Ok, the results are in! First, a few disclaimers: This is based on backtest results, they are not representative of exact trading conditions, it simply serves as a baseline for me to decide if a certain idea is worth exploring.
I first had this idea after trading the OEX weekly. I wanted to duplicate the concept of a weekly trading strategy that was not necessarily dependent upon having an underlying with weekly expiration contracts. So I thought about this question for a few days and the answer came one night in a blast of inspiration. Such inspiration was so strong I’ve decided to test it.
My first test was simple: enter a bearish position, if it goes against you, get out, use a short stop (-8%) for exit, and take profits as soon as you make over 8% in ROI. Exit by end of week regardless. So, I tested this for a bit over 1 year, then I listened to a few Sheridan Mentoring sessions where they were talking about a similar concept (yet monthly), the “chain of butterflies”, the key difference was that instead of exiting the trade, the strategy actually opens a new bullish butterfly if the market moves up. I thought hum, there might be something in there for me.. my weekly strategy could be improved...
So I tested again, this time by hedging the position with a single long if down by around 8%, and opening a bullish butterfly at the top. A lot of improvement on the data-set I had tested.
For the past 2 weeks I had the experience with live trading, as it turns out, my recovery butterfly (the bullish one) ended up hurting both times when I needed them. So I started wondering if simply hedging wouldn’t be better. But I do not allow myself to change a strategy before first testing it.. Lesson learned: do not jump from strategy to strategy based on one bad trade, test the new concept, is it indeed better? Or was it an isolated scenario?
Turns out, the best approach is still to hedge and add a second position to recover. I also learned trading live that using butterflies is a pain (they’re hard to get out) so I re-tested with Iron Butterflies instead, the difference isn’t major from testing results, but it is major (in my mind) in Live trading.
So, as you can see on the table, I’ve placed my results side-by-side, and you’ll notice that even though the hedge+recover strategy gives you a smaller average win, and worse win-loss ratio, it bumps your win-ratio a LOT. That more than makes up for it! One final disclaimer, this is based in only 1 year of data (last year), so take with a grain of salt as well. I will not backtest further until I have a better software program in my hands for backtesting..
Cheers!
