figure out. But quitting the revenge trading and DEFINITELY quitting the averaging down, which is not at all mathematical, will help.
Sounds like a losing strategy. Yes high probability of profit but you are scalping a tiny profit. When you lose you double down and potentially lose big.
The multiple responses about stops are questionable. During calm markets the stops may function as designed. If crap hits the fan stops will mean nothing if stop limit or may make things worse if they are regular stop loss orders.
Position sizing, stop loss. Simplest trick in the book. Risk management. No averaging down. And you aren’t even following your own rules. You are clearly letting losers run much longer than 30 seconds. While instantly bailing out of wins for meager gains. Adjust your position sizing. Don’t let losers run for an hour while cutting wins instantly
Any strategy that has “time the top or bottom” for 30 seconds is fundamentally flawed and you should get rid of it. It is not sustainable long-term. If you want to be in the market for 40 years, you need to find a much lower risk strategy either based on financial data or a rock solid quant strategy that will probably need to evolve every year or two.
Martingales don’t work for this exact reason
This is called Martingaling.