Introduction :
Many traders and systems fail because they represent a single simple idea , like for example buy if MA cross , or keep shorting Vix OTM calls , or keep buying the market and double down … etc .
A system shouldnt just trade a simple idea , otherwise it will become an etf , and etfs fluctuate with the market and many have deep drawdowns and even fail , case in point long Vix etfs . So its not surprising if trading systems long vix fail eventually as well , because technically they are just a form of ETF in a way . Bear in mind this is just an example , and just shorting Vix isnt necessarily profitable either .
Stop Loss dilemma :
Where to place your stop loss ? Thats the one million $ question . Do you use stops , where you place them , do you re-enter after a stop is triggered and you are out ? These are age old questions . If you place the stop very tight you get many losses but they are small , though they add up eventually . If you place it very far you get infrequent losses and a high win rate , but your losses are huge .
What to do ? Well there is no accurate answer for this question , but our choice is to use another method to control losses beside stops , and here comes our system “Hedged ES”
Options instead of stops :
Thats what we are doing with our system , we will use SPX options to offset and control losses in ES futures , preferably we may use ES futures options but at the moment they arent supported in collective2 .
So SPX options should do the trick , hence they are options for the cash underlying and very liquid with many available expirations during the week : Monday Wednesday and Friday . We will use these short term expirations to avoid over paying for time decay .
Add to that SPX options are 1256 contracts which make them treated like futures for tax purposes - unlike stocks options - .
Another benefit for using options as protection is they protect against black swans unlike stops . As in case of stops price may gap and skip the stop level causing a huge slippage , this can happen even in ES futures in a case of black swans . However options should provide a more reliable protection .
Criteria for entering/exiting/hedging :
We use a blend of proprietary methods with unbiased direction to trade ES futures , however we are going to use options instead of stops , and there shouldn’t be a time to hold an ES position without an option hedge already in place .
In general the methods consist of 2 simple ones : buy the dip , fade the news whipsaw , and two advanced ones using level II and market delta .
Scaling :
We started this system with $50K , however subscribers may choose to follow with less money but the minimum scaling is 50% . Bear in mind that the SPX contract is $100 per point and the ES contract is $50 per point , so the ES:SPX ratio is 2:1 , in another words 2 ES contracts = 1 SPX contract .
Note : I couldn’t add this description into my system’s page hence its “too long” . But i would link to here .
n don’t complain if suddenly the strategy become private. It happens over n over.